October 31, 2024 • 42 mins
In 2015, China identified several key industries of the future for which it aimed to compete at the technological frontier. The 'Made in China 2025' plan included expansion in things like EVs, solar power, batteries, semiconductors, AI, and drones. But now, 2025 is almost here and China's progress has been remarkable across several of these categories. In fact, it's the world leader in some of these industries (like EVs and solar), and it's catching up in others. In this episode we speak with Bloomberg News reporter, Rebecca Choong Wilkins, as well as Gerard DiPippo, senior geoeconomics analyst at Bloomberg Economics. The two of them were part of a team that took a major look at the status of Made In China 2025 (a name that isn't really even used that much anymore). We discuss how much progress China has made despite efforts from the US over the last several years to impede its ambitions, and how it's judging the success of the program.
Read More:
US Efforts to Contain Xi’s Push for Tech Supremacy Are Faltering
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots Podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:25):
Joe, do you realize it's almost the end of twenty
twenty four?
Speaker 3 (00:29):
Yeah? Well, yeah, it's crazy.
Speaker 4 (00:31):
You know.
Speaker 3 (00:32):
It's been a really warm month in October.
Speaker 5 (00:34):
Yeah, I know.
Speaker 3 (00:35):
So I feel like we got this free month of
summer and so yeah, like we're basically almost here and
we sort of like got a free, one less month
of winter.
Speaker 2 (00:42):
It feels like I feel like the warm weather is
also throwing everyone's sense of time off. Yeah, but anyway,
we're almost done with twenty twenty four. Who knows what
the rest of the year is going to look like,
but that means that twenty twenty five is coming up.
And you know what I think of When I think
of twenty twenty five.
Speaker 3 (01:00):
You and I think of the same thing. And we're
the only two journalists in America that don't think of
Project twenty.
Speaker 2 (01:06):
Twenty Oh yeah, of course. Okay, So Joe and I
are thinking of Made in China twenty twenty five, which,
of course was the big program that China launched ten
years ago. Almost ten years ago now back in twenty
fifteen to bulk out strategically important advanced technology sectors. And
so I'm kind of curious what exactly happens in twenty
(01:28):
twenty five, how much progress China has made on this front.
You know, next year, are they suddenly going to like
declare victory in advanced technology and that'll be the end
of it. What criteria are they actually using to judge
its success. I have a bunch of.
Speaker 3 (01:43):
Questions, you know, I just have to say that I
appreciate things like made in twenty twenty five initiatives or
even like you know, five year plans or ten year
plans or whatever, just because they provide a very convenient
spot to go back and look, did the goals get
hit or not. It's one thing to talk about moonshots
and like, oh, we're going to lead all this, But
(02:05):
unless you put a date on when you want to
achieve it by, you don't really know whether you're successful,
right because you never really know where you are in
sort of the arc of progress. But if you have
a system that puts dates on where you want to be,
at least you can go back and judge, well, were
we successful or not. And so now we're on the
verge of being able to look at the start of
that initiative and the end of that initiative and sort
(02:27):
of a say whether it worked or not.
Speaker 2 (02:29):
Is that your pitch for All Thoughts World Domination twenty
twenty five.
Speaker 3 (02:33):
Well, we'd have maybe twenty thirty five, okay, and we
need some like very specific metrics, you know, we have
to like really know what that means in advance, and
then yeah, we'll see if we hit it or not.
Speaker 2 (02:43):
Okay, you're right, though, deadlines are very important. So speaking
of deadlines, why don't I go ahead and bring in
our very perfect guests for this particular episode. We're speaking
with Gerard de Pippo, senior geoeconomics analyst over at Bloomberg Economics,
as well as Rebecca Ka Chung Wilkins, senior correspondent for
the Government and Economy Team Asia. I knew her back
(03:05):
when I was in Hong Kong and she covered China
credit and she was so good at it. So who
better to kind of draw the connection between technology and
finance and economics than these two. So Girard and Rebecca,
thank you so much for coming back on our lots.
Speaker 4 (03:22):
Thank you for has such a pleasure to be here.
Speaker 2 (03:24):
Let's start with the beginning. I guess twenty fifteen, China
decides to launch this Maid in China twenty twenty five program.
What was the thinking behind it, what were the goals?
Speaker 4 (03:35):
Well, I think one thing to remember is this sort
of a hole Made in China industrial policy. This comes
just a couple of years into President She's in pain
getting his leadership underway in China. So this is also
very much President She's vision for the Chinese economy, his
idea that these key sectors, these key industries are sentially
(03:55):
going to underpin the national development. So this is not
sort of, I suppose, just a discussion about china strategic ambitions,
but also specifically She's own vision for the direction for China.
Speaker 5 (04:09):
Also that in the context of Chinese industrial policy, so
Made in China twenty five is an example of an
iterative process and also sort of a reflective process with
the rest of the world. So there obviously were other
industrial policies before, and that would include something like the
Medium Long Term Plan from two thousand and five, which
is a fifteen year plan. There are of course five
year plans, but also mad in China twenty five was
(04:29):
partially inspired by Germany's Industry four point zero plan, which
is much less detailed than ambitious. But there's a sort
of a reactive effect there which ends up having knock
on effects because then the US reacts to Made in
China twenty five, and so it's just part of the cycle.
I think what makes Made in China twenty five different
than other plans that China had is that it was
more comprehensive, more ambitious, and much more focused on not
(04:52):
just catching up, but actually leading in ten strategic sectors.
Previous plans have been more about say lower value added
or megaproject right, and this is basically they want to
be the world leader and all the technologies that circut
twenty fifteen they had identified as being the most important.
Speaker 3 (05:07):
That's interesting. So one way of thinking about development is like, Okay,
we're going to build lots of bridges and rail and
housing and hospitals and other sorts of things, but this
is about really leading the technological frontier. And of course
this is what is the source of tremendous angst in Washington,
d C. And various US industrial giants and so forth.
(05:27):
I mean I don't know if we need to like
list all fifteen, but what are the big areas that
China felt it had to pursue.
Speaker 5 (05:33):
Sure, so they have ten strategic sectors, but then within
that there's any number of technologies. So the big ones
would be like information technology, which includes things like semiconductors,
five G artificial intelligence, and then things like aviation and
space technology, Energy equipment whichuld include things like solar panels,
and then new energy vehicles, things like electric vehicles. So
(05:54):
it spans pretty much everything, but it's skews towards the
industrial sector, and it's really a manufacturing based view of development.
Speaker 2 (06:02):
So one thing that was interesting, Jared is you said
that it was an iterative process. How has it changed
in your mind from like twenty fifteen to now. Has
there been maybe more of a focus or a shift
in direction.
Speaker 5 (06:17):
A few things the original made in China twenty five Blueprint,
which is what people treat as being the plan that
was announced in early twenty fifteen, But then actually when
people talk about all the targets, those mostly come from
something that's commonly called the Green Book, which was published
by the Chinese Academy of Engineers, and that's where you
have the two hundred and fifty plus targets that are
(06:37):
looking at specific technologies over time. It is sort of
like an authoritative addendum. But then on top of that,
there are something like four hundred plus other authoritative documents
going through technologies, going through different levels of government. So
it's not just one thing, and that's part of the
fact that those other plans don't come out at exactly
the same time. That makes it iterative. The other thing
(06:58):
that I think is really important is the Chinese government
realized around twenty nineteen that the phrase mid in China
twenty five was provoking antibodies in the West, particularly in
the US. I would say that, along with Belton Road
Initiative or the two slogans ended up having the biggest
effect in a discourse. But BRI is, you know, more
favorably viewed in a lot of parts of the world,
(07:19):
whereas been at China twenty five was considered more of
a threat by a lot of industrial economies. So what
did China do. They actually tamp down on it, so
you will struggle to find any direct references to it
now in Chinese official documents, at least publicly, But it's
not dead, So a lot of the key goals are
now incorporated into the fourteen to five year plan, which
is the one that we're currently in going through twenty
(07:39):
twenty five. The other thing to keep in mind is
that the targets were what they thought circa late twenty fifteen, right,
So I would think that within the Chinese government they
actually have adjusted some things or realized that maybe that
wasn't the right forecasts. Some of them were actually quite vague,
for things like what nanometer technology would semi conductors be
circa twenty third, because of course they didn't actually know.
(08:01):
But my strong suspicion is that this framework still remains
in place, but it's sort of an evolution because the
point is not necessarily to hit all those individual targets.
It's are you basically fulfilling the plan in the broad sense?
Are you actually achieving leadership and all those key technologies.
Speaker 4 (08:18):
I just add there that, you know, some of that
antipathy among Western powers around the idea, and even the
phrase of made in China twenty twenty five is still
sort of quite live. I was at a meeting with
some policymakers think tankers at university recently, and there was
still this quite lively discussion I call it politely discussion
between a visiting European political advisor and Hong Kong officials
(08:41):
and Chinese officials about precisely what made in China is,
whether it's just an industrial policy or in the view
of this particular visitor, something much more sort of malign.
Speaker 3 (08:51):
I just got to say, so weird to be the
idea of like technological development along these lines being malign.
