Our guest today, Lizzi Lee, is smart, daring and unconventional. After earning a PhD in economics from MIT, Lizzi Lee took a bold right turn and dove into research and writing. A few weeks ago, Lizzi wrote a very compelling piece in Foreign Affairs about the risks facing Chinese companies - price wars and vanishing margins at home. The stubborn underlying problem is that China cannot shake itself free from chronic overcapacity. Well, why not, we might wonder. Just shout down the extra plants and get supply in line with demand. It's more complicated than that, of course, especially in China where jobs and stability are number one. Too much capacity, too little profits making everyone a little bit tired, a phenomenon the Chinese call involution or neijuan in Chinese to roll up or coil up. Born in China, formative years in Hong Kong and Singapore, and now in America, Lizzi gives us an insider's view of the realities oin the ground in the PRC as we get ready to head in to 2026.
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Speaker 1 (00:02):
We're top executives and crazy entrepreneurs gathered to talk about
the future of electric vehicles. This is the Driving with
Done podcast.
Speaker 2 (00:12):
Hello and welcome to the Driving with Done podcast. I
am your host, Michael Dunn. All right, here are the
buzzwords of the day. Over capacity, price wars, exports. When
will it end? Our guest today has answers. Her name
Lizzie Lee. She's smart, daring, and unconventional. What do I
mean by that? After get this? After earning a PhD
(00:35):
in economics from MIT, Lizzie took the bold right turn
and dove into research and writing. Several weeks ago, Lizzie
wrote a very compelling piece in Foreign Affairs about the
risks now facing Chinese companies, things like price wars, vanishing
margins at home, excessive exports, the stubborn underlying problems that
(00:59):
China cannot show make itself free from chronic over capacity
building too many things, Well why not, we might wonder,
just shut down the extra plants and get supply in
line with demand. Well, China being China, it's more complicated
than that, especially in China where jobs and stability are
(01:19):
number one. Too much capacity to little profits, making everyone
a little bit tired, a phenomenon Chinese call involution or nijuan.
Born in China, formative years in Hong Kong and Singapore,
and now in America, Washington, d C. Lizzy gives us
an insider's view of the realities on the ground in
(01:41):
the PRC as we get ready to head into a
new year, twenty twenty six. Let's get into it with
Lizzie Lee on over capacity and how it can get
solved or not in the People's Republic of China. Lizzie Lee,
(02:05):
good morning, and welcome to the Driving with Don podcast.
Speaker 1 (02:08):
I agreed to be here a huge fan of the show.
Speaker 2 (02:10):
I've been very much looking forward to this conversation. Let's
get right into it with my first question, tell me
about your first ever car.
Speaker 1 (02:20):
Oh that's a great question. Kind of an embarrassing answer
I have to offer. I was just joking. Oh come,
I am the most unqualified speaker on the show. I
cannot drive a car, like literally do not know how
to drive.
Speaker 2 (02:36):
You don't know how to drive? So you're getting ready
for autonomous cars?
Speaker 1 (02:39):
Oh? Yeah, absolutely, been waiting for you for a decade.
I should say, still not there for some reason. But
so I grew up in several big cities in Asia.
I was born in Beijing, and then for my high
school years, I was all across Asia, you know, in
Hong Kong, in Singapore, all those cities have read public
(03:03):
transportation system, subway system, so I did not need to
learn how to drive. And I you know, came to
the United States in two thousand and eight, two thousand
and nine for college, living in you know, the Boston
Cambridge area for the first ten years of my life
in the US, starting you know, as undergrad, and then
(03:24):
did my PhD program at MIT. Also, you know, the
Boston public transportation system pretty convenient, and Cambridge is a
is a small city, so didn't need to know how
to drive. And then after I you know, started my
career first as a journalist in New York City, not
a great city to be a driver.
Speaker 2 (03:44):
And then now it's expensive, it's dangerous, chaotic, not a
good place to start to learn how to drive, right.
Speaker 1 (03:51):
Right, right right, absolutely, and uh, you know, kind of embarrassingly,
you know, I think I would have been forced to
learn how to drive if I, you know, lived on
a West coast. And I have to say, the fear
for driving actually was one of the reasons why I
chose am I for Stanford when I came down to
(04:13):
to you know, Grascow toys. Also, you know, people in
Stanford just look unreasonably happy. That just you know, got
me a little I mean throw threw me at off.
But that's a fact.
Speaker 2 (04:24):
And you're not the first person who said that. Visiting
from outside of the United States. California, people look abnormally happy, welcome,
what's going on? And then you go to New York
and everybody's looking at you like, hey, do I know you?
Do I know you?
Speaker 1 (04:39):
I'm more, I'm more you know, the grumpy crowd.
Speaker 2 (04:43):
Grumpy crowd. Okay, great, Well that's very helpful to know
that you're like the grumpy crowd. Because what I have
in mind is for us to imagine getting in a
car together and doing a cross country drive in the
United States. So let's just say, Rando, if we're going
to pick a car I'll drive, what would it be?
Which car would you like to ride across the United
(05:06):
States with me?
Speaker 1 (05:06):
Oh? This will be the sell me s U seven Ultra.
I've heard tons of stories about how great the car is.
Apparently it's many people's favorite car from China, and show
Me is kind of a surprising player in the EV
(05:27):
you know field, and even in China. I mean show Me.
You know, when you mentioned sell Me, people think, oh,
you know, of wearable low tech device, but tell Me
is very much reposition itself to be the next Apple.
Now it's in it's in EV it's in high end,
you know, uh, you know, sell for smartphones.
Speaker 2 (05:47):
Smartphone fifteen dollars smartphones, really elegant, beautiful phones. And their
car has just been explosively popular, as you said, just
doing setting world records at the nerber Dreen track in Germany.
Very good looking. Can't build them fast enough? Okay. So
that's our car. Do you have a preferred color?
Speaker 1 (06:05):
Blue? Blue?
Speaker 2 (06:06):
Okaylue. So we're in a blue cell me where we're
going to land ourselves in the state of Iowa, gosh,
Des Moines or you know, Sioux, Iowa, where they make
they happen to be. There's a lot of farmland and
they make a lot of soybeans. And we're going to
visit a farmer there. Yeah, are you still with me?
Are are you still in the car? Yes, yes, okay,
(06:28):
And the farmer is just going to ask like they're
not that they stayed in their hometown all their lives.
So they're a little bit confused and bewildered, and they
want to know why did China stop buying our soybeans?
Speaker 1 (06:41):
And you would say, well, I mean, that's a great question.
Just look at the tariffs, ray, look at the treat war.
Soybean purchase is one of the very soft leverage that
China can use in China Interston that US soybean farmers
key political uh you know, constumers for a prison a
(07:04):
prison Trump and uh, it plays an outside is a
role I would say in US politics relative to their
importance to US economy. And China's purchase of US soybean
is very much a decision in ourself, not an e
common necessity. The sero substitutes and there are alternative you
(07:25):
know stories r mm hmm.
Speaker 2 (07:28):
They can buy them from someone else. But why the change,
because I'll play the farmer role for a moment. For years,
China has been buying all of my crops, and now
this year they kind of stopped. Are they mad at
us or what happened there?
Speaker 1 (07:40):
Well, they've reatting. The news has just restarted right precisely
the opposite reason why they stop.
Speaker 2 (07:48):
One of the big items, of course on the table
among many, is that the United States currently has outrageously
high terriffs on imports of Chinese cars a one hundred
thirty seven and fifty percent, plus a second layer of
if the cars feature Chinese hardware software, they're also not welcome.
So there's just like this fortress US not allowing Chinese
(08:11):
cars on American roads. A lot of people are curious
like how did we get here? And many people who
are you know, fighting this trade war would say that
China has this propensity to produce too many goods, including
too many cars, and now they're flooding global markets with
subsidizer cheaper cars. The O word I call it. People
(08:35):
talk about China's propensity for over capacity. And you've recently
written about this in Foreign Policy thought I found it
was fantastic read on what exactly is going on in China.
So could you take us now across the ocean to
China and explain this phenomenon of call it chronic overcapacity?
How does it happen?
Speaker 1 (08:56):
So great question? First, you know, when it comes to tariff,
is not just the United States, as you know, you know,
it's also the you know you you also Canada and
more and more. I think you know, there's so and
those terms tend to stay, and I think there's a
legitimate justification for ters against some of the Chinese experts,
(09:21):
you know, uh US and allies and also you know,
Southeast Asian countries are concerned about unfair trade practice UH
subsidy et cetera, et cetera, and to some extent those
are all true. I don't want to say, you know,
there's no subsidy, there's no political backing, there's no unfair
treat practice. But I think when it comes to the
(09:42):
scale of China's over capacity, it's it's a it's a poor,
poorly defined word, but everyone uses it. So just use
it as kind of a placeholder for what we want
to dic.
Speaker 2 (09:53):
I mean over capacity is not the best word, or
which is which word is overused?
Speaker 1 (09:58):
So so I don't want to a goal like all
all nerdy commis. But over capacity it's never been defined
formally as an economic concept. I think people use it
as a shorthand for producing more than once domestic market
(10:19):
can absorb, and it has a negative connotation to it.
Speaker 2 (10:24):
It really does. It's like as soon as you say
the word over capacity, people's heads turn and go, what
what's that about?
Speaker 1 (10:32):
Right? Right, right, But let me just use that as
the shorthand for producing too much? Okay, when it comes
to China's over capacity problem, I think the leading narrative is, oh,
it's a deliberate policy choice. China is just, you know,
subsidizing domess economy is flooding our market with cheap goods
(10:52):
to squeeze out US competitors, to squeeze out competitors from
other countries. But what's really, perhaps surprising to the global audience,
is that within China it's also a headache. It's actually
the system working exactly as it's designed to. In some sense,
(11:14):
it has delivered some of China's biggest successes when it
comes to manufacturing. But now China faces serious pressure to
unwind this tendency to producing too much in a few
concentrated sectors while the economy faces imbalanced problems. So the
(11:34):
piece is very much about why it's hard for China
to solve this problem. Why is it that Chinese policymakers
know this is a problem. It's eating Chinese firms profits.
