In The Future China Will Be Dominant & the US Irrelevant | Kyle Chan
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What's up, everybody? My name is Dimitri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.

My guest in this episode is Kyle Chan, a researcher in the Sociology Department at Princeton University and an adjunct researcher at the Rand Corporation, where he focuses on industrial policy, clean technology, and infrastructure in China and India.

Kyle and I spend the first hour of our conversation discussing the nature of China's industrial model and dispelling misconceptions about the historical basis of economic prosperity and the reciprocal interactions between the state, financial capitalism, and the market economy that are primarily responsible for enabling the sorts of technological revolutions that have transformed our way of life over the last two centuries.

In the second hour, we delve deeper into China's development model with a focus on what lessons can be applied to the U.S. today and what sorts of policy choices we should be making that are both obvious and have bipartisan support, such as investing in research and development, forging strategically important economic ties with other nations, and creating a welcoming and attractive climate for international talent and capital.

If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, afternoons,

access to special research and analysis, in-person events and dinners. You can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you. And with that, please enjoy another phenomenal episode about industrial policy and the U.S.-China competition with my guest, Kyle Chan.

Kyle Chen, welcome to Hidden Forces. Great to be here. It's great having you on, Kyle. As I was just telling you before we started this recording, I think today's episode will be an excellent follow-up to my recent conversation with Patrick McGee about Apple's role in helping build out much of China's advanced

manufacturing ecosystem, because unlike with Patrick, you and I are going to focus much more on the Chinese side of that story and the active role played by Chinese policymakers in helping to shape the industrial development ecosystem in China, expediting the growth of Chinese manufacturing and helping to advance the competitiveness of indigenous companies, many of which like Huawei or BYD are now global leaders in critical industries.

So much so that the US and Europe are erecting tariff barriers and instituting export controls to try to impede their development in the hopes that their companies can catch up. In terms of background, you are a postdoctoral researcher in the sociology department at Princeton University where your focus is on industrial policy, clean technology and infrastructure in China and India, which I guess makes you an expert in the Chinese and Indian economies.

and their economic and industrial policies. What does that mean in practice? And what is the path that led you to where you are today? And how did you develop an interest in these topics?

Yeah, happy to get into it. So yes, I'm a sociologist by training, and that's something that I think is distinctive and very useful, and I'll come back to why. But I actually began studying economics at University of Chicago back in the day. So those who might not be familiar, UChicago has had a reputation for a long time as being a very intellectual place, a very heavy focus on theory. We read

You know, Marks, Faber in the original, Adam Smith, sort of all these great thinkers. And the economics department in particular is famous for its very free market focus, right? So you have Nolan Freeman, Gary Becker, some of the people who really sort of put the free market into the center of American democracy.

discourse. And at the time, I drank Kool-Aid. So I was very, very of the mind that ultimately, the market was the best solution to most things. And the best that the government could do was sort of get out of the way. And over time, my thinking evolved. And over time,

I think one of the biggest experiences that changed my thinking was traveling to both China and India. So I'm Chinese American. My family is actually from Hong Kong, and I'm part of this generation of Hong Kong immigrant children who grew up

not speaking Cantonese, although I can speak some Cantonese, but actually grew up speaking Mandarin because our parents were like, Cantonese is good for ordering food at a restaurant. Mandarin is good for everything else. So I learned Mandarin growing up, but traveled to China more as an adult and then India later. And that really shaped my thinking. And I have to say, the first time I went to Beijing as an adult, my first impression was like,

Things are kind of a mess. Things that I took for granted as working, paying your utility bill or, you know, like dealing with simple transactions were very difficult in China. And I just remember buying things at various markets, like, you know, sort of cheap knockoff electronics goods and thinking, well, you know, it's cheap. The quality I just expect to be poor and mixed overall. But over time, I noticed that China was changing very quickly and India as well. And that's

And the question was, why was this happening? And was it simply a story of the government kind of stepping back and letting market forces take over? Was there something more to it than that? And so I started to be really interested in particular also in infrastructure.