I mean, you know, this is human progress, right, technology
advances and countries want to be technological leaders, and I
understand why governments and companies around the world feel threatened
by it. But anyway, just one of the main storializing right.
Speaker 2 (09:15):
Because for instance, the US will say, well, we want
to develop more clean energy technology domestically because it's important
for the environment. But on the other hand, you could
probably have more progress on the clean energy front if
you just imported a bunch of stuff from China.
Speaker 4 (09:31):
Right now, one of the challenges here are the differences
here is precisely over what it means when Beijing says
it's going to back a certain sector. Right. The idea
that if Beijing identifies let's say, electric vehicles or solar
panels as a sector to back. It really can throw
its weight behind it. It can ask banks to provide
cheap credit, it can ask local governments to provide land
(09:53):
at cheap or no cost. It can get state owned
enterprises to pour there's significant resources, talent, innovation into those industries.
It really has sort of a huge machinery that it
can redirect, which you know other countries feel is quote
unquote unfair, and in some ways that's sort of behind
the whole accusation around unfair use of subsidies. For instance.
Speaker 5 (10:15):
I will try to channel both Beijing and Washington to
address your comment. So from Beijing's perspective, I think they
would say it's a bit ridiculous that the WES was
more or less fine with China moving up the value
chain as long as it wasn't in sectors that are
too high value added or too competitive with advanced economy industry.
So textile is fine, but when you say, oh, we
(10:37):
want to have our own jet airliners, that becomes a problem.
And I think there's actually truth to that, right, So
what changes that China went from lower to higher value
added and now it's companies are direct competitors in many
cases with like G seven companies On the US side,
I think part of the response would be, well, the
threat part of it is it's not development per se,
It's that the Chinese government, particularly of late, is quite
(11:00):
clear that self reliance or self sufficiency are the maybe
primary goal. This is clear in the third Planum that
came out in July that it's about self reliance, and
self reliance has a heavy national security undertone. So I'll
go back to what I was saying earlier that I
think both sides sort of feed off each other. So
why is China so worried about self reliance? Well, part
(11:21):
of that is a response to Western tariffs and US
export controls. But the fact is they are basically saying
we want to be free to the extent they can
be from the Western technological supply chain. And they're doing
that because they're worried about national security. So of course
in Washington they would think, why are you worried about
national security? Right, So it sort of goes in both directions.
Speaker 3 (11:58):
I guess I could see this sort of malign angle
also if it's like this is not real technological development,
this is just loss making companies that are backed by
the government that are going to then bankrupt and destroy
the industrial base of the West and not actually make
any progress. I guess I get all of these debates
(12:19):
and nuances and why people talk about China overcapacity as
a problem and all that stuff. But Okay, the other
thing that happened over the last several years is, in
addition to these ominous sounding phrases and slogans like made
in twenty twenty five and the Belton Road initiative that
created anxiety in the West, the US like actively started
(12:41):
to try to suppress Chinese technological development, starting under the
Trump administration and then obviously continuing under the Biden administration,
and it may get ratcheted up even further under the
next administration. Whoever that is, what's that done? How would
you describe specifically what the US has tried to do
in terms of constraining China's technological development and what's the
(13:03):
basics of the impact that these efforts have had.
Speaker 5 (13:06):
What the US is trying to do is somewhat subject
to debate. The official line is that the United States
is not trying to stop China's development. It's not about
overall delinking of the economies. Is just about select de risking.
It's about remaining ahead in the strategic and critical technologies
of the future. But it's not about sort of stifling
(13:27):
the macro economy of China. In Beijing, the view is
that it's all around containment and that the United States
mostly but some other Western countries are trying to encircle
China and basically prevent it from moving up the ladder
economically and technologically. Is it working. It's complicated because there's
a series of policies. So when we talk about what started,
(13:48):
the thing that people mostly focus on is, of course
the trade war, which effectively started in twenty eighteen in
a Trump administration. The purpose that the trade war is complicated.
It wasn't really to stunt China's growth, though there were
people in the Trump administration would have hoped that it
was actually for the president, for President Trump's perspective, to
try to balance trade and get a deal, which we
(14:08):
got in the form of the Phase one deal, whatever
you think of that. But the other thing that happened
that I think was actually a bigger deal from the
Chinese perspective was when the US added Huawei to the
Commerce Department's entity list in early twenty nineteen, because what
that signal was that the United States was effectively trying
to kill what was arguably China's best global technology company.
(14:32):
The US would say, we're not trying to kill it,
but the restrictions are pretty draconian, and there's very much
that vibe, And so what it did was convinced not
just Beijing but the local governments and Chinese companies that
otherwise would it prefer to just use sometimes cheaper or
better foreign inputs, like for semiconductors, that actually what Beijing
was saying about self sufficiency was indeed a national security imperative.
(14:53):
Is it working. It's complicated, but our basic take is
that at the macro level, what's happening in a Chinese
economy is primarily due to the property sector. You could
call it a meltdown, because it's pretty dramatic. That Chinese
government arguably started that with the three Red Lines policy.
But I would be careful about conflating the idea that
Chinese economic weakness is due to basically industrial policy, when
(15:15):
really there's clearly a more obvious macro phenomenon that explains it.
On the technology side, the export controls, I think are
really the crux of the question of are they slowing
China's development? I think they're The focus on the US
side is primarily on semiconductors, and there's even recent news
as Bloomberg has reported that, for example, TSMC, the famous
semiconductor foundry in Taiwan, might have been sending some Nvidia
(15:39):
chips to Huawei through some indirect body. Maybe they didn't
know about it, But there's all this debate about how
far ahead is China really and are they actually able
to make the most advanced chips on their own, And
I think that is really the question of when you
get to how effective are the export controls, it looks
like they are having some effect, but not a lot.
At a macro perspective.
Speaker 4 (15:58):
We also sort of discovering in real time precisely the
sort of miscalculation the idea of export controls. Initially, the
belief was that it would help the US stay ahead
by eight to ten years. But last year we saw
Huawei launch their Mate sixty smartphone, which included a seven
nanometer chip that suggested actually that Huawei's chip making partner, Smick,
(16:21):
was actually somewhere between sort of four or five years behind.
So there have been these sort of series of nasty
surprises and led to recalibrations of precisely where Chinese tech
advancement actually is.
Speaker 2 (16:34):
So just on the idea of what the US needs
to do here, I mean, one of the criticisms of
some of its response is that the problem really is
the cost of these technologies. So in order to make
them domestically and maybe internationally competitive, the US really needs
to bring down the cost curve. And that's hard to
do when you're competing with China and it has maybe
(16:56):
fewer regulations and certainly cheaper labor. Is there anything that
can be done on that front to make American technology
more competitive, for instance, via more tariffs.
Speaker 5 (17:10):
In theory, if the US erects tariff falls, which we
already have, but if Trump is re elected, he's promising
sixty percent tariffs on China, which would be huge and
might shut off eventually a good share of direct US
China trade. His theory, as he explained recently on his
Bloomberg interview with John Micklethwaite, is that essentially that will
compel all these companies to reshore or onshore production back
(17:34):
in the United States to sell in the United States.
Now generally speaking, import substitution has a pretty bad track
record internationally. But the US has the advantage of being
the largest economy in the world, right and it's the
largest consumer market, and so there is some feasibility to it.
But I think something that might be under emphasized in
a general discourse is that the tariffs, particularly as they
(17:54):
are constituted now, but especially if they increase them, also
hit a lot of intermediate goods right, actually makes it
more expensive to import things like steel or all the
components you need to build a factory or inputs for whatever,
And so you have to sort of decide. So the
US wants to protect at steel sector, Okay, we can
do that. We do do that, but that also means
it's steel costs more in the US, and it means
(18:16):
construction costs than or up, which means making a factory
and say Taiwan or China or whatever is cheaper. So
there are trade offs there. In my personal view, I
don't think tariffs are a good way to go about it.
I think industrial policy, which is a much wider set
of tools as some promise, but tariff to me are
like a sledgehammer.
Speaker 3 (18:34):
I think there's a really interesting point about intermediate I mean,
I imagine that even if you were to go into
an Intel factory or fab somewhere in the United States,
they are just numerous imported goods of all sorts. So if
we want Intel to be a powerhouse, the idea of
tariffs are going to make that much easier. I think
it's complicated, And then of course there's all the questions
about like how do you know it's coming from China,
(18:56):
or what if the final assembly is somewhere else, et cetera.
Let's get into civics. Both of you talk about some
key industries where China was in twenty fifteen and where
they are today in twenty twenty five, and what kind
of progress has been made.
Speaker 4 (19:10):
Well, I think the sort of really obvious consumer ones
where we've seen these kind of extraordinary leaps in evs
and solar panels. I mean, I think a company like BYD,
which is basically unheard of. I think globally a couple
of years ago, now a Chinese leader outpacing its global competitors.
It thinks it's going to sell half of its products
(19:32):
overseas in the future, so certainly also doesn't really see
tariffs or potential tariffs as an impediment to its expansion overseas,
and I think in a way it's sort of unimaginable.