Speaker 2 (11:47):
So that's a great point. Go a little bit deeper there.
The Chinese themselves, the policymakers, recognize that they're sitting on
a system that causes some problems for them, even domestically.
Speaker 1 (11:58):
Absolutely, you know, starting early this year, we've an unpresidented
across you know, across bureaucracy, across ministry, across industry, call
for ringing in anti evolution price wars, even in the
h in the recommendations for the fifteenth five year Plan.
(12:21):
So this is China's most important policy document, policy blueprint
for the next five years, twenty twenty six to twenty thirty.
There's a very strong messaging that China must solve this, uh,
this problem, this uh you know, overcapacity problem or evolutionary
price war problem.
Speaker 2 (12:40):
And then you're in your piece you say that's hard
to do.
Speaker 1 (12:43):
Correct, That's absolutely incredibly hard to do for them China.
So let me just just explain it. So the short
answer is it's hard to do because it's not a
political decision to end this. It's actually baked into to
what I highlighted three aspects of the Chinese system, the
(13:04):
bureaucratic system, the financial system, and the corporate system. And
you know, China has similar problems before in the steel
industry in the taxile industry in China was able to
unwind it with political costs, of course, but it was
still relatively easy to do compare with this time because
when it comes to new energy, the dominant players are
(13:26):
private businesses. They are not state owned steel giants as
in past cycles of capacitor or evolutionary price war. So
it's not just a political decision itself. The whole equilibrium
of the system has to be shifted somehow, and because
the equilibrium is so baked into the economic logic of China,
(13:50):
unwinding that system would require what I call institutional renewal.
So it's not just a it's you know, despite beijing
strong local hints on the on the country's economy, it's
not a decisions in all self that can solve things.
Speaker 2 (14:07):
From the outside, it looks like whether it's state enterprises
over producing call it over or over capacity or private
that the state itself still has considerable leverage over you know,
business and society and can take Where does that break down?
Speaker 1 (14:26):
That's a great question. So within the Chinese systems, you
correctly point out, people have this idea that things are
top down. That's true. Beijing has a final authority over
a lot of the e common decisions Beijing. Sets of priorities, Beijing,
you know, coordinate resources and priorities of resource allocation. That's
all very true, but China also has a vast bureaucratic system,
(14:52):
and when it comes to bureaucratic incentives, there are a
lot of bottom up incentives. There are a lot of
local discretion when it comes to how to execute Beijing's
economic priorities. And as with any ambitious career seekers, Chinese
bureaucrats also need to take into consideration their KPI. They
(15:16):
they want to make sure that they deliver their own
political success, uh, not just what works best for the
country in general. So let me just one.
Speaker 2 (15:27):
They're human too, they're outse at home says, did you
get the promotion yet? Did you get a raised? Where's
the bonus?
Speaker 1 (15:34):
Are not? They are? They're human too. They're humans too.
But that's sort of the first piece that I try
to unpack in the foreign affairs piece. Well, local officials
are evaluated and promoted by a set of metrics, and
it's complicated, but you know, in a word, it's about
(15:57):
delivering results, delivering visible growth. And you know, whether you
can raise text revenues whether you have new factories, new
industrial parks built out in your jurisdiction. So that's visibility
and that's very much built into Chinese bureaucrats KPIs, so you.
Speaker 2 (16:16):
Can concrete that they can point to.
Speaker 1 (16:18):
Yes, absolutely, And the kicker is that the biggest text
that local governments rely on is the value added texts
as a legacy from the planning period. But it's still there.
And China's VAT is collected where goods are produced, not
(16:38):
where they are consumed. So officials are rewarded for building capacity.
Speaker 2 (16:45):
Even if every province has the same spec on a
steel plant or a car plant, it's still in there.
They have an incentive to build another one.
Speaker 1 (16:54):
Absolutely, So you know, if you're a mayor, right you are.
A rational move is the build on the entire industrial
supply chain, every step of the supply chain in your
own jurisdiction. Batteries, assembly components, af terream suppliers all within
your jurisdiction, because that way you keep as much production
(17:14):
as many steps in that product production.
Speaker 2 (17:17):
So this is fascinating because what I'm listening hearing from
you is that everyone's kind of a rational actor but
we might have kind of sort of irrational outcomes where
absolutely or at least uncomfortable outcomes as far as the
rest of the world is concerned.
Speaker 1 (17:32):
Absolutely, so you know, that's the classic prisoner in dilemma,
and when every actor acts rationally, the end result might
not be may not be the optimal for the system
as a whole.
Speaker 2 (17:47):
I also want to just jump in for a moment
as you're describing it. You know, this is something I
think very specific to China, not unique, but specific and
concentrated in China. Is that old expression shangyo jumps up
your TETs up right. The top makes a policy that's
your central government, and then the bottom takes countermeasures. And
there's this ongoing constant tension. And it's been this way
(18:10):
in China for you know, for millennia. Is that accurate?
Speaker 1 (18:14):
That's absolutely true. And I should also point out that
this incentive has only gotten strengthened these past few years
because local governments, you know, used to have another cash cow,
real estate. But once the property bubble burst around twenty
twenty one twenty twenty two, giants like Evergrand collapsed, that
(18:37):
revenue stream from land sale dried up for local officials.
So when land sales fell off a cliff, what do
they do? They basically just double down on manufacturing because
that's certainly the remaining lever for growth for creating test revenue.
So that's basically how we ended up with this overcapacity.
(19:00):
That's not only quite different in nature because you know,
many actors, our pred firms which we'll talk about later,
but also with even stronger bureaucratic incentive built into this
tax revenue system and also local officials KPI system that's
you know, central to how the Chinese bureaucratic bureaucractic system works.
Speaker 2 (19:21):
Okay, so this is super helpful and insightful about how
things work inside China. Let's bring it back now to
the United States. What does it mean for us if
this thing is hard to unwind? What would what should
could the United States do in response?
Speaker 1 (19:38):
Yeah, so that's also a great question. So one the
thing I want to argue and argue that you know
in my writing separately, is that this is an opportunity
for for firms in the United States and also for
other countries who want and need to accelerate their green
(19:59):
energy transition. So this is a fascinating dynamic Chinese firms
need to find a release wolf for their domestic over
capacity problem because you know, with so many suppliers in
so such a crowded space, no one is making these
well some some firms are making decent profit, but that
(20:21):
the price pressure.
Speaker 2 (20:22):
That's a that's a good point. Some firms are making
a decent problem many are not making any money.
Speaker 1 (20:27):
Many or not. And you know, if we think about it,
do we need two hundred three hundred EVNI firms in China? Well?
Probably not. How many firms do we need? What we
don't know? There are firms who are doing fantastically and
I think there are going to continue to do so.
There are the by Ds of the world, but there
are also a lot of firms that you have probably
(20:47):
never heard of. Those firms are still you know, you
know they're but they're not really making money hanging around.
So there's there's this real urgency for Chinese firms to
be able to find new market and for global partners,
(21:09):
you know, whether it's the United States or or can
the Southeast Asia and America, they actually need a window
to leap frog in their own green transitions. And for
countries like Costa Rica, right, uh, you know, clean energy
is central to the to the country. They might not
have their own you know, industrial policy goals or ambitions,
(21:32):
but they still want cost effective evs. Chinese cars can
be produced very cost efficiently. Chinese cars can you know,
speed up green energy transition for a lot of countries
and even for the United States, for for European countries
who now have tariffs against Chinese cars. Uh. Chinese firms
(21:54):
are also eager to invest abroad if they cannot export. Uh,
they're yes, We've.
Speaker 2 (22:01):
Seen that already in Brazil, Thailand, Indonesia, Egypt, there's a
Spain now. So that's a trend for sure.
Speaker 1 (22:08):
Trends absolutely, yeah, and I think that's a critical issue here.
China knows it cannot export its way out of ower
capacity anymore, not in this geopolical climate. As you mentioned,
United States is lab terraffs one hundred percent on Chinese
evs and batteries. You has followed suit, and you know,
the trend is there, and I think it's going to stay.
(22:31):
Whether that's a you know, that's economically right or wrong
decisions a separate, separate matter. But I think given the
political climate, it's going to stay elevated at least in
a mid term. In the mid to long term, I
would say.
Speaker 2 (22:44):
So, I'm curious, and this is getting into the weeds
of the auto industry, but just imagine that these transplants
do happen with China's advantages that come out of this
environment of hyper competition at home, which drives down profits
and makes them very competitive. Would it be duplicated if
(23:05):
they go into manufacturing in places not called China. What
happens there?
Speaker 1 (23:10):
So that's a great question, And to be quite honest,
I think we're definitely seeing similar dynamics in those spaces too.
But you know, each country is a different story, so
I won't way into those issues too deeply, and I
you know, what I would just say is too.
Speaker 2 (23:29):
Soon to tell.
Speaker 1 (23:31):
Yeah, a lot of things I think that are still,
you know, need some time to play out. On me.
In a country like Indonesia, things are very different when
it comes to local political constraints then say a country
like Brazil. So you know, again, I think it needs
to be analyzed a case case by case, but I
think the general trend is that exporting its way out
(23:55):
of over capacity is going to be a thorny issue.
And with the tightening of scrutiny on third country rerouting.
The pressure is not gonna it's not gonna go away
anytime soon.
Speaker 2 (24:07):
Certain country rerouting. Could you just that's an important new
development and the negotiations could for our listeners, could you
just expand on that a little bit. What's what's happening there?
Speaker 1 (24:16):
Right? So you know, if you think back to Trump
from one point right, it's very it's very much about
China plus one. Right. So basically the chairs, the tree engines,
you know, centered on China. So Chinese firbs not just
in in evs, but also in other sectors. Well, they've
(24:36):
found a smart workaround, smart or not so smart workaround
basically by soup producing the critical components at home. But
then uh, you know, packaging and can do the final
stage of production in Vietnam and in countries in southead Asia.
So when it comes to the United States, it's labeled
Maiden vietnamse it's not a mating.
Speaker 2 (24:58):
A little bit of a workaround, a little bit of workaround.