I grew up in California. We have the high-speed rail project, which has now become, I think, synonymous with America can't build things. And unfortunately, that project has been pushed back by years, if not decades now. And I was traveling around China a lot, just

wondering, you know, why China was able to build a high speed rail system across the entire country? Why China was able to build infrastructure so quickly? What was the role of government in all this? What were the role of private players in all this? And then also my time in India. So I spent a lot of time doing field work there as well, mostly based in Delhi, but traveling all over. It was a really great privilege to do so much field work.

going all the way to parts of the Northeast, often traveling by train. So I got to experience infrastructure firsthand. But the thing that struck me there too was so many daily encumbrances for just everyday people, whether it's getting to work or getting a job or enrolling in school, it felt like it was sort of a million coordination problems. Every step of the way, it was, well, there is a better way and everyone knows it, but who's going to step in and

just sort of coordinate things a little bit more. And so those two experiences in China and India really shaped my view of what is the role of some kind of coordinating actor, whether it's a company or a university or a research institute or a government agency in trying to coordinate some of these loose ends and at least shape some direction to it so that we don't just have

sort of like a chaotic mess of consumer safety scandals every other day, which is, again, going back to my experience in China, which was like a lot of the dominant sort of news headlines earlier at least. So that really kind of set me on this path. And then ultimately sociology, I settled on sociology as a way to think

in terms of systems rather than in terms of just like a data set or in terms of just a particular kind of teasing out a particular variable's impact. And that's obviously very important, but the systems level thinking in sociology, looking at institutions, org structures, I'm like,

a huge nerd when it comes to trying to dissect org charts. And not just the formal ones, but the informal ones, like trying to map out how companies operate, how supply chains intersect, and how local governments interface with central governments. These things, I love digging into the details. And I felt like sociology gave me that ability to look

Look at those topics and then do it in a way that encompass the full range of sort of like methodological approach, interviews, data, corporate filings, you know, speeches, government reports, you know, everything, sort of the kitchen sink approach, whatever was necessary to understand

the question, the problem, as it were. So that's sort of my background, my approach into all this and how I got interested in all of these topics. I mean, my thinking is still evolving over time. And I think it will evolve as we see the trajectory of China's economic development and industrial policy. And as we see the US and Europe and other countries, India as well, thinking about their own approaches to industrial policy along the way. But yeah, that's sort of the big picture background on how I got to this moment.

I love how you think. I love how you think through problems, Kyle. And I love that you started at the University of Chicago and ended up where you are today, which I think only validates what I said earlier about your thinking process. Do you think that the Western economic establishment and free trade orthodoxy that developed a foothold in academia over the post-Cold War era misunderstood something fundamental about the basis of economic prosperity? And if so, what was that, do you think?

Yes, I do. And I think ultimately, it was this hope, and you can understand it in sort of the Cold War context, the competition with the Soviet Union, and the obvious massive failures in state planning in the Soviet Union, in China especially. You can understand how the reaction to that would be

this is not the way. And I think it's very interesting to see there's a whole history of sort of economic thinking, of economic philosophy that has taken these sort of pendulum swings over time in terms of attitudes towards markets and states. But I think there has been, I think, a gap in understanding not just where markets can fail, but where they can fail

where they can fail systematically. So, you know, again, and I hate to sort of demigrate my alma mater so much. I learned a ton, you know, that was a fantastic informative experience. But to kind of take the free market orthodoxy as a bit of a foil, you know, I think this idea that if we sort of just let these market forces run on their own and we sort of ignore

the interventions or the useful, and this is a very important word, but useful and smart and selected regulatory interventions by here in the US, we're used to FDA or the EPA, like trying to keep our food safe and our medicine supply safe and our environment safe. So these things I think got downplayed perhaps, especially as the US was veering

becoming more dominant economically in the world. And I think it's sort of reinforced this view that the way that America became sort of this global economic juggernaut was because we had stepped back. And I think we forgot some of our own experiences, you know, going back to certainly before World War II, but then especially in the post-war experience when, when in fact we were building a lot of those institutions that were the foundation for, you know, for our companies being so successful today. So I, you know, I don't see it in sort

sort of either end of the spectrum, I think there's some useful middle ground to understanding. But I think some of the big gaps are this short-term focus on immediate profitability, a focus on sort of narrow interests, right? So like if you're a shareholder, you want the company that you are invested in to do well. But there are some gaps between things that are good for a country or for a society and what is good for a company or what is good for a set of

companies in an industry. And I think that gap there, we have been trying to address it for a long time. I think that just got downplayed. And now we're realizing that there's a special role for that. I think other things like national security, and especially now with competition with China, has brought that back into the fold. And I think obviously also the shock of supply chains with the pandemic.