I remember reporting in China about a decade ago around
the time that Made in China was actually announced, and
officials OCA Gunment officials are very excited to take me
to a lithium battery factory which batteries were going to
(19:56):
be used for electric vehicles, and it seemed to have
to say, like something of a pipe dream, Like I said,
totally misunderestimated the future of this sector and the future
of the company. But even at that time, it was
something that you know, local officials were really had this
sort of razor sharp focus.
Speaker 5 (20:14):
On evs are probably the best example, because they are
the technology where China has exceeded the plan, so to speak, right,
they've done much better than their internal forecasts would have
suggested in the twenty fifteen documents. But there are other
sectors where they've also done well, so unmanned area vehicles,
which is to say drones like that DJI makes China
(20:34):
is clearly the world's leader, and that the US tries
to restrict imports and use of that in the US,
but elsewhere they're dominant. There are other things like solar
panels that China clearly has dominance in other areas, they're
not exactly their world leader, but they're clearly starting to
catch up, and they're better off than they would have been,
say circa twenty fifteen. So semiconductors are one area where
they're not the world's leader, but they are on a
(20:55):
relative basis stronger than they were five years ago. Industrial robots,
things like that, machine tools. There are other sort of
you know, maybe more obscure things like large tractors. So
part of the plan talks about things like agricultural equipment
and pharmaceuticals. They're also making gains. So really in all
areas except arguably for maybe commercial aircraft, they're making relative gains.
Speaker 4 (21:16):
I guess the other element in China in some ways
China sort of had set itself up to succeed because
there are some areas right JO where you know, China
was already a global leader.
Speaker 5 (21:25):
Yeah. Well, so that's a good point because the new
energy vehicle plans go back to I believe two thousand
and nine, right, so when they're deciding in twenty fifteen,
whereas it's going to go some of those technologies, they
already had plans in place that were underway, and so
they could sort of project, Okay, we already know how
this is starting to work, whereas other things like artificial intelligence. Yeah,
(21:46):
it was a thing people spoke about in twenty fifteen,
but it wasn't nearly as real as it is now, right,
so that was much more speculative.
Speaker 2 (22:09):
Can we maybe talk about semiconductors specifically, because this obviously
has been a very hot button area for both the
US and China and maybe one of the areas where
we've seen a lot of money pouring in. How's that
shaking out?
Speaker 4 (22:23):
I mean, by and large, semi conductors is probably the
one area where the US has had most success in
rolling out export controls and curbing China's access to these
really key strategic technologies. And part of that is down to,
you know, the success of the Biden administration enlisting support
from its allies. It's just a handful of companies that
(22:44):
are involved in making these types of chips. And you know,
there's an argument you made that unless Biden had sort
of convinced Japan and the Netherlands to come on site,
that actually the controls that he rolled out would have
been far, far less effective. And one key area here
is actually preventing China from accessing the manufacturing equipment that's
(23:06):
needed to actually make these types of really advanced chips
that are used in AI and quantum computing.
Speaker 5 (23:13):
There's an interesting and I think quite important counterfactual to
be discussed, which is that you know, what if the
US had not done the export controls. In essence, what
the US is doing is imposing import substitution on China
in a way that China hadn't preferred. But we can
also see in the data, including for filings for Smick,
their main foundry, that they upped the amount of subsidies
(23:33):
they were getting after twenty nineteen. Right, So it means
that China sort of turned the industrial policy dial from
ten to eleven. You could debate how much effect it has,
but it seems clear that that is the overriding priority
now more than anything else, actually semic conductors, right, because
they know that is the keynode both sides except that
is it working. I mean, clearly it has slowed down
(23:53):
their ability to get the most advanced chips, but China's
clearly making gains on so called legacy nos or mature nodes, right,
so sort of slightly older technology, and they're building out
a lot of capacity there and that's something that they
still have access to a lot of the lithography equipment
to do. So other areas like packaging, they've improved it's design,
maybe some improvement, but that they're still lagging the West,
(24:15):
so qualcomm and video, et cetera. I think, really, as
Rebecca said, it's the equipment, so specifically, the most advanced
lithography machines that China as far as we know, has
not been able to make on its own, and that
is the current roadblock.
Speaker 3 (24:28):
But like whatever the most advanced lithography machine that China
is able to make today on October twenty fourth, twenty
twenty four, is it substantially higher than the most advanced
lithography machine that China was able to make at some
point in twenty fifteen, And is the number of years
gap between that most advanced machine versus the one that
(24:50):
ASML makes is it perceived to have narrowed?
Speaker 4 (24:54):
I actually don't know the narrowing of the generations Gerardine, Okay.
Speaker 5 (24:57):
Well, first of all, this is something where I think
would be subject to debate. Right, So there's the fact,
as Rebeca already mentioned, the Mate Pro, the Huawei phone
that had the seven animeter chip. When that came out,
there was a debate, and I don't think it's been
conclusively settled as far as I know, as exactly what
happened how they got those chips. The fact that we
have news recently saying that maybe actually Huawei is kitting
(25:19):
chips from TSMC indirectly as a wrinkle, because if that's true,
then it would suggest that actually they don't have their
own technology. They're essentially just finding a way around the
export controls, which is a problem for the US in
one sense, but it also means that maybe the export
controls are working in that China doesn't have the indigenous
capacity to make those things on lithography. I'm not an
expert on that, which is a super technical topic, but
(25:40):
my strong suspicion is that the quality of China's domestic
capacity has increased, but the gap is still there. And
so TSMC, I believe, is still pretty confident in SML
that they're, you know, the world's leader, and there's there's
going to be a gap going forward.
Speaker 4 (25:54):
I just had you, the gap that we know of
now between Smick and the industry leaded to TSMC is
about two generations, so that's roughly four years. But as
Gerard says, there is actual sort of still life debate
over precisely where that gap might be. Something it's bigger,
something it's smaller.
Speaker 5 (26:15):
So I think semiconductors are also. They're interesting for many reasons,
but one of them is that the technological race is
very much ongoing. So if More's law hasn't been exhausted yet,
so if there's still the ability to get to lower
and lower nanometers, then you could imagine that TSMC or
the West or whatever is able to stay ahead. But
(26:35):
if that slows, if at some point in a not
too distant future, that innovation is not moving as quickly,
I would imagine that with enough resources, the odds of
China catching up is higher. So there are other areas,
like say commercial aircraft right where there's clearly an innovative field,
but it's not as cutting edge as semiconductors, and yet
COMAC China is struggling. I think that is more of
(26:57):
a function of the sort of dualopoly nature of that
market and the difficulty of having sort of product integration
and then sort of market share. But from a technological perspective,
they're getting there and they eventually will catch up.
Speaker 2 (27:09):
So the other thing I was wondering is the role
of foreign investment, and I don't just mean foreign direct investment,
but also companies that come into China and set up
factories and then workers learn some of those techniques for
advanced manufacturing and things like that. Obviously there's a debate
over intellectual property and things like that as well. But
(27:32):
what role does FDI, foreign investment, foreign expertise play in
China's technological progress?
Speaker 5 (27:39):
Now, I would say a lot less than the ease
to So it would vary by sector and technology, right,
But generally speaking, if you look at, for example, the
trade data that China Customs puts out, they actually break
down whether the entity that's doing the trading is a
state on enterprise, is a foreign funded enterprises which is
basically an FDI company, or actually a private Chinese company.
(28:01):
And what you see is that China's exports are now
overwhelmingly dominated by private Chinese companies. So in the two thousands,
during the sort of peak China Shock years, a lot
of that growth and exports were actually foreign invested firms
in China that had set up factories. Over the past
decade that it's shifted, it's really just private firms, and
(28:22):
so I think more and more, at least in terms
of brands and manufacturing, it's really indigenous companies that are
doing the work. Now. There are some things like AI
where I think having some of the research links might
still matter, but by and large, I think China is
moving closer towards indigenous innovation, as they call it.
Speaker 4 (28:40):
One area that we really see that transition that Gerard
is talking about is about ten years ago, if you're
a foreign investor in China setting up a factory, you
were deeply concerned about IP and about you know, information
leakage and all of those sort of issues. And now actually,
as we see for example, more Chinese going to set
(29:00):
up their own factories overseas in part in response to
issues around tariffs, we actually see state owned enterprises and
private businesses. Chinese private business is concerned about that same problem,
concerned that you know, their international competitors and local workers
will actually be picking up sort of technological skills and
(29:21):
be picking up on potential company secrets and they're worried
about information leakage the other way.
Speaker 3 (29:26):
One big question. You know, we're obviously in the US
doing our own industrial policy of various sorts. One thing
we haven't really gotten into in the Maid and twenty
fifteen specific conversation is the operationalization of a goal. Okay,
so it's one thing to say in ten years we
want to be leaders in all these areas. And I
think you know clearly they've made extraordinary strides. And I'm
(29:49):
sure this is a very long, separate question, but I'd
be curious from both of you, you know, maybe start
with Rebecca, Like, you know, you went to that factory
ten years ago and it seemed like a pipe dream,
and now it's extraordinary. How would you characterize what the
government did, or what the government did along with banks
and other et cetera and private companies to make these
dreams of reality.