Speaker 1 (25:01):
And also in Latin America you see a lot of that.
But now, as you know, the trade tensions seem not
to be just about China. It seems to be about
a lot of other countries, so those re routing will
not function as effectively as they need to be. So
(25:21):
but but you know, back to my point, instead of
exporting products, Chinese firms and also Chinese policy makers are
increasingly looking at exporting capacity itself. For exporting you know,
China's productive technology itself through FTI not always feasible joint ventures,
(25:43):
more political appetite, especially for minority stake to adventures and
other licensing agreements. So I think this is actually a
really interesting space to watch.
Speaker 2 (25:56):
If you were there in Korea today and you're on
the team team, the Trump administration's team advising, what would
be the number one ask on this front with regards
to you know, the trade war and how to handle overcapacity?
What would you ask from China?
Speaker 1 (26:12):
So I actually wrote about not in the US contest,
but for financial time for ft in the EU context.
So what I argue is that well, requiring tech transfers
from these Chinese energy clean energy firms, this smarter ask
than just lapping tariffs on them. But you know, when
(26:35):
it comes to tech transfer, I think the main concern
or constraint is national security and also political. So you know,
for national security, I don't want to you know, say, oh,
this is not an issue. Definitely when it comes to
you know, Chinese firms and Chinese technology, there is a legitimate,
I think concern about national security implications, and you know,
(26:59):
especially when it comes to more sensitive ideology when it
comes to data stuff. So I think, you know, US
policymakers and global policy makers are rightly concerned about the
potential risks and loopholes that can be at stake. So
national security definitely one of the concerns. But if you
(27:20):
kind of ring fence specific technology that we think has
less of those concerns, or at least when those concerns
can be addressed in a pragmatic way, I think we
can actually construct those tech transfer deals, build them into
JV structure, build them into investment deals to be able
(27:44):
to balance risk and benefit. So you know, it's just
extreme case for something like hydrogen rate clean energy. I
think the security risk is relatively low for other things
when it comes to data. When it comes to you know,
GEO data, geolocation data, and other aspects of technology, the
security concern when it comes to you know, six G infrastructure,
(28:07):
for example, I think the security concern could be more valid.
But again it's not a it's not a blanket thing.
I think the tendency now is to put a national
security concern label over everything and that kind of risk
first lens when it comes to anything China can actually
(28:29):
blind ourselves and you know, frankly hamper ourselves against potential
opportunities to actually leverage Chinese technology to accelerate our own
reindustrialization agenda.
Speaker 2 (28:40):
That's a good inventive way of thinking about that. Yeah,
just don't put everything under one category, you know.
Speaker 1 (28:46):
Yeah, and you know when it comes to I guess
you know, when it comes to China, Chinese Chinese clean energy,
you know, including EV, but also in a battery, etcetera, etcetera.
On solar, I think all to it's it's it's a
political problem. It's not a it's not an economic problem.
I think the economic cost and benefits are very clear.
(29:09):
It's not an engineering problem. I think, you know, if
you ask a corporate lawyer, they know what kind of
deals are feasible, and they know how to design the
system to accurately and to precisely address natural security concern.
It's it's the political will. It's a political courage, and
also I think, quite honestly, it's it's it's what we
(29:32):
how like our political end goal. I think we need
to be clear about what our goals are when it
comes to our approach to Chinese investment Chinese businesses. Right,
So if the end goal is, oh, we want to
accelerate our own domestic reindustrialization agenda, the answer is is
very different from say, if our goal is to make
(29:55):
sure democratic value states, makes sure we don't seed ground
to China globally, make sure we want to protect the
you know, we want to slow the Chinese manufacturing machine down,
and we want to slow down China's catch up to
US in tech race.
Speaker 2 (30:16):
What are the priorities, what are the trade offs?
Speaker 1 (30:19):
Absolutely, I mean this is not just email about investment
or business deals with China when it comes to things
like export control. When I think when it comes to
things like our approach to US China AI race, which
is a different topic, I think we need to be
super clear about what we really want. And I cannot
answer that question for US policymakers, but just based on
(30:42):
what I see, I think I'm still very puzzled as
to what we really want or need. I think I
hear one thing on day one, another thing our own day.
Speaker 2 (30:53):
Too, and Monday, Wednesday, Friday, yep.
Speaker 1 (30:56):
And you know, when it comes to something that industrial
strategy that's not get if I mean, the Chinese system
has lots of problems, it's shortcoming, it has a lot
of flaws. But if there's one thing that they are
pretty good at, it's just you know, decide on one
thing and do it right, do it over spent other
not over four years, but over a decade or more.
(31:19):
And you can argue that China's current strength in its
ev manufacturing system, in its well I would say entire
events manufacturing ecosystem, not I mean it's started, not in
this decade, it started several decades a growth goal in
its nationwide electrification campaign. So you sort of see that
(31:42):
first mover advantage if you will, compounding on itself and
keep accelerating itself. And it's still continuing. We've highlighted what
we call infrastructure renaissance. We are seeing this renewed push
on infrastructure built out this time not just bridges then,
not just electrification system, but in data center, you know,
(32:08):
in next gen energy sources like nuclear SMRs across the
Western Central and eastern regions of.
Speaker 2 (32:18):
China of the country.
Speaker 1 (32:19):
Yes, understanding that energy security is going to be key
for a lot of the next gen technology, and a
lot of those technologies are energy hungry. Energy can be
super expensive.
Speaker 2 (32:31):
Let's come back just for a moment, Lizzie, to something
you said with regards to how it's not just economics
but political. So imagine an American company is going to
do a joint venture with a Chinese partner here to
do batteries, for example, in the United States, the commercial
terms are clear, should the American company also expect that
(32:51):
there could be some intervention anytime by regulators to shape
the eventual agreement. With regards to tech transfer, how real
is that kind of lingering risk there?
Speaker 1 (33:02):
On the side, I think that's absolutely a fantastic question,
and I should point out one caveat when it comes
to tech transfer, it depends on what kind of tech
we are talking about. When it comes to political concerns,
it's not just the United States political country, also Chinese politics.
So I think Chinese policy makers are also weary when
(33:25):
it comes to what kind of tech can go abroad.
Chinese policy makers also concerned about the potential security risks
in those jvs, in those FDIs when it comes to
IP leakage, they understand that.
Speaker 2 (33:42):
Because the center for the private company would be different
from the center from the regulator private companies that you
just want to do business with my partner over there
in Europe or Brazil or wherever. Right, the regularly gets
in there and says you can't give away the goods.
Speaker 1 (33:54):
Absolutely, But it also, you know, depends on what kind
of tech we're talking, of course, it's yeah, if it
is something very frontier, very cutting at say solid state battery,
still you know, very much in experiment. By the way,
another Chinese battery giant s a at L is also
leading in a solid state battery innection battery technology. Well,
(34:19):
when it comes to things like that, I think Chinese
policymakers are still very much on the fence and very
restrictive when it comes to what kind of tech can
or should go abroad. That's absolutely, that's real. Yeah. But
when it comes to legacy tech, at least from the
Chinese point of view, say, you know, LFP batteries, those
are very mature tech, and Chinese firms can produce them
(34:42):
very cheaply, very cost effectively, those are less of a concern.
So for those kind of tex I think it's relatively
easy for Chinese firms to shift them abroad. And you know,
if you look at the more than a dozen jvs
and ni us with Chinese tech firms, a lot of
(35:03):
them are centered around you know, solar, A lot of
them are centered around batteries. These tend to be more
mature technologically from the from the Chinese point of view
at least. Uh So, another issue you point out is, well,
there are there potential concerns of some kind of regulatory
clamp down from the Chinese side. I think that's also
(35:25):
a real risk, especially if the geopolitical climate deteriorates.
Speaker 2 (35:33):
Of course go hand in hand, right, Yes.
Speaker 1 (35:35):
So how do we how do how we how do
we prevent it from happening? Well, it's always a tricky
thing to to predict what policy makers, what Chinese policy
makers are going to do. I cannot predict. I I've
been you know, been wrong multiple times pretting predicting directions
for for for Chinese politics. But there are guardrails that
(35:58):
we can build into those JV infrastructure that can best
protect our firm's interesting.
Speaker 2 (36:04):
I think your phone's going to be ringing off the
hook very soon to talk about those guardrails. So many
people would be curious to know what those look like. Yeah,
so important. I have just two final questions for you, Lizzie.
One is, let's imagine you're one of those. You're a
rare species. I can tell I know from your history
(36:25):
as that we were talking earlier, you know more. You've
forgotten more about economics. Even though you're so young, you've
forgotten more in economics than most people know than their
whole lifetime. So thank you again for being with us
and shedding light on how China works from the inside.
Question is if, just for fun moments ago, I asked,
what should the US ask from China? Imagine you're advising
(36:48):
the Chinese government in negotiations this week. What would be
the number one thing you'd ask of the US or
Europe for that matter.
Speaker 1 (36:56):
Oh so, I mean, I mean no position of US
policy makers to do anything when it comes to China.
I would say, you know, in terms of what's really
critical for the US industry when it comes to uh
what uh you know? When it comes to what China
can realistically offer, I would say clean tech, Chinese, mature,
(37:20):
clean tech is one of the key pieces that Chinese
policy makers are potentially open to give, and the United
States really needed to accelerate its own domestic agenda.
Speaker 2 (37:34):
This would this could be a priority for the Chinese
side too, to to leverage their knowledge and know how
capabilities in clean tech to find some kind of common ground.
Speaker 1 (37:45):
Absolutely so, So you know, if we talk about pragmatic
approach for US China to to to shape some kind
of videal when it comes to business relations and investment. Actually,
I think we you know, the TikTok deal is interesting.
TikTok well, you know, women argue it's not a high
(38:06):
priority for for China. It could be a high priority
for President Trump. But TikTok actually touches on some pretty
sensitive stuff, right data algorithm, So those are you know,
quote unquote sensitive things that potentially have national security concerns.