And the realization that actually there are certain critical nodes in the entire sort of global supply chain network. There are certain bottlenecks or fragile points where if those break, if those even get mildly disrupted, they can have huge repercussions. And again, these are not priced into the thinking for any individual company or any, even a whole industry, because they can have

broader spillover effects across industries that we might not be able to capture in terms of immediate shareholder interests or managerial interests at the corporate level. So those are some of the gaps that I see as persistent and that keep coming up again and again. So I feel like a lot of people, there's a large cohort of Americans who view this debate along the lines of free market economics versus central planning. What do you think is wrong with that framing? What does that framing miss?

Yeah. So I think it misses the reality on the ground in both

say, the US and China. So it's really interesting to look at the Chinese case, because I think right now, perhaps a lot of people's views are colored by a top-down sort of command economy approach that China really did have, especially before the reform era of the 1970s and 1980s. But the reality is then, since then, you have this sort of hybrid approach, a hybrid approach in China, a hybrid approach in the US, a hybrid approach in many other

parts of the world, you have this sort of broader spectrum. And it depends on industry, it depends on point in time. But I think this hybrid approach is really interesting. So in the Chinese case, right, they not only did take a step back in terms of pulling the state back in certain areas and letting market forces play a stronger role, but they did so selectively. And they did so in a gradual manner. And they did so in a way that tried to harness the

I would argue some of what Chinese policy folks

saw as the advantages of the American system, trying to harness the advantages of competition, or at the very least, of trying to avoid the monopolies of the past that created that kind of rigidity and lack of resilience, as well as, of course, a political challenge even to central government control in some cases. So those lessons, I think, were sort of learned and still an ongoing process from

places like the US as well as elsewhere. Japan played a huge role actually in all this. And I think the Chinese approach has been more of this sort of blended

mashup really between probably ultimately still a party state system right at the end of the day where certain key industries are shaped, if not outright directed by policy control. But more broadly, this sort of mix up of competition of some role of private players. And this is always sort of like in contention and the sands are shifting always for private entrepreneurs in China, especially. But

One more question along these lines before we get into a recent New York Times op-ed you wrote titled, "In the future, China will be dominant, the US will be irrelevant," which is what prompted this conversation initially. And the question has to do with what I think is a myth, which is that the government doesn't already play a major role in the economy. I think there's this sense in the US that we've had a free market here, or we've gone through periods of having a free market.

How would you respond to that framing? I mean, how far removed has this country been during its development from what we consider to be a classical free market? Yeah. So I think the US system, yeah, has never been a true classical free market in the sense that was theorized by, again, some of the marquee thinkers like Milton Friedman, perhaps. And I think one interesting element in all this is

is just the visibility of the different players involved. So I think today, understandably, a bright young entrepreneur who has a startup in Silicon Valley that changes the world is celebrated. And rightly so, you know, some kind of technological breakthrough or a business model innovation that is striking, that affects, you know, that creates opportunities

some new product that I think has been celebrated. What is less celebrated, I think, is these, like for lack of better term, the bureaucrats who are sort of day in and day out trying to measure the lead levels and other sort of impurities in your water treatment systems, or the people who are doing research at the more fundamental level in say, Department of Energy National Labs,

And that research then feeds into the private sector, right? Innovations and breakthroughs in, say, solar technology or battery technology, you know, that feeds into the broader sort of American system. American companies can take advantage of that. You know, of course, you have the classic case of the COVID vaccines and mRNA technology being built on previous work done universities and at public research institutions.