Speaker 4 (30:10):
Well, just the scale of resources that were poured into
these sectors. I mean, the sort of two key parts
of the MAID. In China, on the one hand, there
was this idea of self sufficiency, that China should be
less reliant on other countries, and it wanted to essentially
to stand on its own. Two feet and that was
clearly linked fundamentally to a national security goal. The other
part of it was this drive for innovation that China
(30:32):
wanted to create these sectors that became global competitors, that
they were able to export high value added goods into
the rest of the world. So there was these sort
of dual ambitions that were also feeding into the sort
of raison detre for supporting all of these industries. And
I think there's also this sort of prevailing issue too
for Beijing about the idea of needing to really shore
(30:57):
up its own security. So, for example, Beijing officials are
increasingly sort of concerned about making sure that has access
to its own sources of energy, particularly in any kind of,
you know, potential wartime scenario, and that is part of
a whole ethos that we see also for example, in
food security in China too, but really an increasing focus
(31:18):
on trying to make sure that Beijing isn't unnecessarily exposed
and perhaps even exposed in any way to oversee supply
chains for these key areas.
Speaker 5 (31:28):
In terms of policy instruments, quantifying what China's doing is
actually very difficult, except for things like rebates for electric
vehicles or things that show up in listed firm data,
but things like state linked credit or even totally in
government guidance fund allocations is quite difficult. I would say,
you know, in China's case, subsidies are not new, so
(31:51):
subsidies are not the secret sauce. What is different now? Well,
generally speaking, around really twenty thirteen twenty fourteen, they tried
to pivot to more market orientation. The big policy innovation
at that time was the reinvigoration of government guidance funds,
which are essentially state owned private equity funds or venture
capital funds. Those played a very large role in the
(32:12):
first say five ish years of the plan. My sense
is they've slowed in part because they weren't having the
market oriented return so they were hoping to have. But
in general, the state's essential ownership of much of the
financial sector matters a lot, and you see private investors
in the stock market, for example, where if Beijing says
this sector is a priority, then people invest in it.
(32:34):
Or on the other side, when they said, you know,
five or so years ago that ed tech was not
a priority, that tanked, and so there's a way of
sort of allocating all the market resources towards priority sectors.
The other thing I would flag is that there are
some technologies I think EV is the best example of
this where they really got the market orientation right in
a sense that they allowed consumers to adjudicate. So every
(32:57):
EV company, if actually eligible, could get the credits for
purchases to reduce the price of their evs. Their localities
might have been helping them in different ways, but ultimately
the best cars from a consumer perspective, one out like
so vyd why is byd great. It's not just subsidies. Yes,
they benefited from somethings, but a lot of other companies
did too. I think the hard part now for China,
(33:19):
and this is what their system is less good at,
is while they might have fixed the problem of picking
winners so to speak, by having the market do it,
they're less bad at eliminating losers. And there's a consolidation
that now has to happen. That you look at areas
like solar panels where a lot of these companies they
have negative margins actually, right, so how do you address that?
So it's sort of like the tide goes in and
(33:39):
goes out, But as long as it's market oriented it's
generally more effective.
Speaker 2 (33:43):
Yeah, I think it's interesting. A lot of people forget
the sort of volatility that we've seen, especially in EV
funding specifically because a few years ago we had lots
of Chinese EV makers that were going bankrupt, and there
are still some going bankrupt now, but there are also
those that are sort of getting I guess, revived from
the dead with new funding. So it's interesting to see
(34:05):
that flow kind of go back and forth. But what
happens in twenty twenty five? So the Maid in China
label brand is being downplayed somewhat, So what exactly does
that anniversary the end of the timeframe actually mean.
Speaker 4 (34:24):
I kindly add one more for Geral, which I'm also
curious about, which is what happens in twenty thirty.
Speaker 5 (34:29):
Well, in both cases, I would say the fifteenth and
sixteenth five year plans respectively, Right, I think it's iterative.
So Made in China twenty twenty five, somewhat misleadingly, actually
has a lot of targets to go out to twenty thirty.
They're typically vaguer than the twenty twenty five targets, but
the plan doesn't end in twenty twenty five, and so
I think they will as part of the five year
(34:50):
plan that will be coming out in early twenty twenty
six will probably essentially incorporate some of that. And as
I said up front, there are so many documents that
are associated with this one blueprint. It's like think of
it as the phrase I prefer as someone that's coined
as cascade of plans. Right, It's not just one plan.
It's a plan that then begets a whole bunch of
other plans, and it is iterative and requires a lot.
(35:11):
It actually, I think eats up a lot of the
bureaucracy is time because they have to assess and reassess
and come up with new targets. But the bottom line
is China's definitely not giving up an industrial policy. The
signals coming out of Beijing in recent years, if anything,
suggests there's an even greater urgency in part to the
national security concerns. And so whatever the successor to Made
in China twenty twenty five is, it's going to happen.
(35:33):
It probably won't be called Made in China twenty forty
or whatever, but it's going to exist.
Speaker 4 (35:37):
Part of the question is, I guess over that packaging
precisely because of all of the responses and suspicions that
were provoked by the made in China twenty twenty five label,
and it's no longer advantageous. In fact, it's sort of
geopolitically disadvantageous to be advertising your industrial policy in this way.
Speaker 2 (35:55):
If you're Beijing and Gerard, you read all of those plans, right,
the hundreds and hundreds of pages, thousands of pages.
Speaker 5 (36:03):
There are plenty of people around the world to do
that work for us. Even reading just the so called
green Book of the targets is quite a slog.
Speaker 2 (36:11):
All right, we're going to have to leave it there,
but thank you so much to both of you for
coming on all thoughts.
Speaker 5 (36:17):
That was great, Thank you, Thank you so much. Joe.
Speaker 2 (36:32):
I thought that was a fantastic overview of what China
is doing and to some extent, what the US is
trying to do too.
Speaker 3 (36:38):
I did too. I had a lot of thoughts, and
obviously anyone who listens to the podcast knows that we're
both extremely interested in this specifically and all the other
things related to it. Can I say, you know one
thing at the end, and Gerard was talking about like
I think he called it a cascade of plans and
all I've been reading, you know, a lot of Chinese history,
(37:00):
twentieth century history. They love meetings and planted They always
have all these like work groups and study groups and
random people or it's like I'll get appointed to a
new study group. I don't know if that's good or bad,
but they love a study group.
Speaker 2 (37:13):
I think it's funny that you're just discovering this. Actually,
you know, one of the interesting books just speaking of bureaucracies,
One of the interesting books I read when I moved
to Abu Dhabi was about Saudi Arabian government ministries and
what it was actually like to work there, and it
was sort of a similar thing. There were lots of
meetings and people kind of getting paid to not do
(37:34):
very much. But it was super interesting.
Speaker 3 (37:36):
As a meeting hater myself, I guess whenever I read
I note when they're like, it rings a bell in
my head. When I see another study group or work
committee or something like that getting formed, I'm like, oh God,
that sounds so awful. But no, I thought that was good.
And look, I mean, you know, this gets back to
many of our big themes, and I get why the
US and the West is anxious and all this stuff.
(37:58):
But on the other hand, I would just say things
like economic development is technological development. This goes back to
Ricardo Houseman and the ability to make complex machines. That
is what it means to get wealthier, or that seems
to be the ability to do complicated things and move
up the value chain. And when we look at Boeing
and we look at what our own manufacturing like a
(38:20):
lot of the issues I get the impression are projecting
our own problems abroad. Like, you know, one way for
China to close the gap on aircraft to make better
and cheaper airplanes, But another way for China to close
the gap on aircraft is for the US to not
be able to make planes. And we can converge in
two directions, and one way of maybe if we want
(38:42):
to avoid that divergence would be getting better at making
airplanes ourselves.
Speaker 2 (38:46):
Well, the other thing I was thinking about, and this
is sort of speculative or kind of fuzzy, but the
socioeconomic I guess aspect of this, which is, you know,
a lot of the jobs in advanced technology they might
pay well relative to other manufacturing jobs, but like some
of them aren't very much fun. Right, It's like if
(39:07):
you're working in a fab or something, you're wearing like
one of those suits and you're staring at tiny chips
all day and you're indoors, et cetera. But at the
same time, in China, you know, we've seen a lot
of like popular dissatisfaction. Yeah, you have the live flat
movement where people are like, why should I even bother
(39:28):
trying because my life is never going to get better?
And so I kind of wonder like how all of
that plays into some of this as well.
Speaker 3 (39:35):
There's a really good video by Asianometry that people should watch.
It's basically what does someone who work in a fab
actually do? And it's an issue here. I mean they
talk about, you know, this is not a job. I mean,
there are jobs in engineering and tech and hard tech
in the US that many people would find to be
an extraordinary, challenging and interesting and highly remunative career. But
(39:58):
there are also a lot of jobs in engineering and
hard tech in the United States that I think or anywhere,
that people would find to be quite miserable, et cetera.
But this is why we need humanoid robots.
Speaker 2 (40:09):
That's right, Okay, shall we leave it there?
Speaker 3 (40:11):
Let's leave it there.
Speaker 2 (40:12):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (40:18):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guests Gerard de Pippo He's at GDP nineteen
eighty five and Rebecca Chung Wilkins, She's at our Chun Wilkins.