So very very interested in how the TikTok deal or
(38:27):
you know, Project Texas will work out, right, will this
kind of you know, project taxis structure. You know, Chinese
firms still owns the tech the algorithm, licensed it to
US entity with US control you know, within US border,
data stored locally subject to US board oversight. Will that work?
(38:53):
Will that be a fruitful successful example? If that case
works out, could it be a a model, a model
for other Chinese tech firms potentially doing. I'm curious, Oh,
I lurk TikTok all. I have to say, that's basically
my my my way to stay tuned to gen Z
(39:17):
culture so that I don't feel old and all the time.
Speaker 2 (39:20):
All right, last question, what is the number one thing?
As I said moments ago, you're fluent one of those
rare species of people fluent intellectually, culturally, linguistically, and both
East and West. Given your background and your education, what's
the number one thing in your experience that Americans or
people in the West get wrong about China.
Speaker 1 (39:42):
I think it's well, actually, I would say it's not.
It's not just a US problem. I think it's a
problem on both that. I think we tend to see
the other system through our own lens. You know, I
think you know well, US polsy makers or some US
policy makers, the less informed ones tend to see the
(40:04):
Chinese system from what we you know, in Western narrative,
is is a wrong word. But when it comes to
things that overcapacity, we tend to see it through our
kins in economic lens as a supply versus demand problem,
the binary choice of the system. Just you know, the
(40:26):
idea that you can you can supply too much, or
you can demand too much or use some some kinds
some of the balance you have to find in between.
When it comes to China's sluggish domestic demand. I think
you know the policy prescription we hear from US policymakers. Oh,
you know, why don't you just stimulate consumption? Right, just
(40:50):
use physical stimulus to balance domestic demand? Why why you're
not doing it? And that's a very much I think
you know kinsin approach or Western economic approached to things
well from the Chinese point of view, like using physical
similars to stimulate consumption might not work out that well
within this system. Right. For one thing, a lot of
(41:14):
Chinese people in third and fourth tier countries and the
rural eras which are vast do not have a bank account.
Right if you want to send send people a one
thousand dollars check, how do you actually do it? There's
no existing mechanism to do it. And also the Chinese
people's saving behavior is very different from US people's saving
(41:36):
behavior in the past when you hand of a check.
What you know the Chinese people tend to do is
just you know whether whether it's d average words save
it does not translate immediately into spending. Even if it
translates into spending is kind of a one off thing.
I think this is something that Chinese possible makers are
(41:57):
slowly realizing. I mean China has been doing trading incentives
for multiple years now. Basically you know, offering bonuses if
you trade in, trading your old car for a new one,
if you upgrade your cars. And also you know home appliances, right,
so if you trade in your old TV for a
better flash your TV, you got to rebate. But one
(42:21):
the thing is when it comes to upgrade home home
appliances in Chinese le consumption habit really is quite different. Well,
upgate one time, sure, do you want me to upgrade
my TV three times in five years? Will probably not?
So when it comes to how we think about rebalancing
(42:43):
demand and supply, the incentive within the Chinese system is
quite different, quite different.
Speaker 2 (42:51):
Yeah, I said that would be the found question, but
I just want to tack on one here, and maybe
it's the ultimate question from our conversation is on the
one side of the person. You have a system. Some
call call it state capitalism. Anyway, it's a form of
capitalism that's different than what we have here in the West,
which we tend to call like market capitalism. Are those
(43:12):
two compatible long term or does something have to give?
Speaker 1 (43:17):
Well, that's a great question. But back to state capitalism.
Another main misunderstanding I think when it comes to ev
sector is it's actually fears domestic competition among the private
players that very much contribute to China's most and brilliant
(43:39):
innovative breakthroughs and most and brilliant successes in clean energy sector,
but also the most I think the hardest part of
the problem to solve because the actors are from the
private industry and they're acting rationally based on their own
business interest. So when we think about state capitalism state capacity,
(43:59):
I think it's important not to over exaggerate how much
a state can do. Yes, I think when it comes
to infrastructure, when it comes to providing kind of policy support,
long term policy support, policy priority, the state playing outside
the role compared with the United States when it comes
to you know, financial resource. When it comes to this
(44:21):
ecosystem of stem talent, a robust pipeline of stem talent,
of engineering talent supplying these Chinese firms. Policy plays a role.
But then when it comes to delivering innovation, when it
comes to product iteration itself, that's done by brilliant, innovative
(44:43):
Chinese entrepreneurs. Many of them do not really have hand
in hand relationship with the state, and many of them
are actually actively competing against state owned giants.
Speaker 2 (44:54):
Right, They've done an an incredible job of harnessing the
energies and how of millions of brilliant entrepreneurs. So you've
got this hybrid system. So would you call it something else?
What would be your term to describe that economy? If
not state capitalism? Is there something better, more accurate out there.
Speaker 1 (45:13):
So again, I think that's really that's that's that's probably
the million dollar question for the next noble winning in
the commist to figure out. But I do want to
point out that when it comes to state capitalism or
the Chinese system, which you know, we don't really have
a perfect name for, I think a critical shortcoming of
(45:34):
that system is financial system. We can you know, that's
that's a separate topic. But when it comes to capital market,
the United States still has the most mature ecosystem, most
dynamic capital capital market. And you know when we talk
to stakeholders and industry industry practitioners in the Southeast Asia,
(45:56):
they are you know, there's sense oh you know what
when it comes to us in China, we need China tech,
but we want US capital. China does not supply that
kind of deep rich uh, you know, a capital to
support you know, domestic investment, uh, you know, domestic innovation,
especially when it comes to private businesses. China's financial support
(46:16):
to the private sector is still very much lacking. When
it comes to VCPE capital support, it's actually pretty pretty chilling,
very thin, and you know, if anything, it just got
worse over the past few years. But the United States,
when it comes to reindustrialization, I think the US strength
still very much lies in its in its financial.
Speaker 2 (46:37):
System capital markets.
Speaker 1 (46:38):
Yes, absolutely so. I think that's that's you know, if
if I'm optimistic, I think when it when it comes
to things like AI. Here we talk about US China
AI competition, but I think ultimately US China AI equosystem
margana operate on two separate lanes, each plane to its
own strength. When I think when it comes to UH
(47:00):
data center frontier model, cutting edge tech. US still has
a leg and I think the capital market, the deep
mature capital ecosystem is going to place enterl role here.
But when it comes to AI deployment AI applications, things
like industrial robots, I think China will have a faster
(47:20):
runway from prototype to commercialization in China's vastness of market
place to its own strength, So I think shorthand is
zero to one. Probably the US is going to have
an edge for a while one to one hundred. Do
not underestimate the strength of the Chinese innovative ecosystem.
Speaker 2 (47:41):
So they're so good at commercializing and ramping scaling.
Speaker 1 (47:46):
Right, and I think we need a knowledge that Chinese
firms are brilliant and there's real innovation when it comes
to making the foundational technology that was invented in US
and elsewhere, but making them commercially viable, deployable and producing
(48:07):
high quality product in a cost effective way and market them,
you know, fast in in China's the best market Also globally,
I think we need to go beyond the trope of
China being a mirror copycat. There's some real innovative strength there.
So if we have that homebleness. I think will actually
(48:30):
be our in our own interest to see how the
Chinese firms innovate and to potentially leverage their strength to
charge a more pragmatic kind of relation with China. I
hope the political recognition is there. I don't know how
(48:50):
that's going to play out institutionally or from a policy
point of view, but I'm hopeful.
Speaker 2 (48:57):
Luzie. I'm thinking about our listeners, and I'm sure any
of them would like to speak to you. So how
do we get hold of you? What's the easiest way?
Speaker 1 (49:04):
Oh, that's that's easy. So I am pretty active on
x mostly commenting on Chinese policy stuff, but I feel
free to put my ex handle in your show notes.
Your listeners are free to reach out to me to
chat any chat about anything, you know, uh, Chinese economy,
about life in the US in general, how are things
(49:26):
going in DC? Have to chat about anything, or you know,
my fascination about TikTok okay.
Speaker 2 (49:33):
Fantastic, Lizzie, thank you so much for joining me today.
It's been highly enlightening. Really enjoyed it from start to finish,
and I am quite certain that you're going to hear
from a lot.
Speaker 1 (49:45):
Of people a really great treat for me to talk
to I mean talk to you, and I'm a fan
of the of the show. Keep the show going and
hopefully you know next time you can actually step in
that you sell me as you as you seven car
and see how it's it's you know, like, is it
as great as everyone?
Speaker 2 (50:05):
Let's go out, all right, Lizzie, take care of yourself.
Speaker 1 (50:08):
Take care and thank you Michael, Thank.
Speaker 2 (50:10):
You, Lizzie. Lee belongs and I know you'll agree with
beyond this belongs to that rare species of people who
can see things both from the Chinese perspective and from
the American perspective at the same time. That's enormously valuable
(50:34):
to us, and I learned a lot from her in
today's conversation. Three major takeaways. One, we come back to incentives.
What did Munger say about show me the incentive, I'll
show you the outcome. She calls them bureaucratic incentives. And
if we got them in competition with each other. Beijing
might want to solve over capacity, streamline things make them
(50:56):
more efficient, but the folks at the local level have
their own care APIs they want to put up more factories.
That leads to promotions and raises and bonuses. Second, how
are those KPIs measured? Usually in China means some kind
of visible physical growth, and that means factories. Hey buddy,
did you do your job this year? Yeah, look at
(51:17):
the new factory I've put up down the street. Okay, good,
you get a bonus. Third, local governments, she reminded, us,
in China rely heavily on value added tacks collected where
goods are produced, not where they're sold or consumed. As
a result, every mayor, every governor in China has an
(51:39):
incentive would love to have a factory in his or
her own backyard. As a result, you have way too
many car companies, way too many battery companies, way too
many chip makers. It's just like an overdose of capacity,
but no one's willing to step out. It's a fascinating
place and the rest of the world has to reckon
(52:03):
with it more and more as China doesn't stay home anymore.
It's going global into our backyards. So fascinating to hear
from Lizzie Lee. I hope you enjoyed this conversation. Thank
you so much for joining. I am Michael Dunn, and
this is the driving with Done.