institutions. So I think all this is sort of happening in the background. And until now, we've almost taken it for granted. We don't have a culture of celebrating. This is very sort of Max Faber. Max Faber was this famous German sociologist who was a theorist and student of bureaucracy. And he was probably one of the few people who made a name for championing civil servants and bureaucrats. But for him, he saw that there was this sort of almost, I don't want to

downplay it too much, but almost kind of a drudgery or a uncelebrated part of what makes a modern economy run in the background that we just, you know, we don't see in the headlines until they break, right? Until they come under attack or until there's a failure with say the FAA and air traffic control issues in Newark. I'm near Newark Liberty airport. That's my main airport. So I experienced it. But until those things go wrong, we're just like,

Oh, of course they're going to do that. That's not the interesting story. The interesting story is everything that's being built on top of that infrastructure. So it's interesting that you mentioned the air traffic controller issue over in New York airport, because I also live in this area and I have a flight that I'm dreading coming up soon. And stuff like this, and this story in particular, has prompted me and I'm sure millions of other Americans to ask themselves, what the hell is wrong with this country?

What exactly is going on where we have this persistent problem of air traffic controllers quitting because of trauma or other issues that they cite, saying that they have these near misses of airplanes, where we've actually already seen, tragically, a helicopter, a military helicopter crash into a commercial airliner heading into Reagan National Airport in DC.

And it's not clear that there's a solution. In the past at least, and I'm not saying this is necessarily a good thing, but you would have seen the president and members of Congress come out and say, "We're going to fix this right now. It's going to get fixed right now." Whether or not they'd been able to fix this is a different story, but there seems to also be a kind of sort of inertia that's been building up in the system as if we can't solve these major problems.

So, anyway, we'll have a chance to sort of delve into all of those things, but let's bring it to the New York Times op-ed that I mentioned earlier titled, "In the Future China Will Be Dominant, The US Will Be Irrelevant." In that op-ed you wrote, quote,

"When historians look back, they may very well pinpoint the early months of Trump's second term as the watershed moment when China pulled away and left the United States behind." And then you went on to say that Trump is, "Taking a wrecking ball to the pillars of American power and innovation. His tariffs are endangering US companies' access to global markets and supply chains. He's slashing public research funding and gutting our universities, pushing talented researchers to consider leaving for other countries.

He wants to roll back programs for technologies like green energy and semiconductor manufacturing, and is wiping out American soft power in large swaths of the globe. China's trajectory couldn't be more different. Walk me through the argument you make in this op-ed. Why will China be dominant and the US irrelevant? And why have the last few months validated this outcome in your view?

Yeah, this piece was really meant to be a wake-up call, not necessarily a prediction about the future, but a thought experiment for rolling forward the trajectory that I saw the two countries being on if we take current trends and project them ahead by years, maybe even a decade or two. And the argument I'm trying to make is ultimately a simple one, which is,

China's trying to do a lot right now to become competitive in many, many different industries, from robotics and AI, these so-called industries of the future, to even industries that we take as more mundane, the inputs that might go into some of these industries, steel, aluminum. And across all these industries, there's broad, believable,

belief in sort of the Chinese political establishment that these areas require support, that they are too important to be left on their own, and that China should aim to become, if not a leader, at least a very, very strong player in many of these industries. And a lot of this comes back to a desire to build up national resilience. So we can come back to that later perhaps. But I

On the other side, I see the U.S. as potentially squandering a really, really good thing, which is all these strengths that we have, all these factors that we have going for us are incredible universities, which still to this day, you know, despite the attacks from the Trump administration, are just these beacons of, you know,

free discussion and cutting-edge research that international students from around the world flock to.

to our companies, to even some of actually our institutions. And we can come back to this. This comes back to your point. You know, even the ones that have faced issues along the way, you know, government regulatory agencies, things like that, they still are the model for much of the world. Even China has tried to replicate, even going on so far as to name some of their institutions after our institutions in the U.S. So these things are

have been, I argue, the pillars of American strength, the things that our great companies are built on top of, the things that allow us to become an economic and technological leader in the world. And these things are really for us to lose. And that's why this piece is

was meant to be a wake-up call to say, this moment right now is a make-or-break moment. And I actually, you know, I know these op-eds, they tend to be loud and try to make a very, you know, strong point. But in this case, I really feel very, very much that we are at a make-or-break moment in terms of, you know, do we want to be destroying the very factors that have affected

made the past century essentially the American century. And going forward, what would that mean? And so the China contrast here, I think, is really critical because maybe in a world without China, we could say, well, we'll probably still be number one in many of these areas. And even if we start to slip behind or some of our institutions start to fall apart, but right now, we're really in a neck and neck race with China. And I think there's no time to lose.