Follow our producers Carman Rodriguez at Kerman armand Dashel Bennett
at Dashbot and Kelbrooks at Calebrooks. Thank you to our
producer Moses Ondam and from our Odd Lots content. Go
(40:40):
to Bloomberg dot com slash odd Lots. We have transcripts,
a blog, and a daily newsletter, and you can chat
about all of these topics twenty four to seven in
our discord Discord dot gg slash odd Lots.
Speaker 2 (40:52):
And if you enjoy add lots, if you like it
when we check in on China's industrial and technological plans,
then please leave us a positive review on your favorite
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(41:12):
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(41:32):
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Thanks for listening. In eight
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots Podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:25):
Joe, do you realize it's almost the end of twenty
twenty four?
Speaker 3 (00:29):
Yeah? Well, yeah, it's crazy.
Speaker 4 (00:31):
You know.
Speaker 3 (00:32):
It's been a really warm month in October.
Speaker 5 (00:34):
Yeah, I know.
Speaker 3 (00:35):
So I feel like we got this free month of
summer and so yeah, like we're basically almost here and
we sort of like got a free, one less month
of winter.
Speaker 2 (00:42):
It feels like I feel like the warm weather is
also throwing everyone's sense of time off. Yeah, but anyway,
we're almost done with twenty twenty four. Who knows what
the rest of the year is going to look like,
but that means that twenty twenty five is coming up.
And you know what I think of When I think
of twenty twenty five.
Speaker 3 (01:00):
You and I think of the same thing. And we're
the only two journalists in America that don't think of
Project twenty.
Speaker 2 (01:06):
Twenty Oh yeah, of course. Okay, So Joe and I
are thinking of Made in China twenty twenty five, which,
of course was the big program that China launched ten
years ago. Almost ten years ago now back in twenty
fifteen to bulk out strategically important advanced technology sectors. And
so I'm kind of curious what exactly happens in twenty
(01:28):
twenty five, how much progress China has made on this front.
You know, next year, are they suddenly going to like
declare victory in advanced technology and that'll be the end
of it. What criteria are they actually using to judge
its success. I have a bunch of.
Speaker 3 (01:43):
Questions, you know, I just have to say that I
appreciate things like made in twenty twenty five initiatives or
even like you know, five year plans or ten year
plans or whatever, just because they provide a very convenient
spot to go back and look, did the goals get
hit or not. It's one thing to talk about moonshots
and like, oh, we're going to lead all this, But
(02:05):
unless you put a date on when you want to
achieve it by, you don't really know whether you're successful,
right because you never really know where you are in
sort of the arc of progress. But if you have
a system that puts dates on where you want to be,
at least you can go back and judge, well, were
we successful or not. And so now we're on the
verge of being able to look at the start of
that initiative and the end of that initiative and sort
(02:27):
of a say whether it worked or not.
Speaker 2 (02:29):
Is that your pitch for All Thoughts World Domination twenty
twenty five.
Speaker 3 (02:33):
Well, we'd have maybe twenty thirty five, okay, and we
need some like very specific metrics, you know, we have
to like really know what that means in advance, and
then yeah, we'll see if we hit it or not.
Speaker 2 (02:43):
Okay, you're right, though, deadlines are very important. So speaking
of deadlines, why don't I go ahead and bring in
our very perfect guests for this particular episode. We're speaking
with Gerard de Pippo, senior geoeconomics analyst over at Bloomberg Economics,
as well as Rebecca Ka Chung Wilkins, senior correspondent for
the Government and Economy Team Asia. I knew her back
(03:05):
when I was in Hong Kong and she covered China
credit and she was so good at it. So who
better to kind of draw the connection between technology and
finance and economics than these two. So Girard and Rebecca,
thank you so much for coming back on our lots.
Speaker 4 (03:22):
Thank you for has such a pleasure to be here.
Speaker 2 (03:24):
Let's start with the beginning. I guess twenty fifteen, China
decides to launch this Maid in China twenty twenty five program.
What was the thinking behind it, what were the goals?
Speaker 4 (03:35):
Well, I think one thing to remember is this sort
of a hole Made in China industrial policy. This comes
just a couple of years into President She's in pain
getting his leadership underway in China. So this is also
very much President She's vision for the Chinese economy, his
idea that these key sectors, these key industries are sentially
(03:55):
going to underpin the national development. So this is not
sort of, I suppose, just a discussion about china strategic ambitions,
but also specifically She's own vision for the direction for China.
Speaker 5 (04:09):
Also that in the context of Chinese industrial policy, so
Made in China twenty five is an example of an
iterative process and also sort of a reflective process with
the rest of the world. So there obviously were other
industrial policies before, and that would include something like the
Medium Long Term Plan from two thousand and five, which
is a fifteen year plan. There are of course five
year plans, but also mad in China twenty five was
(04:29):
partially inspired by Germany's Industry four point zero plan, which
is much less detailed than ambitious. But there's a sort
of a reactive effect there which ends up having knock
on effects because then the US reacts to Made in
China twenty five, and so it's just part of the cycle.
I think what makes Made in China twenty five different
than other plans that China had is that it was
more comprehensive, more ambitious, and much more focused on not
(04:52):
just catching up, but actually leading in ten strategic sectors.
Previous plans have been more about say lower value added
or megaproject right, and this is basically they want to
be the world leader and all the technologies that circut
twenty fifteen they had identified as being the most important.
Speaker 3 (05:07):
That's interesting. So one way of thinking about development is like, Okay,
we're going to build lots of bridges and rail and
housing and hospitals and other sorts of things, but this
is about really leading the technological frontier. And of course
this is what is the source of tremendous angst in Washington,
d C. And various US industrial giants and so forth.
(05:27):
I mean I don't know if we need to like
list all fifteen, but what are the big areas that
China felt it had to pursue.
Speaker 5 (05:33):
Sure, so they have ten strategic sectors, but then within
that there's any number of technologies. So the big ones
would be like information technology, which includes things like semiconductors,
five G artificial intelligence, and then things like aviation and
space technology, Energy equipment whichuld include things like solar panels,
and then new energy vehicles, things like electric vehicles. So
(05:54):
it spans pretty much everything, but it's skews towards the
industrial sector, and it's really a manufacturing based view of development.
Speaker 2 (06:02):
So one thing that was interesting, Jared is you said
that it was an iterative process. How has it changed
in your mind from like twenty fifteen to now. Has
there been maybe more of a focus or a shift
in direction.
Speaker 5 (06:17):
A few things the original made in China twenty five Blueprint,
which is what people treat as being the plan that
was announced in early twenty fifteen, But then actually when
people talk about all the targets, those mostly come from
something that's commonly called the Green Book, which was published
by the Chinese Academy of Engineers, and that's where you
have the two hundred and fifty plus targets that are
(06:37):
looking at specific technologies over time. It is sort of
like an authoritative addendum. But then on top of that,
there are something like four hundred plus other authoritative documents
going through technologies, going through different levels of government. So
it's not just one thing, and that's part of the
fact that those other plans don't come out at exactly
the same time. That makes it iterative. The other thing
(06:58):
that I think is really important is the Chinese government
realized around twenty nineteen that the phrase mid in China
twenty five was provoking antibodies in the West, particularly in
the US. I would say that, along with Belton Road
Initiative or the two slogans ended up having the biggest
effect in a discourse. But BRI is, you know, more
favorably viewed in a lot of parts of the world,
(07:19):
whereas been at China twenty five was considered more of
a threat by a lot of industrial economies. So what
did China do. They actually tamp down on it, so
you will struggle to find any direct references to it
now in Chinese official documents, at least publicly, But it's
not dead, So a lot of the key goals are
now incorporated into the fourteen to five year plan, which
is the one that we're currently in going through twenty
(07:39):
twenty five. The other thing to keep in mind is
that the targets were what they thought circa late twenty fifteen, right,
So I would think that within the Chinese government they
actually have adjusted some things or realized that maybe that
wasn't the right forecasts. Some of them were actually quite vague,
for things like what nanometer technology would semi conductors be
circa twenty third, because of course they didn't actually know.
(08:01):
But my strong suspicion is that this framework still remains
in place, but it's sort of an evolution because the
point is not necessarily to hit all those individual targets.
It's are you basically fulfilling the plan in the broad sense?
Are you actually achieving leadership and all those key technologies.
Speaker 4 (08:18):
I just add there that, you know, some of that
antipathy among Western powers around the idea, and even the
phrase of made in China twenty twenty five is still
sort of quite live. I was at a meeting with
some policymakers think tankers at university recently, and there was
still this quite lively discussion I call it politely discussion
between a visiting European political advisor and Hong Kong officials
(08:41):
and Chinese officials about precisely what made in China is,
whether it's just an industrial policy or in the view
of this particular visitor, something much more sort of malign.
Speaker 3 (08:51):
I just got to say, so weird to be the
idea of like technological development along these lines being malign.
I mean, you know, this is human progress, right, technology
advances and countries want to be technological leaders, and I
understand why governments and companies around the world feel threatened
by it. But anyway, just one of the main storializing right.