Speaker 1 (52:21):
Podcast, where you meet the experts creating the technologies that
will power tomorrow's cars electric autonomous software. To find this
is a Driving with Done podcast. Thank you for joining
this episode of the Driving with Done podcast.
Speaker 2 (52:39):
To connect with Michael Dunn, visit doneinsights dot.
Speaker 1 (52:42):
Com or find Michael on x or LinkedIn. This is
the Driving with Done Podcast.
We're top executives and crazy entrepreneurs gathered to talk about
the future of electric vehicles. This is the Driving with
Done podcast.
Speaker 2 (00:12):
Hello and welcome to the Driving with Done podcast. I
am your host, Michael Dunn. All right, here are the
buzzwords of the day. Over capacity, price wars, exports. When
will it end? Our guest today has answers. Her name
Lizzie Lee. She's smart, daring, and unconventional. What do I
mean by that? After get this? After earning a PhD
(00:35):
in economics from MIT, Lizzie took the bold right turn
and dove into research and writing. Several weeks ago, Lizzie
wrote a very compelling piece in Foreign Affairs about the
risks now facing Chinese companies, things like price wars, vanishing
margins at home, excessive exports, the stubborn underlying problems that
(00:59):
China cannot show make itself free from chronic over capacity
building too many things, Well why not, we might wonder,
just shut down the extra plants and get supply in
line with demand. Well, China being China, it's more complicated
than that, especially in China where jobs and stability are
(01:19):
number one. Too much capacity to little profits, making everyone
a little bit tired, a phenomenon Chinese call involution or nijuan.
Born in China, formative years in Hong Kong and Singapore,
and now in America, Washington, d C. Lizzy gives us
an insider's view of the realities on the ground in
(01:41):
the PRC as we get ready to head into a
new year, twenty twenty six. Let's get into it with
Lizzie Lee on over capacity and how it can get
solved or not in the People's Republic of China. Lizzie Lee,
(02:05):
good morning, and welcome to the Driving with Don podcast.
Speaker 1 (02:08):
I agreed to be here a huge fan of the show.
Speaker 2 (02:10):
I've been very much looking forward to this conversation. Let's
get right into it with my first question, tell me
about your first ever car.
Speaker 1 (02:20):
Oh that's a great question. Kind of an embarrassing answer
I have to offer. I was just joking. Oh come,
I am the most unqualified speaker on the show. I
cannot drive a car, like literally do not know how
to drive.
Speaker 2 (02:36):
You don't know how to drive? So you're getting ready
for autonomous cars?
Speaker 1 (02:39):
Oh? Yeah, absolutely, been waiting for you for a decade.
I should say, still not there for some reason. But
so I grew up in several big cities in Asia.
I was born in Beijing, and then for my high
school years, I was all across Asia, you know, in
Hong Kong, in Singapore, all those cities have read public
(03:03):
transportation system, subway system, so I did not need to
learn how to drive. And I you know, came to
the United States in two thousand and eight, two thousand
and nine for college, living in you know, the Boston
Cambridge area for the first ten years of my life
in the US, starting you know, as undergrad, and then
(03:24):
did my PhD program at MIT. Also, you know, the
Boston public transportation system pretty convenient, and Cambridge is a
is a small city, so didn't need to know how
to drive. And then after I you know, started my
career first as a journalist in New York City, not
a great city to be a driver.
Speaker 2 (03:44):
And then now it's expensive, it's dangerous, chaotic, not a
good place to start to learn how to drive, right.
Speaker 1 (03:51):
Right, right right, absolutely, and uh, you know, kind of embarrassingly,
you know, I think I would have been forced to
learn how to drive if I, you know, lived on
a West coast. And I have to say, the fear
for driving actually was one of the reasons why I
chose am I for Stanford when I came down to
(04:13):
to you know, Grascow toys. Also, you know, people in
Stanford just look unreasonably happy. That just you know, got
me a little I mean throw threw me at off.
But that's a fact.
Speaker 2 (04:24):
And you're not the first person who said that. Visiting
from outside of the United States. California, people look abnormally happy, welcome,
what's going on? And then you go to New York
and everybody's looking at you like, hey, do I know you?
Do I know you?
Speaker 1 (04:39):
I'm more, I'm more you know, the grumpy crowd.
Speaker 2 (04:43):
Grumpy crowd. Okay, great, Well that's very helpful to know
that you're like the grumpy crowd. Because what I have
in mind is for us to imagine getting in a
car together and doing a cross country drive in the
United States. So let's just say, Rando, if we're going
to pick a car I'll drive, what would it be?
Which car would you like to ride across the United
(05:06):
States with me?
Speaker 1 (05:06):
Oh? This will be the sell me s U seven Ultra.
I've heard tons of stories about how great the car is.
Apparently it's many people's favorite car from China, and show
Me is kind of a surprising player in the EV
(05:27):
you know field, and even in China. I mean show Me.
You know, when you mentioned sell Me, people think, oh,
you know, of wearable low tech device, but tell Me
is very much reposition itself to be the next Apple.
Now it's in it's in EV it's in high end,
you know, uh, you know, sell for smartphones.
Speaker 2 (05:47):
Smartphone fifteen dollars smartphones, really elegant, beautiful phones. And their
car has just been explosively popular, as you said, just
doing setting world records at the nerber Dreen track in Germany.
Very good looking. Can't build them fast enough? Okay. So
that's our car. Do you have a preferred color?
Speaker 1 (06:05):
Blue? Blue?
Speaker 2 (06:06):
Okaylue. So we're in a blue cell me where we're
going to land ourselves in the state of Iowa, gosh,
Des Moines or you know, Sioux, Iowa, where they make
they happen to be. There's a lot of farmland and
they make a lot of soybeans. And we're going to
visit a farmer there. Yeah, are you still with me?
Are are you still in the car? Yes, yes, okay,
(06:28):
And the farmer is just going to ask like they're
not that they stayed in their hometown all their lives.
So they're a little bit confused and bewildered, and they
want to know why did China stop buying our soybeans?
Speaker 1 (06:41):
And you would say, well, I mean, that's a great question.
Just look at the tariffs, ray, look at the treat war.
Soybean purchase is one of the very soft leverage that
China can use in China Interston that US soybean farmers
key political uh you know, constumers for a prison a
(07:04):
prison Trump and uh, it plays an outside is a
role I would say in US politics relative to their
importance to US economy. And China's purchase of US soybean
is very much a decision in ourself, not an e
common necessity. The sero substitutes and there are alternative you
(07:25):
know stories r mm hmm.
Speaker 2 (07:28):
They can buy them from someone else. But why the change,
because I'll play the farmer role for a moment. For years,
China has been buying all of my crops, and now
this year they kind of stopped. Are they mad at
us or what happened there?
Speaker 1 (07:40):
Well, they've reatting. The news has just restarted right precisely
the opposite reason why they stop.
Speaker 2 (07:48):
One of the big items, of course on the table
among many, is that the United States currently has outrageously
high terriffs on imports of Chinese cars a one hundred
thirty seven and fifty percent, plus a second layer of
if the cars feature Chinese hardware software, they're also not welcome.
So there's just like this fortress US not allowing Chinese
(08:11):
cars on American roads. A lot of people are curious
like how did we get here? And many people who
are you know, fighting this trade war would say that
China has this propensity to produce too many goods, including
too many cars, and now they're flooding global markets with
subsidizer cheaper cars. The O word I call it. People
(08:35):
talk about China's propensity for over capacity. And you've recently
written about this in Foreign Policy thought I found it
was fantastic read on what exactly is going on in China.
So could you take us now across the ocean to
China and explain this phenomenon of call it chronic overcapacity?
How does it happen?
Speaker 1 (08:56):
So great question? First, you know, when it comes to tariff,
is not just the United States, as you know, you know,
it's also the you know you you also Canada and
more and more. I think you know, there's so and
those terms tend to stay, and I think there's a
legitimate justification for ters against some of the Chinese experts,
(09:21):
you know, uh US and allies and also you know,
Southeast Asian countries are concerned about unfair trade practice UH
subsidy et cetera, et cetera, and to some extent those
are all true. I don't want to say, you know,
there's no subsidy, there's no political backing, there's no unfair
treat practice. But I think when it comes to the
(09:42):
scale of China's over capacity, it's it's a it's a poor,
poorly defined word, but everyone uses it. So just use
it as kind of a placeholder for what we want
to dic.
Speaker 2 (09:53):
I mean over capacity is not the best word, or
which is which word is overused?
Speaker 1 (09:58):
So so I don't want to a goal like all
all nerdy commis. But over capacity it's never been defined
formally as an economic concept. I think people use it
as a shorthand for producing more than once domestic market
(10:19):
can absorb, and it has a negative connotation to it.
Speaker 2 (10:24):
It really does. It's like as soon as you say
the word over capacity, people's heads turn and go, what
what's that about?
Speaker 1 (10:32):
Right? Right, right, But let me just use that as
the shorthand for producing too much? Okay, when it comes
to China's over capacity problem, I think the leading narrative is, oh,
it's a deliberate policy choice. China is just, you know,
subsidizing domess economy is flooding our market with cheap goods
(10:52):
to squeeze out US competitors, to squeeze out competitors from
other countries. But what's really, perhaps surprising to the global audience,
is that within China it's also a headache. It's actually
the system working exactly as it's designed to. In some sense,
(11:14):
it has delivered some of China's biggest successes when it
comes to manufacturing. But now China faces serious pressure to
unwind this tendency to producing too much in a few
concentrated sectors while the economy faces imbalanced problems. So the
(11:34):
piece is very much about why it's hard for China
to solve this problem. Why is it that Chinese policymakers
know this is a problem. It's eating Chinese firms profits.
Speaker 2 (11:47):
So that's a great point. Go a little bit deeper there.
The Chinese themselves, the policymakers, recognize that they're sitting on
a system that causes some problems for them, even domestically.
Speaker 1 (11:58):
Absolutely, you know, starting early this year, we've an unpresidented
across you know, across bureaucracy, across ministry, across industry, call
for ringing in anti evolution price wars, even in the
h in the recommendations for the fifteenth five year Plan.