You said something earlier about free discussions. I wasn't entirely clear of the context you were describing. Were you saying that the universities were beginning to lose that kind of freedom of speech on campus? Or that was something that... I didn't really understand what you were saying, to be honest. Oh, yeah. No, that just meant...

universities as places where you could debate all sorts of issues. Yeah. So I think that's obviously been a problem in recent years, and the Trump administration has been trying to address that, some of its measures. To be honest, I don't really know. I haven't looked into what those measures are to see if they would be effective enough. So I don't have an opinion. I will say that something I read recently that seems rather alarming, and my initial reaction to this was, this cannot be true, I thought to myself.

But honestly, I feel like I have that reaction to so many things these days and I didn't look into it further, but is it true that the Trump administration has

issued an order that prevents Harvard from recruiting foreign students. Is that real? Have you seen this? Yeah, yeah. So they try to remove a certain kind of accreditation or basically like a license that Harvard has to be able to enroll foreign students. And I think it's tied to their visa status and things like that. So this was enacted and then blocked, at least temporarily, by, I believe, a federal government.

But it would effectively prevent Harvard from recruiting foreign students, from admitting foreign students rather to their university. That is remarkably stupid. I agree. That is incredibly dumb.

Yeah. And it's just amazing because, okay, so I'm at Princeton right now. There are lots of international students. They're a huge, huge part of the community, not just in terms of their numbers, but in terms of what they contribute to campus. They are very active in my classes. You know, I have some friends who do work on quantums.

And they're international. And they're just like, the US wants to be a leader in quantum technology. And I think it's a really, really critical technology that we need to be moving forward on as quickly as possible. China is definitely pouring a lot of investment into quantum technology. And the last thing you want to do is scare away these incredible researchers who are really pushing the envelope and really bringing up the level of our entire country. So-

That's infuriating that people coming up with these policies are really, really misinformed in my view. And no one would advocate this for US sports. No one would say that we have to stop admitting all these European basketball players to the NBA because they're somehow negatively impacting American competitiveness or the opportunity for US basketball players to find a job in the NBA. I mean, no one would say this. But somehow we think it's appropriate in the areas of science and technology or other places

Remarkable and concerning. So, let's bring it back to Beijing here, because we're going to go back and forth between comparing the US to the Chinese industrial model or lack thereof. And you wrote in the same piece that Beijing is, quote, "bringing a Manhattan project style focus to achieving dominance in high tech industries."

I want to understand how exactly they are doing this, and please feel free to go into as much detail as possible. I want to try and understand top level, how we go from ideation to implementation to evolution and iteration of the model over time, because this is something that Patrick McGee and I discussed

briefly and in sort of various ways in our conversation. But one way which it came up was how the Chinese had a particular model of industrial policy that they implemented with the joint venture that led to the growth of Huawei.

and the dominance in telecommunications that was not what they applied in the case of Tesla, because they'd learned from what Apple was able to do to build a domestic ecosystem. And so they gave Tesla an opportunity to enter the Chinese market without a JV partner. So you see there that it wasn't a fixed policy that they implemented from 1970 something or 1980 something all the way through the present. So they've also evolved. So just help me understand the totality of how Chinese industrial and market policy works from top to bottom.