Speaker 2 (09:15):
Because for instance, the US will say, well, we want
to develop more clean energy technology domestically because it's important
for the environment. But on the other hand, you could
probably have more progress on the clean energy front if
you just imported a bunch of stuff from China.
Speaker 4 (09:31):
Right now, one of the challenges here are the differences
here is precisely over what it means when Beijing says
it's going to back a certain sector. Right. The idea
that if Beijing identifies let's say, electric vehicles or solar
panels as a sector to back. It really can throw
its weight behind it. It can ask banks to provide
cheap credit, it can ask local governments to provide land
(09:53):
at cheap or no cost. It can get state owned
enterprises to pour there's significant resources, talent, innovation into those industries.
It really has sort of a huge machinery that it
can redirect, which you know other countries feel is quote
unquote unfair, and in some ways that's sort of behind
the whole accusation around unfair use of subsidies. For instance.
Speaker 5 (10:15):
I will try to channel both Beijing and Washington to
address your comment. So from Beijing's perspective, I think they
would say it's a bit ridiculous that the WES was
more or less fine with China moving up the value
chain as long as it wasn't in sectors that are
too high value added or too competitive with advanced economy industry.
So textile is fine, but when you say, oh, we
(10:37):
want to have our own jet airliners, that becomes a problem.
And I think there's actually truth to that, right, So
what changes that China went from lower to higher value
added and now it's companies are direct competitors in many
cases with like G seven companies On the US side,
I think part of the response would be, well, the
threat part of it is it's not development per se,
It's that the Chinese government, particularly of late, is quite
(11:00):
clear that self reliance or self sufficiency are the maybe
primary goal. This is clear in the third Planum that
came out in July that it's about self reliance, and
self reliance has a heavy national security undertone. So I'll
go back to what I was saying earlier that I
think both sides sort of feed off each other. So
why is China so worried about self reliance? Well, part
(11:21):
of that is a response to Western tariffs and US
export controls. But the fact is they are basically saying
we want to be free to the extent they can
be from the Western technological supply chain. And they're doing
that because they're worried about national security. So of course
in Washington they would think, why are you worried about
national security? Right, So it sort of goes in both directions.
Speaker 3 (11:58):
I guess I could see this sort of malign angle
also if it's like this is not real technological development,
this is just loss making companies that are backed by
the government that are going to then bankrupt and destroy
the industrial base of the West and not actually make
any progress. I guess I get all of these debates
(12:19):
and nuances and why people talk about China overcapacity as
a problem and all that stuff. But Okay, the other
thing that happened over the last several years is, in
addition to these ominous sounding phrases and slogans like made
in twenty twenty five and the Belton Road initiative that
created anxiety in the West, the US like actively started
(12:41):
to try to suppress Chinese technological development, starting under the
Trump administration and then obviously continuing under the Biden administration,
and it may get ratcheted up even further under the
next administration. Whoever that is, what's that done? How would
you describe specifically what the US has tried to do
in terms of constraining China's technological development and what's the
(13:03):
basics of the impact that these efforts have had.
Speaker 5 (13:06):
What the US is trying to do is somewhat subject
to debate. The official line is that the United States
is not trying to stop China's development. It's not about
overall delinking of the economies. Is just about select de risking.
It's about remaining ahead in the strategic and critical technologies
of the future. But it's not about sort of stifling
(13:27):
the macro economy of China. In Beijing, the view is
that it's all around containment and that the United States
mostly but some other Western countries are trying to encircle
China and basically prevent it from moving up the ladder
economically and technologically. Is it working. It's complicated because there's
a series of policies. So when we talk about what started,
(13:48):
the thing that people mostly focus on is, of course
the trade war, which effectively started in twenty eighteen in
a Trump administration. The purpose that the trade war is complicated.
It wasn't really to stunt China's growth, though there were
people in the Trump administration would have hoped that it
was actually for the president, for President Trump's perspective, to
try to balance trade and get a deal, which we
(14:08):
got in the form of the Phase one deal, whatever
you think of that. But the other thing that happened
that I think was actually a bigger deal from the
Chinese perspective was when the US added Huawei to the
Commerce Department's entity list in early twenty nineteen, because what
that signal was that the United States was effectively trying
to kill what was arguably China's best global technology company.
(14:32):
The US would say, we're not trying to kill it,
but the restrictions are pretty draconian, and there's very much
that vibe, And so what it did was convinced not
just Beijing but the local governments and Chinese companies that
otherwise would it prefer to just use sometimes cheaper or
better foreign inputs, like for semiconductors, that actually what Beijing
was saying about self sufficiency was indeed a national security imperative.
(14:53):
Is it working. It's complicated, but our basic take is
that at the macro level, what's happening in a Chinese
economy is primarily due to the property sector. You could
call it a meltdown, because it's pretty dramatic. That Chinese
government arguably started that with the three Red Lines policy.
But I would be careful about conflating the idea that
Chinese economic weakness is due to basically industrial policy, when
(15:15):
really there's clearly a more obvious macro phenomenon that explains it.
On the technology side, the export controls, I think are
really the crux of the question of are they slowing
China's development? I think they're The focus on the US
side is primarily on semiconductors, and there's even recent news
as Bloomberg has reported that, for example, TSMC, the famous
semiconductor foundry in Taiwan, might have been sending some Nvidia
(15:39):
chips to Huawei through some indirect body. Maybe they didn't
know about it, But there's all this debate about how
far ahead is China really and are they actually able
to make the most advanced chips on their own, And
I think that is really the question of when you
get to how effective are the export controls, it looks
like they are having some effect, but not a lot.
At a macro perspective.
Speaker 4 (15:58):
We also sort of discovering in real time precisely the
sort of miscalculation the idea of export controls. Initially, the
belief was that it would help the US stay ahead
by eight to ten years. But last year we saw
Huawei launch their Mate sixty smartphone, which included a seven
nanometer chip that suggested actually that Huawei's chip making partner, Smick,
(16:21):
was actually somewhere between sort of four or five years behind.
So there have been these sort of series of nasty
surprises and led to recalibrations of precisely where Chinese tech
advancement actually is.
Speaker 2 (16:34):
So just on the idea of what the US needs
to do here, I mean, one of the criticisms of
some of its response is that the problem really is
the cost of these technologies. So in order to make
them domestically and maybe internationally competitive, the US really needs
to bring down the cost curve. And that's hard to
do when you're competing with China and it has maybe
(16:56):
fewer regulations and certainly cheaper labor. Is there anything that
can be done on that front to make American technology
more competitive, for instance, via more tariffs.
Speaker 5 (17:10):
In theory, if the US erects tariff falls, which we
already have, but if Trump is re elected, he's promising
sixty percent tariffs on China, which would be huge and
might shut off eventually a good share of direct US
China trade. His theory, as he explained recently on his
Bloomberg interview with John Micklethwaite, is that essentially that will
compel all these companies to reshore or onshore production back
(17:34):
in the United States to sell in the United States.
Now generally speaking, import substitution has a pretty bad track
record internationally. But the US has the advantage of being
the largest economy in the world, right and it's the
largest consumer market, and so there is some feasibility to it.
But I think something that might be under emphasized in
a general discourse is that the tariffs, particularly as they
(17:54):
are constituted now, but especially if they increase them, also
hit a lot of intermediate goods right, actually makes it
more expensive to import things like steel or all the
components you need to build a factory or inputs for whatever,
And so you have to sort of decide. So the
US wants to protect at steel sector, Okay, we can
do that. We do do that, but that also means
it's steel costs more in the US, and it means
(18:16):
construction costs than or up, which means making a factory
and say Taiwan or China or whatever is cheaper. So
there are trade offs there. In my personal view, I
don't think tariffs are a good way to go about it.
I think industrial policy, which is a much wider set
of tools as some promise, but tariff to me are
like a sledgehammer.
Speaker 3 (18:34):
I think there's a really interesting point about intermediate I mean,
I imagine that even if you were to go into
an Intel factory or fab somewhere in the United States,
they are just numerous imported goods of all sorts. So if
we want Intel to be a powerhouse, the idea of
tariffs are going to make that much easier. I think
it's complicated, And then of course there's all the questions
about like how do you know it's coming from China,
(18:56):
or what if the final assembly is somewhere else, et cetera.
Let's get into civics. Both of you talk about some
key industries where China was in twenty fifteen and where
they are today in twenty twenty five, and what kind
of progress has been made.
Speaker 4 (19:10):
Well, I think the sort of really obvious consumer ones
where we've seen these kind of extraordinary leaps in evs
and solar panels. I mean, I think a company like BYD,
which is basically unheard of. I think globally a couple
of years ago, now a Chinese leader outpacing its global competitors.
It thinks it's going to sell half of its products
(19:32):
overseas in the future, so certainly also doesn't really see
tariffs or potential tariffs as an impediment to its expansion overseas,
and I think in a way it's sort of unimaginable.
I remember reporting in China about a decade ago around
the time that Made in China was actually announced, and
officials OCA Gunment officials are very excited to take me
to a lithium battery factory which batteries were going to
(19:56):
be used for electric vehicles, and it seemed to have
to say, like something of a pipe dream, Like I said,
totally misunderestimated the future of this sector and the future
of the company. But even at that time, it was
something that you know, local officials were really had this
sort of razor sharp focus.