(12:21):
So this is China's most important policy document, policy blueprint
for the next five years, twenty twenty six to twenty thirty.
There's a very strong messaging that China must solve this, uh,
this problem, this uh you know, overcapacity problem or evolutionary
price war problem.
Speaker 2 (12:40):
And then you're in your piece you say that's hard
to do.
Speaker 1 (12:43):
Correct, That's absolutely incredibly hard to do for them China.
So let me just just explain it. So the short
answer is it's hard to do because it's not a
political decision to end this. It's actually baked into to
what I highlighted three aspects of the Chinese system, the
(13:04):
bureaucratic system, the financial system, and the corporate system. And
you know, China has similar problems before in the steel
industry in the taxile industry in China was able to
unwind it with political costs, of course, but it was
still relatively easy to do compare with this time because
when it comes to new energy, the dominant players are
(13:26):
private businesses. They are not state owned steel giants as
in past cycles of capacitor or evolutionary price war. So
it's not just a political decision itself. The whole equilibrium
of the system has to be shifted somehow, and because
the equilibrium is so baked into the economic logic of China,
(13:50):
unwinding that system would require what I call institutional renewal.
So it's not just a it's you know, despite beijing
strong local hints on the on the country's economy, it's
not a decisions in all self that can solve things.
Speaker 2 (14:07):
From the outside, it looks like whether it's state enterprises
over producing call it over or over capacity or private
that the state itself still has considerable leverage over you know,
business and society and can take Where does that break down?
Speaker 1 (14:26):
That's a great question. So within the Chinese systems, you
correctly point out, people have this idea that things are
top down. That's true. Beijing has a final authority over
a lot of the e common decisions Beijing. Sets of priorities, Beijing,
you know, coordinate resources and priorities of resource allocation. That's
all very true, but China also has a vast bureaucratic system,
(14:52):
and when it comes to bureaucratic incentives, there are a
lot of bottom up incentives. There are a lot of
local discretion when it comes to how to execute Beijing's
economic priorities. And as with any ambitious career seekers, Chinese
bureaucrats also need to take into consideration their KPI. They
(15:16):
they want to make sure that they deliver their own
political success, uh, not just what works best for the
country in general. So let me just one.
Speaker 2 (15:27):
They're human too, they're outse at home says, did you
get the promotion yet? Did you get a raised? Where's
the bonus?
Speaker 1 (15:34):
Are not? They are? They're human too. They're humans too.
But that's sort of the first piece that I try
to unpack in the foreign affairs piece. Well, local officials
are evaluated and promoted by a set of metrics, and
it's complicated, but you know, in a word, it's about
(15:57):
delivering results, delivering visible growth. And you know, whether you
can raise text revenues whether you have new factories, new
industrial parks built out in your jurisdiction. So that's visibility
and that's very much built into Chinese bureaucrats KPIs, so you.
Speaker 2 (16:16):
Can concrete that they can point to.
Speaker 1 (16:18):
Yes, absolutely, And the kicker is that the biggest text
that local governments rely on is the value added texts
as a legacy from the planning period. But it's still there.
And China's VAT is collected where goods are produced, not
(16:38):
where they are consumed. So officials are rewarded for building capacity.
Speaker 2 (16:45):
Even if every province has the same spec on a
steel plant or a car plant, it's still in there.
They have an incentive to build another one.
Speaker 1 (16:54):
Absolutely, So you know, if you're a mayor, right you are.
A rational move is the build on the entire industrial
supply chain, every step of the supply chain in your
own jurisdiction. Batteries, assembly components, af terream suppliers all within
your jurisdiction, because that way you keep as much production
(17:14):
as many steps in that product production.
Speaker 2 (17:17):
So this is fascinating because what I'm listening hearing from
you is that everyone's kind of a rational actor but
we might have kind of sort of irrational outcomes where
absolutely or at least uncomfortable outcomes as far as the
rest of the world is concerned.
Speaker 1 (17:32):
Absolutely, so you know, that's the classic prisoner in dilemma,
and when every actor acts rationally, the end result might
not be may not be the optimal for the system
as a whole.
Speaker 2 (17:47):
I also want to just jump in for a moment
as you're describing it. You know, this is something I
think very specific to China, not unique, but specific and
concentrated in China. Is that old expression shangyo jumps up
your TETs up right. The top makes a policy that's
your central government, and then the bottom takes countermeasures. And
there's this ongoing constant tension. And it's been this way
(18:10):
in China for you know, for millennia. Is that accurate?
Speaker 1 (18:14):
That's absolutely true. And I should also point out that
this incentive has only gotten strengthened these past few years
because local governments, you know, used to have another cash cow,
real estate. But once the property bubble burst around twenty
twenty one twenty twenty two, giants like Evergrand collapsed, that
(18:37):
revenue stream from land sale dried up for local officials.
So when land sales fell off a cliff, what do
they do? They basically just double down on manufacturing because
that's certainly the remaining lever for growth for creating test revenue.
So that's basically how we ended up with this overcapacity.
(19:00):
That's not only quite different in nature because you know,
many actors, our pred firms which we'll talk about later,
but also with even stronger bureaucratic incentive built into this
tax revenue system and also local officials KPI system that's
you know, central to how the Chinese bureaucratic bureaucractic system works.
Speaker 2 (19:21):
Okay, so this is super helpful and insightful about how
things work inside China. Let's bring it back now to
the United States. What does it mean for us if
this thing is hard to unwind? What would what should
could the United States do in response?
Speaker 1 (19:38):
Yeah, so that's also a great question. So one the
thing I want to argue and argue that you know
in my writing separately, is that this is an opportunity
for for firms in the United States and also for
other countries who want and need to accelerate their green
(19:59):
energy transition. So this is a fascinating dynamic Chinese firms
need to find a release wolf for their domestic over
capacity problem because you know, with so many suppliers in
so such a crowded space, no one is making these
well some some firms are making decent profit, but that
(20:21):
the price pressure.
Speaker 2 (20:22):
That's a that's a good point. Some firms are making
a decent problem many are not making any money.
Speaker 1 (20:27):
Many or not. And you know, if we think about it,
do we need two hundred three hundred EVNI firms in China? Well?
Probably not. How many firms do we need? What we
don't know? There are firms who are doing fantastically and
I think there are going to continue to do so.
There are the by Ds of the world, but there
are also a lot of firms that you have probably
(20:47):
never heard of. Those firms are still you know, you
know they're but they're not really making money hanging around.
So there's there's this real urgency for Chinese firms to
be able to find new market and for global partners,
(21:09):
you know, whether it's the United States or or can
the Southeast Asia and America, they actually need a window
to leap frog in their own green transitions. And for
countries like Costa Rica, right, uh, you know, clean energy
is central to the to the country. They might not
have their own you know, industrial policy goals or ambitions,
(21:32):
but they still want cost effective evs. Chinese cars can
be produced very cost efficiently. Chinese cars can you know,
speed up green energy transition for a lot of countries
and even for the United States, for for European countries
who now have tariffs against Chinese cars. Uh. Chinese firms
(21:54):
are also eager to invest abroad if they cannot export. Uh,
they're yes, We've.
Speaker 2 (22:01):
Seen that already in Brazil, Thailand, Indonesia, Egypt, there's a
Spain now. So that's a trend for sure.
Speaker 1 (22:08):
Trends absolutely, yeah, and I think that's a critical issue here.
China knows it cannot export its way out of ower
capacity anymore, not in this geopolical climate. As you mentioned,
United States is lab terraffs one hundred percent on Chinese
evs and batteries. You has followed suit, and you know,
the trend is there, and I think it's going to stay.
(22:31):
Whether that's a you know, that's economically right or wrong
decisions a separate, separate matter. But I think given the
political climate, it's going to stay elevated at least in
a mid term. In the mid to long term, I
would say.
Speaker 2 (22:44):
So, I'm curious, and this is getting into the weeds
of the auto industry, but just imagine that these transplants
do happen with China's advantages that come out of this
environment of hyper competition at home, which drives down profits
and makes them very competitive. Would it be duplicated if
(23:05):
they go into manufacturing in places not called China. What
happens there?
Speaker 1 (23:10):
So that's a great question, And to be quite honest,
I think we're definitely seeing similar dynamics in those spaces too.
But you know, each country is a different story, so
I won't way into those issues too deeply, and I
you know, what I would just say is too.
Speaker 2 (23:29):
Soon to tell.
Speaker 1 (23:31):
Yeah, a lot of things I think that are still,
you know, need some time to play out. On me.
In a country like Indonesia, things are very different when
it comes to local political constraints then say a country
like Brazil. So you know, again, I think it needs
to be analyzed a case case by case, but I
think the general trend is that exporting its way out
(23:55):
of over capacity is going to be a thorny issue.
And with the tightening of scrutiny on third country rerouting.
The pressure is not gonna it's not gonna go away
anytime soon.
Speaker 2 (24:07):
Certain country rerouting. Could you just that's an important new
development and the negotiations could for our listeners, could you
just expand on that a little bit. What's what's happening there?
Speaker 1 (24:16):
Right? So you know, if you think back to Trump
from one point right, it's very it's very much about
China plus one. Right. So basically the chairs, the tree engines,
you know, centered on China. So Chinese firbs not just
in in evs, but also in other sectors. Well, they've
(24:36):
found a smart workaround, smart or not so smart workaround
basically by soup producing the critical components at home. But
then uh, you know, packaging and can do the final
stage of production in Vietnam and in countries in southead Asia.
So when it comes to the United States, it's labeled
Maiden vietnamse it's not a mating.
Speaker 2 (24:58):
A little bit of a workaround, a little bit of workaround.
Speaker 1 (25:01):
And also in Latin America you see a lot of that.
But now, as you know, the trade tensions seem not
to be just about China. It seems to be about
a lot of other countries, so those re routing will
not function as effectively as they need to be. So
(25:21):
but but you know, back to my point, instead of
exporting products, Chinese firms and also Chinese policy makers are
increasingly looking at exporting capacity itself. For exporting you know,
China's productive technology itself through FTI not always feasible joint ventures,
(25:43):
more political appetite, especially for minority stake to adventures and
other licensing agreements. So I think this is actually a
really interesting space to watch.