Yeah. So this is a big question and there's a lot to say here. Definitely Patrick McGee's book is fantastic and gets into a lot of the detail, especially for one especially important company. But from the big picture perspective, right, what is the goal? What is Beijing trying to do in the long run? And how long has this been happening? And I would argue that Beijing's goal is there's sort of several fold. One is economic development, which they talk about

all the time. I mean, it's just like their favorite term. Everything is about not just GDP growth, but sort of this broader sense of elevating the level of country, quality of life, competitiveness of its firms across the board. But in particular, there's a very, very strong focus on two dimensions that I would really stress. One is these strategic industries, these

target industries that come up again and again. Made in China 2025 is one example, and I'll come back to that in a second. But these industries are literally just, it's often the same ones, aerospace, high-speed rail, obviously now with AI, but AI and next-gen information technology has long been one of these sort of pillar industries. There's a whole bunch of these

target industries that the government has been focused on supporting. Okay, so that's one dimension. The other dimension is a very, very strong focus on manufacturing and sort of like the

the physical world. And I know you said, well, we'll kind of go back and forth between the US and China. Like, it's interesting to see how much I think perhaps the US offers the contrast in some ways of what China doesn't want. It doesn't want a consumer focused economy. It doesn't want one where all the manufacturing got moved

outside to other countries. And it doesn't want one where the focus is more on just design and software and things like that. A lot of the policies in China are really geared towards making things physical, tangible. Even the policies on AI, often it's paired with policy support for robotics and autonomous vehicles.

and autonomous systems, drones, things like that, industrial automation, sort of hard tech applications. But those are sort of the two broad dimensions in terms of like the goals for a lot of Chinese industrial policy. And what has happened over time is a whole series of

plans, policies, initiatives, programs that go all the way back to the early years of the reform period. They go back to even the 80s. You can argue even pre-reform. They include a longstanding investment in public spending in science, in science

target scientific areas like satellite technology or space or solar and semiconductor technology. A lot of that R&D, especially at public research institutes and universities, that has been happening for a long time, for decades. Then, in addition to a focus on scientific research,

There is in particular focus on industry, sort of targeted industry level support. And that's where you get programs like Made in China 2025 that was launched back in 2015. Again, targeting those key industries that I mentioned. And the way that Beijing tries to support those industries, it's very interesting. And I'm glad you actually sort of framed it the way you did. It's not any one particular industry.

tactic or any one particular strategy. It's a whole playbook of different tools that Beijing tries to use in order to push its own industries forward. And that playbook evolves and the different actual tactics and strategies evolve over time. So one example is you can get into the auto industry. So long before electric vehicles and long before companies like BYD started to seal the headlines, China has been trying to build up its automotive industry.

and has used a number of different strategies that have changed over time. There was a longstanding effort to have state-owned

enterprises, state automakers take the lead. And there's sort of an overlap with military transportation equipment there in the early days. And then later on, they tried a joint venture approach. So you have companies like GM, Ford, Volkswagen, Toyota, all forming joint ventures with Chinese automakers in China to produce mainly for the Chinese domestic market. And that process

was seen by some as a success, but also by a lot of other analysts as a huge failure. It was a success in the sense that China's auto industry, this is the traditional one, did expand and became in the 2000s the largest in the world by sort of sheer volume.

But almost all of that was for the Chinese domestic market. And you did not have a Chinese version of GM or Volkswagen or Toyota on the global stage. And so there was a worry that some of the technology that was supposed to be

acquired and absorbed and adopted in that process, right? So the point of bringing in, say, a Volkswagen was to bring in all these manufacturing techniques and know-how, including, ideally, some aspects of the combustion engine technology into China in some way. And then the idea was that would diffuse to the rest of the country.

whether it's to other state automakers or perhaps to the broader auto supply chain in China. So there was that hope that bringing in these foreign automakers will upgrade the entire industrial ecosystem in China. And to an extent it did, but it didn't yield those actual sort of national champions that later on would become so critical. Was it not successful because...

the major components of that supply chain were still outside of China or outside of China's influence or control? What was the reason? Yeah. So one of the reasons was trying to master the core technology for combustion engines. That was very difficult and that was closely guarded by the foreign automakers. Another big thing though, was the incentives for the industry structure within China. You had a few state automakers, SAIC, BIC, that were complacent, essentially, that they

They each, through their joint ventures, had a really secure hold on the Chinese domestic market. And they were fine with that. The Chinese government kept a tight lid on the number of new entrants into the space. And there's a whole sort of historical background here with Japan and South Korea doing something similar. But the idea was we would build up these handful of state automakers, and they would sort of

own the Chinese domestic market and they were happy with that and didn't really see a need to innovate at the cutting edge and expand to international markets. So there was a huge incentive problem along the way that became comfortable. So this idea of, you know, now China being able to leverage its huge market to

as a competitive edge, there are a lot of people who are pointing out that that could be a huge liability as well. You got too comfortable just selling to your own customers, selling to your own market, and you don't have really motivation to take that really hard step and compete at the international level. Well, so why did that not happen in the case of telecommunications equipment or handset manufacturing?