Speaker 5 (20:14):
On evs are probably the best example, because they are
the technology where China has exceeded the plan, so to speak, right,
they've done much better than their internal forecasts would have
suggested in the twenty fifteen documents. But there are other
sectors where they've also done well, so unmanned area vehicles,
which is to say drones like that DJI makes China
(20:34):
is clearly the world's leader, and that the US tries
to restrict imports and use of that in the US,
but elsewhere they're dominant. There are other things like solar
panels that China clearly has dominance in other areas, they're
not exactly their world leader, but they're clearly starting to
catch up, and they're better off than they would have been,
say circa twenty fifteen. So semiconductors are one area where
they're not the world's leader, but they are on a
(20:55):
relative basis stronger than they were five years ago. Industrial robots,
things like that, machine tools. There are other sort of
you know, maybe more obscure things like large tractors. So
part of the plan talks about things like agricultural equipment
and pharmaceuticals. They're also making gains. So really in all
areas except arguably for maybe commercial aircraft, they're making relative gains.
Speaker 4 (21:16):
I guess the other element in China in some ways
China sort of had set itself up to succeed because
there are some areas right JO where you know, China
was already a global leader.
Speaker 5 (21:25):
Yeah. Well, so that's a good point because the new
energy vehicle plans go back to I believe two thousand
and nine, right, so when they're deciding in twenty fifteen,
whereas it's going to go some of those technologies, they
already had plans in place that were underway, and so
they could sort of project, Okay, we already know how
this is starting to work, whereas other things like artificial intelligence. Yeah,
(21:46):
it was a thing people spoke about in twenty fifteen,
but it wasn't nearly as real as it is now, right,
so that was much more speculative.
Speaker 2 (22:09):
Can we maybe talk about semiconductors specifically, because this obviously
has been a very hot button area for both the
US and China and maybe one of the areas where
we've seen a lot of money pouring in. How's that
shaking out?
Speaker 4 (22:23):
I mean, by and large, semi conductors is probably the
one area where the US has had most success in
rolling out export controls and curbing China's access to these
really key strategic technologies. And part of that is down to,
you know, the success of the Biden administration enlisting support
from its allies. It's just a handful of companies that
(22:44):
are involved in making these types of chips. And you know,
there's an argument you made that unless Biden had sort
of convinced Japan and the Netherlands to come on site,
that actually the controls that he rolled out would have
been far, far less effective. And one key area here
is actually preventing China from accessing the manufacturing equipment that's
(23:06):
needed to actually make these types of really advanced chips
that are used in AI and quantum computing.
Speaker 5 (23:13):
There's an interesting and I think quite important counterfactual to
be discussed, which is that you know, what if the
US had not done the export controls. In essence, what
the US is doing is imposing import substitution on China
in a way that China hadn't preferred. But we can
also see in the data, including for filings for Smick,
their main foundry, that they upped the amount of subsidies
(23:33):
they were getting after twenty nineteen. Right, So it means
that China sort of turned the industrial policy dial from
ten to eleven. You could debate how much effect it has,
but it seems clear that that is the overriding priority
now more than anything else, actually semic conductors, right, because
they know that is the keynode both sides except that
is it working. I mean, clearly it has slowed down
(23:53):
their ability to get the most advanced chips, but China's
clearly making gains on so called legacy nos or mature nodes, right,
so sort of slightly older technology, and they're building out
a lot of capacity there and that's something that they
still have access to a lot of the lithography equipment
to do. So other areas like packaging, they've improved it's design,
maybe some improvement, but that they're still lagging the West,
(24:15):
so qualcomm and video, et cetera. I think, really, as
Rebecca said, it's the equipment, so specifically, the most advanced
lithography machines that China as far as we know, has
not been able to make on its own, and that
is the current roadblock.
Speaker 3 (24:28):
But like whatever the most advanced lithography machine that China
is able to make today on October twenty fourth, twenty
twenty four, is it substantially higher than the most advanced
lithography machine that China was able to make at some
point in twenty fifteen, And is the number of years
gap between that most advanced machine versus the one that
(24:50):
ASML makes is it perceived to have narrowed?
Speaker 4 (24:54):
I actually don't know the narrowing of the generations Gerardine, Okay.
Speaker 5 (24:57):
Well, first of all, this is something where I think
would be subject to debate. Right, So there's the fact,
as Rebeca already mentioned, the Mate Pro, the Huawei phone
that had the seven animeter chip. When that came out,
there was a debate, and I don't think it's been
conclusively settled as far as I know, as exactly what
happened how they got those chips. The fact that we
have news recently saying that maybe actually Huawei is kitting
(25:19):
chips from TSMC indirectly as a wrinkle, because if that's true,
then it would suggest that actually they don't have their
own technology. They're essentially just finding a way around the
export controls, which is a problem for the US in
one sense, but it also means that maybe the export
controls are working in that China doesn't have the indigenous
capacity to make those things on lithography. I'm not an
expert on that, which is a super technical topic, but
(25:40):
my strong suspicion is that the quality of China's domestic
capacity has increased, but the gap is still there. And
so TSMC, I believe, is still pretty confident in SML
that they're, you know, the world's leader, and there's there's
going to be a gap going forward.
Speaker 4 (25:54):
I just had you, the gap that we know of
now between Smick and the industry leaded to TSMC is
about two generations, so that's roughly four years. But as
Gerard says, there is actual sort of still life debate
over precisely where that gap might be. Something it's bigger,
something it's smaller.
Speaker 5 (26:15):
So I think semiconductors are also. They're interesting for many reasons,
but one of them is that the technological race is
very much ongoing. So if More's law hasn't been exhausted yet,
so if there's still the ability to get to lower
and lower nanometers, then you could imagine that TSMC or
the West or whatever is able to stay ahead. But
(26:35):
if that slows, if at some point in a not
too distant future, that innovation is not moving as quickly,
I would imagine that with enough resources, the odds of
China catching up is higher. So there are other areas,
like say commercial aircraft right where there's clearly an innovative field,
but it's not as cutting edge as semiconductors, and yet
COMAC China is struggling. I think that is more of
(26:57):
a function of the sort of dualopoly nature of that
market and the difficulty of having sort of product integration
and then sort of market share. But from a technological perspective,
they're getting there and they eventually will catch up.
Speaker 2 (27:09):
So the other thing I was wondering is the role
of foreign investment, and I don't just mean foreign direct investment,
but also companies that come into China and set up
factories and then workers learn some of those techniques for
advanced manufacturing and things like that. Obviously there's a debate
over intellectual property and things like that as well. But
(27:32):
what role does FDI, foreign investment, foreign expertise play in
China's technological progress?
Speaker 5 (27:39):
Now, I would say a lot less than the ease
to So it would vary by sector and technology, right,
But generally speaking, if you look at, for example, the
trade data that China Customs puts out, they actually break
down whether the entity that's doing the trading is a
state on enterprise, is a foreign funded enterprises which is
basically an FDI company, or actually a private Chinese company.
(28:01):
And what you see is that China's exports are now
overwhelmingly dominated by private Chinese companies. So in the two thousands,
during the sort of peak China Shock years, a lot
of that growth and exports were actually foreign invested firms
in China that had set up factories. Over the past
decade that it's shifted, it's really just private firms, and
(28:22):
so I think more and more, at least in terms
of brands and manufacturing, it's really indigenous companies that are
doing the work. Now. There are some things like AI
where I think having some of the research links might
still matter, but by and large, I think China is
moving closer towards indigenous innovation, as they call it.
Speaker 4 (28:40):
One area that we really see that transition that Gerard
is talking about is about ten years ago, if you're
a foreign investor in China setting up a factory, you
were deeply concerned about IP and about you know, information
leakage and all of those sort of issues. And now actually,
as we see for example, more Chinese going to set
(29:00):
up their own factories overseas in part in response to
issues around tariffs, we actually see state owned enterprises and
private businesses. Chinese private business is concerned about that same problem,
concerned that you know, their international competitors and local workers
will actually be picking up sort of technological skills and
(29:21):
be picking up on potential company secrets and they're worried
about information leakage the other way.
Speaker 3 (29:26):
One big question. You know, we're obviously in the US
doing our own industrial policy of various sorts. One thing
we haven't really gotten into in the Maid and twenty
fifteen specific conversation is the operationalization of a goal. Okay,
so it's one thing to say in ten years we
want to be leaders in all these areas. And I
think you know clearly they've made extraordinary strides. And I'm
(29:49):
sure this is a very long, separate question, but I'd
be curious from both of you, you know, maybe start
with Rebecca, Like, you know, you went to that factory
ten years ago and it seemed like a pipe dream,
and now it's extraordinary. How would you characterize what the
government did, or what the government did along with banks
and other et cetera and private companies to make these
dreams of reality.