Speaker 2 (25:56):
If you were there in Korea today and you're on
the team team, the Trump administration's team advising, what would
be the number one ask on this front with regards
to you know, the trade war and how to handle overcapacity?
What would you ask from China?
Speaker 1 (26:12):
So I actually wrote about not in the US contest,
but for financial time for ft in the EU context.
So what I argue is that well, requiring tech transfers
from these Chinese energy clean energy firms, this smarter ask
than just lapping tariffs on them. But you know, when
(26:35):
it comes to tech transfer, I think the main concern
or constraint is national security and also political. So you know,
for national security, I don't want to you know, say, oh,
this is not an issue. Definitely when it comes to
you know, Chinese firms and Chinese technology, there is a legitimate,
I think concern about national security implications, and you know,
(26:59):
especially when it comes to more sensitive ideology when it
comes to data stuff. So I think, you know, US
policymakers and global policy makers are rightly concerned about the
potential risks and loopholes that can be at stake. So
national security definitely one of the concerns. But if you
(27:20):
kind of ring fence specific technology that we think has
less of those concerns, or at least when those concerns
can be addressed in a pragmatic way, I think we
can actually construct those tech transfer deals, build them into
JV structure, build them into investment deals to be able
(27:44):
to balance risk and benefit. So you know, it's just
extreme case for something like hydrogen rate clean energy. I
think the security risk is relatively low for other things
when it comes to data. When it comes to you know,
GEO data, geolocation data, and other aspects of technology, the
security concern when it comes to you know, six G infrastructure,
(28:07):
for example, I think the security concern could be more valid.
But again it's not a it's not a blanket thing.
I think the tendency now is to put a national
security concern label over everything and that kind of risk
first lens when it comes to anything China can actually
(28:29):
blind ourselves and you know, frankly hamper ourselves against potential
opportunities to actually leverage Chinese technology to accelerate our own
reindustrialization agenda.
Speaker 2 (28:40):
That's a good inventive way of thinking about that. Yeah,
just don't put everything under one category, you know.
Speaker 1 (28:46):
Yeah, and you know when it comes to I guess
you know, when it comes to China, Chinese Chinese clean energy,
you know, including EV, but also in a battery, etcetera, etcetera.
On solar, I think all to it's it's it's a
political problem. It's not a it's not an economic problem.
I think the economic cost and benefits are very clear.
(29:09):
It's not an engineering problem. I think, you know, if
you ask a corporate lawyer, they know what kind of
deals are feasible, and they know how to design the
system to accurately and to precisely address natural security concern.
It's it's the political will. It's a political courage, and
also I think, quite honestly, it's it's it's what we
(29:32):
how like our political end goal. I think we need
to be clear about what our goals are when it
comes to our approach to Chinese investment Chinese businesses. Right,
So if the end goal is, oh, we want to
accelerate our own domestic reindustrialization agenda, the answer is is
very different from say, if our goal is to make
(29:55):
sure democratic value states, makes sure we don't seed ground
to China globally, make sure we want to protect the
you know, we want to slow the Chinese manufacturing machine down,
and we want to slow down China's catch up to
US in tech race.
Speaker 2 (30:16):
What are the priorities, what are the trade offs?
Speaker 1 (30:19):
Absolutely, I mean this is not just email about investment
or business deals with China when it comes to things
like export control. When I think when it comes to
things like our approach to US China AI race, which
is a different topic, I think we need to be
super clear about what we really want. And I cannot
answer that question for US policymakers, but just based on
(30:42):
what I see, I think I'm still very puzzled as
to what we really want or need. I think I
hear one thing on day one, another thing our own day.
Speaker 2 (30:53):
Too, and Monday, Wednesday, Friday, yep.
Speaker 1 (30:56):
And you know, when it comes to something that industrial
strategy that's not get if I mean, the Chinese system
has lots of problems, it's shortcoming, it has a lot
of flaws. But if there's one thing that they are
pretty good at, it's just you know, decide on one
thing and do it right, do it over spent other
not over four years, but over a decade or more.
(31:19):
And you can argue that China's current strength in its
ev manufacturing system, in its well I would say entire
events manufacturing ecosystem, not I mean it's started, not in
this decade, it started several decades a growth goal in
its nationwide electrification campaign. So you sort of see that
(31:42):
first mover advantage if you will, compounding on itself and
keep accelerating itself. And it's still continuing. We've highlighted what
we call infrastructure renaissance. We are seeing this renewed push
on infrastructure built out this time not just bridges then,
not just electrification system, but in data center, you know,
(32:08):
in next gen energy sources like nuclear SMRs across the
Western Central and eastern regions of.
Speaker 2 (32:18):
China of the country.
Speaker 1 (32:19):
Yes, understanding that energy security is going to be key
for a lot of the next gen technology, and a
lot of those technologies are energy hungry. Energy can be
super expensive.
Speaker 2 (32:31):
Let's come back just for a moment, Lizzie, to something
you said with regards to how it's not just economics
but political. So imagine an American company is going to
do a joint venture with a Chinese partner here to
do batteries, for example, in the United States, the commercial
terms are clear, should the American company also expect that
(32:51):
there could be some intervention anytime by regulators to shape
the eventual agreement. With regards to tech transfer, how real
is that kind of lingering risk there?
Speaker 1 (33:02):
On the side, I think that's absolutely a fantastic question,
and I should point out one caveat when it comes
to tech transfer, it depends on what kind of tech
we are talking about. When it comes to political concerns,
it's not just the United States political country, also Chinese politics.
So I think Chinese policy makers are also weary when
(33:25):
it comes to what kind of tech can go abroad.
Chinese policy makers also concerned about the potential security risks
in those jvs, in those FDIs when it comes to
IP leakage, they understand that.
Speaker 2 (33:42):
Because the center for the private company would be different
from the center from the regulator private companies that you
just want to do business with my partner over there
in Europe or Brazil or wherever. Right, the regularly gets
in there and says you can't give away the goods.
Speaker 1 (33:54):
Absolutely, But it also, you know, depends on what kind
of tech we're talking, of course, it's yeah, if it
is something very frontier, very cutting at say solid state battery,
still you know, very much in experiment. By the way,
another Chinese battery giant s a at L is also
leading in a solid state battery innection battery technology. Well,
(34:19):
when it comes to things like that, I think Chinese
policymakers are still very much on the fence and very
restrictive when it comes to what kind of tech can
or should go abroad. That's absolutely, that's real. Yeah. But
when it comes to legacy tech, at least from the
Chinese point of view, say, you know, LFP batteries, those
are very mature tech, and Chinese firms can produce them
(34:42):
very cheaply, very cost effectively, those are less of a concern.
So for those kind of tex I think it's relatively
easy for Chinese firms to shift them abroad. And you know,
if you look at the more than a dozen jvs
and ni us with Chinese tech firms, a lot of
(35:03):
them are centered around you know, solar, A lot of
them are centered around batteries. These tend to be more
mature technologically from the from the Chinese point of view
at least. Uh So, another issue you point out is, well,
there are there potential concerns of some kind of regulatory
clamp down from the Chinese side. I think that's also
(35:25):
a real risk, especially if the geopolitical climate deteriorates.
Speaker 2 (35:33):
Of course go hand in hand, right, Yes.
Speaker 1 (35:35):
So how do we how do how we how do
we prevent it from happening? Well, it's always a tricky
thing to to predict what policy makers, what Chinese policy
makers are going to do. I cannot predict. I I've
been you know, been wrong multiple times pretting predicting directions
for for for Chinese politics. But there are guardrails that
(35:58):
we can build into those JV infrastructure that can best
protect our firm's interesting.
Speaker 2 (36:04):
I think your phone's going to be ringing off the
hook very soon to talk about those guardrails. So many
people would be curious to know what those look like. Yeah,
so important. I have just two final questions for you, Lizzie.
One is, let's imagine you're one of those. You're a
rare species. I can tell I know from your history
(36:25):
as that we were talking earlier, you know more. You've
forgotten more about economics. Even though you're so young, you've
forgotten more in economics than most people know than their
whole lifetime. So thank you again for being with us
and shedding light on how China works from the inside.
Question is if, just for fun moments ago, I asked,
what should the US ask from China? Imagine you're advising
(36:48):
the Chinese government in negotiations this week. What would be
the number one thing you'd ask of the US or
Europe for that matter.
Speaker 1 (36:56):
Oh so, I mean, I mean no position of US
policy makers to do anything when it comes to China.
I would say, you know, in terms of what's really
critical for the US industry when it comes to uh
what uh you know? When it comes to what China
can realistically offer, I would say clean tech, Chinese, mature,
(37:20):
clean tech is one of the key pieces that Chinese
policy makers are potentially open to give, and the United
States really needed to accelerate its own domestic agenda.
Speaker 2 (37:34):
This would this could be a priority for the Chinese
side too, to to leverage their knowledge and know how
capabilities in clean tech to find some kind of common ground.
Speaker 1 (37:45):
Absolutely so, So you know, if we talk about pragmatic
approach for US China to to to shape some kind
of videal when it comes to business relations and investment. Actually,
I think we you know, the TikTok deal is interesting.
TikTok well, you know, women argue it's not a high
(38:06):
priority for for China. It could be a high priority
for President Trump. But TikTok actually touches on some pretty
sensitive stuff, right data algorithm, So those are you know,
quote unquote sensitive things that potentially have national security concerns.
So very very interested in how the TikTok deal or
(38:27):
you know, Project Texas will work out, right, will this
kind of you know, project taxis structure. You know, Chinese
firms still owns the tech the algorithm, licensed it to
US entity with US control you know, within US border,
data stored locally subject to US board oversight. Will that work?
(38:53):
Will that be a fruitful successful example? If that case
works out, could it be a a model, a model
for other Chinese tech firms potentially doing. I'm curious, Oh,
I lurk TikTok all. I have to say, that's basically
my my my way to stay tuned to gen Z
(39:17):
culture so that I don't feel old and all the time.