Okay. Yeah. So telecom is another really, really interesting industry, right? So telecom equipment, now we know, you know, sort of looking back, we know about the rise of Huawei and how dominant it has become globally as a technological player across a number of industries, not just telecom. But you go back to the early days when China was very dependent on

on foreign telecom equipment, Alcatel, Lucent, Ericsson. And it was really interesting because you can even go back further and see that China's whole telecom industry was really sort of starting to take off after the reform era. And leaders in Beijing were recognizing that this industry was not just one of many, but sort of, again, one of these core backbones of the entire economy. And

as well as being a national security issue. So they were very focused in their industrial policy efforts, they being the Beijing policymakers, in trying to eventually indigenize or localize some of this technology and bring it into China. And this was a long process that was phased out over time. So originally, it began with, again, these joint ventures. So this model you see appearing again and again, where you have China opens its markets, but

to foreign telecom equipment makers on the condition that you form a joint venture that you manufacture within China for the Chinese market and that you help share technology and sort of upgrade the R&D for Chinese labs or Chinese companies along the way. Shanghai Bell was, I believe, the earliest of these joint ventures and many others follow it. But then there was another phase after that.

where over time, a lot of the production was done domestically within China through these joint ventures. But then you have the emergence of the sort of like pure play, pure Chinese companies like Huawei that were pure Chinese companies in the sense that they were not joint ventures, but were not pure in the sense that they were building off of a lot of this foreign technology that was brought in. This ties back to your conversation with Patrick McGee and the role of Apple in all this. So that foreign technology got diffused through these joint ventures

across the broader Chinese telecom equipment industry to places like ZTE and Huawei that were not originally part of those joint ventures. And that became sort of the technology foundation upon which China's own industry and own companies

companies emerged. So that's really some of the background. You see it again and again and again. It changes over time, right? There are different periods in time when the joint venture approach seems to be the one that's more dominant. And there are other times when there is more of a focus on, say, a newer technology like electric vehicles or lithium batteries. Right. Because in that case, while there certainly must have been diffusion in some of the supporting industries that created this flywheel, the electric vehicle market itself

I mean, we had Tesla in the US, which was an innovator in electric vehicles, but we had no comparative industry from which China could sort of steal competing technologies or sort of emulate or replicate a domestic ecosystem.

And as you said, they struggled to do that with internal combustion engines. And without necessarily getting unduly fixated on this particular example, and if it's not appropriate the way I'm framing it, please feel free to say so. But what was the tweak that happened between internal combustion engines and electric vehicles that led to this success, this really remarkable success?

I just feel like this is an almost overnight thing that happened, at least from the perspective of Americans, right? Which is we wake up one day and we went from sort of seeing the major leaders or leader in electric vehicle being Tesla and the US market to now all of a sudden China having a whole ecosystem around electric vehicles where they're producing what seemed to be the best EVs on the market at the most competitive price points.

What enabled that and what lessons can we draw from that transition to apply them elsewhere?

Yeah, so it's really interesting to see the EV space because what we're seeing internationally is these Chinese EV companies sort of breaking through the surface and it looks like they're emerging. It feels like an overnight transformation, right? But the reality is this longer process happening in the background that led up to this moment. And some of the factors there were, there is in particular one minister for science and technology named Wang Gong who actually had experience

Audi before and Volkswagen. And he was an auto engineer. And he, in particular, has been credited with this political focus on so-called new energy vehicles. So this includes battery technologies,

battery electric vehicles, hybrids, hydrogen fuel cells, sort of the broad range beyond internal combustion engines. And he was hoping that this would be a way for China to catch up, maybe even leapfrog, or at least get around some of the barriers that it was facing in traditional automotive.