Speaker 4 (30:10):
Well, just the scale of resources that were poured into
these sectors. I mean, the sort of two key parts
of the MAID. In China, on the one hand, there
was this idea of self sufficiency, that China should be
less reliant on other countries, and it wanted to essentially
to stand on its own. Two feet and that was
clearly linked fundamentally to a national security goal. The other
part of it was this drive for innovation that China
(30:32):
wanted to create these sectors that became global competitors, that
they were able to export high value added goods into
the rest of the world. So there was these sort
of dual ambitions that were also feeding into the sort
of raison detre for supporting all of these industries. And
I think there's also this sort of prevailing issue too
for Beijing about the idea of needing to really shore
(30:57):
up its own security. So, for example, Beijing officials are
increasingly sort of concerned about making sure that has access
to its own sources of energy, particularly in any kind of,
you know, potential wartime scenario, and that is part of
a whole ethos that we see also for example, in
food security in China too, but really an increasing focus
(31:18):
on trying to make sure that Beijing isn't unnecessarily exposed
and perhaps even exposed in any way to oversee supply
chains for these key areas.
Speaker 5 (31:28):
In terms of policy instruments, quantifying what China's doing is
actually very difficult, except for things like rebates for electric
vehicles or things that show up in listed firm data,
but things like state linked credit or even totally in
government guidance fund allocations is quite difficult. I would say,
you know, in China's case, subsidies are not new, so
(31:51):
subsidies are not the secret sauce. What is different now? Well,
generally speaking, around really twenty thirteen twenty fourteen, they tried
to pivot to more market orientation. The big policy innovation
at that time was the reinvigoration of government guidance funds,
which are essentially state owned private equity funds or venture
capital funds. Those played a very large role in the
(32:12):
first say five ish years of the plan. My sense
is they've slowed in part because they weren't having the
market oriented return so they were hoping to have. But
in general, the state's essential ownership of much of the
financial sector matters a lot, and you see private investors
in the stock market, for example, where if Beijing says
this sector is a priority, then people invest in it.
(32:34):
Or on the other side, when they said, you know,
five or so years ago that ed tech was not
a priority, that tanked, and so there's a way of
sort of allocating all the market resources towards priority sectors.
The other thing I would flag is that there are
some technologies I think EV is the best example of
this where they really got the market orientation right in
a sense that they allowed consumers to adjudicate. So every
(32:57):
EV company, if actually eligible, could get the credits for
purchases to reduce the price of their evs. Their localities
might have been helping them in different ways, but ultimately
the best cars from a consumer perspective, one out like
so vyd why is byd great. It's not just subsidies. Yes,
they benefited from somethings, but a lot of other companies
did too. I think the hard part now for China,
(33:19):
and this is what their system is less good at,
is while they might have fixed the problem of picking
winners so to speak, by having the market do it,
they're less bad at eliminating losers. And there's a consolidation
that now has to happen. That you look at areas
like solar panels where a lot of these companies they
have negative margins actually, right, so how do you address that?
So it's sort of like the tide goes in and
(33:39):
goes out, But as long as it's market oriented it's
generally more effective.
Speaker 2 (33:43):
Yeah, I think it's interesting. A lot of people forget
the sort of volatility that we've seen, especially in EV
funding specifically because a few years ago we had lots
of Chinese EV makers that were going bankrupt, and there
are still some going bankrupt now, but there are also
those that are sort of getting I guess, revived from
the dead with new funding. So it's interesting to see
(34:05):
that flow kind of go back and forth. But what
happens in twenty twenty five? So the Maid in China
label brand is being downplayed somewhat, So what exactly does
that anniversary the end of the timeframe actually mean.
Speaker 4 (34:24):
I kindly add one more for Geral, which I'm also
curious about, which is what happens in twenty thirty.
Speaker 5 (34:29):
Well, in both cases, I would say the fifteenth and
sixteenth five year plans respectively, Right, I think it's iterative.
So Made in China twenty twenty five, somewhat misleadingly, actually
has a lot of targets to go out to twenty thirty.
They're typically vaguer than the twenty twenty five targets, but
the plan doesn't end in twenty twenty five, and so
I think they will as part of the five year
(34:50):
plan that will be coming out in early twenty twenty
six will probably essentially incorporate some of that. And as
I said up front, there are so many documents that
are associated with this one blueprint. It's like think of
it as the phrase I prefer as someone that's coined
as cascade of plans. Right, It's not just one plan.
It's a plan that then begets a whole bunch of
other plans, and it is iterative and requires a lot.
(35:11):
It actually, I think eats up a lot of the
bureaucracy is time because they have to assess and reassess
and come up with new targets. But the bottom line
is China's definitely not giving up an industrial policy. The
signals coming out of Beijing in recent years, if anything,
suggests there's an even greater urgency in part to the
national security concerns. And so whatever the successor to Made
in China twenty twenty five is, it's going to happen.
(35:33):
It probably won't be called Made in China twenty forty
or whatever, but it's going to exist.
Speaker 4 (35:37):
Part of the question is, I guess over that packaging
precisely because of all of the responses and suspicions that
were provoked by the made in China twenty twenty five label,
and it's no longer advantageous. In fact, it's sort of
geopolitically disadvantageous to be advertising your industrial policy in this way.
Speaker 2 (35:55):
If you're Beijing and Gerard, you read all of those plans, right,
the hundreds and hundreds of pages, thousands of pages.
Speaker 5 (36:03):
There are plenty of people around the world to do
that work for us. Even reading just the so called
green Book of the targets is quite a slog.
Speaker 2 (36:11):
All right, we're going to have to leave it there,
but thank you so much to both of you for
coming on all thoughts.
Speaker 5 (36:17):
That was great, Thank you, Thank you so much. Joe.
Speaker 2 (36:32):
I thought that was a fantastic overview of what China
is doing and to some extent, what the US is
trying to do too.
Speaker 3 (36:38):
I did too. I had a lot of thoughts, and
obviously anyone who listens to the podcast knows that we're
both extremely interested in this specifically and all the other
things related to it. Can I say, you know one
thing at the end, and Gerard was talking about like
I think he called it a cascade of plans and
all I've been reading, you know, a lot of Chinese history,
(37:00):
twentieth century history. They love meetings and planted They always
have all these like work groups and study groups and
random people or it's like I'll get appointed to a
new study group. I don't know if that's good or bad,
but they love a study group.
Speaker 2 (37:13):
I think it's funny that you're just discovering this. Actually,
you know, one of the interesting books just speaking of bureaucracies,
One of the interesting books I read when I moved
to Abu Dhabi was about Saudi Arabian government ministries and
what it was actually like to work there, and it
was sort of a similar thing. There were lots of
meetings and people kind of getting paid to not do
(37:34):
very much. But it was super interesting.
Speaker 3 (37:36):
As a meeting hater myself, I guess whenever I read
I note when they're like, it rings a bell in
my head. When I see another study group or work
committee or something like that getting formed, I'm like, oh God,
that sounds so awful. But no, I thought that was good.
And look, I mean, you know, this gets back to
many of our big themes, and I get why the
US and the West is anxious and all this stuff.
(37:58):
But on the other hand, I would just say things
like economic development is technological development. This goes back to
Ricardo Houseman and the ability to make complex machines. That
is what it means to get wealthier, or that seems
to be the ability to do complicated things and move
up the value chain. And when we look at Boeing
and we look at what our own manufacturing like a
(38:20):
lot of the issues I get the impression are projecting
our own problems abroad. Like, you know, one way for
China to close the gap on aircraft to make better
and cheaper airplanes, But another way for China to close
the gap on aircraft is for the US to not
be able to make planes. And we can converge in
two directions, and one way of maybe if we want
(38:42):
to avoid that divergence would be getting better at making
airplanes ourselves.
Speaker 2 (38:46):
Well, the other thing I was thinking about, and this
is sort of speculative or kind of fuzzy, but the
socioeconomic I guess aspect of this, which is, you know,
a lot of the jobs in advanced technology they might
pay well relative to other manufacturing jobs, but like some
of them aren't very much fun. Right, It's like if
(39:07):
you're working in a fab or something, you're wearing like
one of those suits and you're staring at tiny chips
all day and you're indoors, et cetera. But at the
same time, in China, you know, we've seen a lot
of like popular dissatisfaction. Yeah, you have the live flat
movement where people are like, why should I even bother
(39:28):
trying because my life is never going to get better?
And so I kind of wonder like how all of
that plays into some of this as well.
Speaker 3 (39:35):
There's a really good video by Asianometry that people should watch.
It's basically what does someone who work in a fab
actually do? And it's an issue here. I mean they
talk about, you know, this is not a job. I mean,
there are jobs in engineering and tech and hard tech
in the US that many people would find to be
an extraordinary, challenging and interesting and highly remunative career. But
(39:58):
there are also a lot of jobs in engineering and
hard tech in the United States that I think or anywhere,
that people would find to be quite miserable, et cetera.
But this is why we need humanoid robots.
Speaker 2 (40:09):
That's right, Okay, shall we leave it there?
Speaker 3 (40:11):
Let's leave it there.
Speaker 2 (40:12):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (40:18):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow our guests Gerard de Pippo He's at GDP nineteen
eighty five and Rebecca Chung Wilkins, She's at our Chun Wilkins.
Follow our producers Carman Rodriguez at Kerman armand Dashel Bennett
at Dashbot and Kelbrooks at Calebrooks. Thank you to our
producer Moses Ondam and from our Odd Lots content. Go
(40:40):
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