Speaker 2 (39:20):
All right, last question, what is the number one thing?
As I said moments ago, you're fluent one of those
rare species of people fluent intellectually, culturally, linguistically, and both
East and West. Given your background and your education, what's
the number one thing in your experience that Americans or
people in the West get wrong about China.
Speaker 1 (39:42):
I think it's well, actually, I would say it's not.
It's not just a US problem. I think it's a
problem on both that. I think we tend to see
the other system through our own lens. You know, I
think you know well, US polsy makers or some US
policy makers, the less informed ones tend to see the
(40:04):
Chinese system from what we you know, in Western narrative,
is is a wrong word. But when it comes to
things that overcapacity, we tend to see it through our
kins in economic lens as a supply versus demand problem,
the binary choice of the system. Just you know, the
(40:26):
idea that you can you can supply too much, or
you can demand too much or use some some kinds
some of the balance you have to find in between.
When it comes to China's sluggish domestic demand. I think
you know the policy prescription we hear from US policymakers. Oh,
you know, why don't you just stimulate consumption? Right, just
(40:50):
use physical stimulus to balance domestic demand? Why why you're
not doing it? And that's a very much I think
you know kinsin approach or Western economic approached to things
well from the Chinese point of view, like using physical
similars to stimulate consumption might not work out that well
within this system. Right. For one thing, a lot of
(41:14):
Chinese people in third and fourth tier countries and the
rural eras which are vast do not have a bank account.
Right if you want to send send people a one
thousand dollars check, how do you actually do it? There's
no existing mechanism to do it. And also the Chinese
people's saving behavior is very different from US people's saving
(41:36):
behavior in the past when you hand of a check.
What you know the Chinese people tend to do is
just you know whether whether it's d average words save
it does not translate immediately into spending. Even if it
translates into spending is kind of a one off thing.
I think this is something that Chinese possible makers are
(41:57):
slowly realizing. I mean China has been doing trading incentives
for multiple years now. Basically you know, offering bonuses if
you trade in, trading your old car for a new one,
if you upgrade your cars. And also you know home appliances, right,
so if you trade in your old TV for a
better flash your TV, you got to rebate. But one
(42:21):
the thing is when it comes to upgrade home home
appliances in Chinese le consumption habit really is quite different. Well,
upgate one time, sure, do you want me to upgrade
my TV three times in five years? Will probably not?
So when it comes to how we think about rebalancing
(42:43):
demand and supply, the incentive within the Chinese system is
quite different, quite different.
Speaker 2 (42:51):
Yeah, I said that would be the found question, but
I just want to tack on one here, and maybe
it's the ultimate question from our conversation is on the
one side of the person. You have a system. Some
call call it state capitalism. Anyway, it's a form of
capitalism that's different than what we have here in the West,
which we tend to call like market capitalism. Are those
(43:12):
two compatible long term or does something have to give?
Speaker 1 (43:17):
Well, that's a great question. But back to state capitalism.
Another main misunderstanding I think when it comes to ev
sector is it's actually fears domestic competition among the private
players that very much contribute to China's most and brilliant
(43:39):
innovative breakthroughs and most and brilliant successes in clean energy sector,
but also the most I think the hardest part of
the problem to solve because the actors are from the
private industry and they're acting rationally based on their own
business interest. So when we think about state capitalism state capacity,
(43:59):
I think it's important not to over exaggerate how much
a state can do. Yes, I think when it comes
to infrastructure, when it comes to providing kind of policy support,
long term policy support, policy priority, the state playing outside
the role compared with the United States when it comes
to you know, financial resource. When it comes to this
(44:21):
ecosystem of stem talent, a robust pipeline of stem talent,
of engineering talent supplying these Chinese firms. Policy plays a role.
But then when it comes to delivering innovation, when it
comes to product iteration itself, that's done by brilliant, innovative
(44:43):
Chinese entrepreneurs. Many of them do not really have hand
in hand relationship with the state, and many of them
are actually actively competing against state owned giants.
Speaker 2 (44:54):
Right, They've done an an incredible job of harnessing the
energies and how of millions of brilliant entrepreneurs. So you've
got this hybrid system. So would you call it something else?
What would be your term to describe that economy? If
not state capitalism? Is there something better, more accurate out there.
Speaker 1 (45:13):
So again, I think that's really that's that's that's probably
the million dollar question for the next noble winning in
the commist to figure out. But I do want to
point out that when it comes to state capitalism or
the Chinese system, which you know, we don't really have
a perfect name for, I think a critical shortcoming of
(45:34):
that system is financial system. We can you know, that's
that's a separate topic. But when it comes to capital market,
the United States still has the most mature ecosystem, most
dynamic capital capital market. And you know when we talk
to stakeholders and industry industry practitioners in the Southeast Asia,
(45:56):
they are you know, there's sense oh you know what
when it comes to us in China, we need China tech,
but we want US capital. China does not supply that
kind of deep rich uh, you know, a capital to
support you know, domestic investment, uh, you know, domestic innovation,
especially when it comes to private businesses. China's financial support
(46:16):
to the private sector is still very much lacking. When
it comes to VCPE capital support, it's actually pretty pretty chilling,
very thin, and you know, if anything, it just got
worse over the past few years. But the United States,
when it comes to reindustrialization, I think the US strength
still very much lies in its in its financial.
Speaker 2 (46:37):
System capital markets.
Speaker 1 (46:38):
Yes, absolutely so. I think that's that's you know, if
if I'm optimistic, I think when it when it comes
to things like AI. Here we talk about US China
AI competition, but I think ultimately US China AI equosystem
margana operate on two separate lanes, each plane to its
own strength. When I think when it comes to UH
(47:00):
data center frontier model, cutting edge tech. US still has
a leg and I think the capital market, the deep
mature capital ecosystem is going to place enterl role here.
But when it comes to AI deployment AI applications, things
like industrial robots, I think China will have a faster
(47:20):
runway from prototype to commercialization in China's vastness of market
place to its own strength, So I think shorthand is
zero to one. Probably the US is going to have
an edge for a while one to one hundred. Do
not underestimate the strength of the Chinese innovative ecosystem.
Speaker 2 (47:41):
So they're so good at commercializing and ramping scaling.
Speaker 1 (47:46):
Right, and I think we need a knowledge that Chinese
firms are brilliant and there's real innovation when it comes
to making the foundational technology that was invented in US
and elsewhere, but making them commercially viable, deployable and producing
(48:07):
high quality product in a cost effective way and market them,
you know, fast in in China's the best market Also globally,
I think we need to go beyond the trope of
China being a mirror copycat. There's some real innovative strength there.
So if we have that homebleness. I think will actually
(48:30):
be our in our own interest to see how the
Chinese firms innovate and to potentially leverage their strength to
charge a more pragmatic kind of relation with China. I
hope the political recognition is there. I don't know how
(48:50):
that's going to play out institutionally or from a policy
point of view, but I'm hopeful.
Speaker 2 (48:57):
Luzie. I'm thinking about our listeners, and I'm sure any
of them would like to speak to you. So how
do we get hold of you? What's the easiest way?
Speaker 1 (49:04):
Oh, that's that's easy. So I am pretty active on
x mostly commenting on Chinese policy stuff, but I feel
free to put my ex handle in your show notes.
Your listeners are free to reach out to me to
chat any chat about anything, you know, uh, Chinese economy,
about life in the US in general, how are things
(49:26):
going in DC? Have to chat about anything, or you know,
my fascination about TikTok okay.
Speaker 2 (49:33):
Fantastic, Lizzie, thank you so much for joining me today.
It's been highly enlightening. Really enjoyed it from start to finish,
and I am quite certain that you're going to hear
from a lot.
Speaker 1 (49:45):
Of people a really great treat for me to talk
to I mean talk to you, and I'm a fan
of the of the show. Keep the show going and
hopefully you know next time you can actually step in
that you sell me as you as you seven car
and see how it's it's you know, like, is it
as great as everyone?
Speaker 2 (50:05):
Let's go out, all right, Lizzie, take care of yourself.
Speaker 1 (50:08):
Take care and thank you Michael, Thank.
Speaker 2 (50:10):
You, Lizzie. Lee belongs and I know you'll agree with
beyond this belongs to that rare species of people who
can see things both from the Chinese perspective and from
the American perspective at the same time. That's enormously valuable
(50:34):
to us, and I learned a lot from her in
today's conversation. Three major takeaways. One, we come back to incentives.
What did Munger say about show me the incentive, I'll
show you the outcome. She calls them bureaucratic incentives. And
if we got them in competition with each other. Beijing
might want to solve over capacity, streamline things make them
(50:56):
more efficient, but the folks at the local level have
their own care APIs they want to put up more factories.
That leads to promotions and raises and bonuses. Second, how
are those KPIs measured? Usually in China means some kind
of visible physical growth, and that means factories. Hey buddy,
did you do your job this year? Yeah, look at
(51:17):
the new factory I've put up down the street. Okay, good,
you get a bonus. Third, local governments, she reminded, us,
in China rely heavily on value added tacks collected where
goods are produced, not where they're sold or consumed. As
a result, every mayor, every governor in China has an
(51:39):
incentive would love to have a factory in his or
her own backyard. As a result, you have way too
many car companies, way too many battery companies, way too
many chip makers. It's just like an overdose of capacity,
but no one's willing to step out. It's a fascinating
place and the rest of the world has to reckon
(52:03):
with it more and more as China doesn't stay home anymore.
It's going global into our backyards. So fascinating to hear
from Lizzie Lee. I hope you enjoyed this conversation. Thank
you so much for joining. I am Michael Dunn, and
this is the driving with Done.
Speaker 1 (52:21):
Podcast, where you meet the experts creating the technologies that
will power tomorrow's cars electric autonomous software. To find this
is a Driving with Done podcast. Thank you for joining
this episode of the Driving with Done podcast.
Speaker 2 (52:39):
To connect with Michael Dunn, visit doneinsights dot.
Speaker 1 (52:42):
Com or find Michael on x or LinkedIn. This is
the Driving with Done Podcast.
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