And along the way, you had a very heavy investment. Sorry, I mentioned earlier the public spending, the research that was being done at institutions affiliated with the Chinese Academy of Sciences, at various Chinese universities focused on this. And then you also have the emergence of a consumer electronics industry.

So iPhone actually comes back into the story again and again, where some of these battery companies, for example, were focused originally like BYD on consumer electronics. They were focused on making lithium batteries at scale for laptops and later other sort of portable consumer devices.

They also benefited from cooperation with Japanese and South Korean battery makers along the way. So some of these joint ventures, it depends on which country and which industry. But in this case, a lot of it was really coming from Japan and South Korea, at least in the earlier days. And at the same time, and this is, I think, something really crucial to understand about China's approach to industrial policy. It was a two-way or a two-sided approach.

approach to dealing with foreign technology. On the one hand, it was a very concerted effort to bring in foreign companies, to learn from them, to absorb, again, not just sort of like the stuff that you can patent and license, but the just engineering and manufacturing process know-how. There was that. But there was also an effort to insulate Chinese domestic players, to use this process that's often referred to as an

infant industry strategy where you use various tariff or non-tariff barriers to protect your domestic industry, at least temporarily, to give them a chance to grow and scale up and reach a level where they might be able to compete without being completely squashed by the Panasonic's of a previous era. So that was happening in China. And there was a sense among the Chinese battery companies and the Chinese EV companies that there was writing on the wall.

that these protective policies weren't going to be around forever. And a battery maker like CATL, their CEO, talked about how time was limited. At a certain point, they would have to face the music. They would have to face

actual direct competition with the top dogs in the space. And in the meantime, they needed to take advantage of that opportunity to ramp up, to acquire and build up and develop their own technology and scale up to a way that they would survive when

those sort of walls were lifted and they were forced to compete. And so I think that whole process, again, it's sort of a sequential or staged process, right? At different times, you want different policies. And I think Beijing has tried to, where it's successful, it has tried to sequence it appropriately. So they've been trying to protect their industries to a certain extent when they felt like

They were just starting, but then subject them to really, really fierce domestic and then also international competition later on when they felt like these sectors were ready. So I think that kind of sequential staging of this whole process has been really crucial. Again, I keep thinking back to the US approach, even going back to the Biden era, Inflation Reduction Act, the CHIPS Act, and trying to think carefully about when to

protect some of your budding industries, protect even maybe some of your startups or even some of your incumbents from just getting flooded with, let's say, Chinese batteries or Chinese EVs in the near term. So I can understand that policy for sure. But then the key is you need to have that sort of

fire under their feet, driving them to want to innovate and not get too comfortable thinking that, oh, these walls are going to be around forever, that they can just be like these Chinese state automakers of the past, comfortable in their domestic market. So this is really crucial. I feel like eventually the competition is coming. And to tie back to the broader US-China thing, the competition is here now. So thinking about that kind of urgency, I think is really crucial.

Yeah. I mean, one of the things that comes across in reading your work, and I want to mention your sub-stack, high-capacity.com, is that the Chinese were very adroit in fostering domestic competition. It wasn't that they had a couple of state champions and they just gave them all the money that they had. They created conditions that were competitive. So, it was very mixed market. They supported them, they protected them.

from foreign competition without not allowing them to be exposed to foreign competition, which they could use to learn. And also they pitted firms against each other or they fostered environments that enabled that. All of this is so difficult for someone like me to understand because it's also

hard to reckon with the Chinese industrial model. And I want to spend some of the second hour kind of delving into that more deeply to understand the relationship between the party, the Chinese Communist Party, the local governments, and these companies, and what lessons we can draw here in the United States around what maybe we can learn from what China has done. Also, what can we relearn about what we've done in the past and disabuse ourselves in

of some of the, let's say, wrong frameworks that we've been working under for the last several decades? And also, what are the consequences of inaction? I mean, that's something else I want to get into in the second hour, Kyle.

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