In The Future China Will Be Dominant & the US Irrelevant | Kyle Chan

In Episode 420 https://hiddenforces.io/podcasts/in-the-future-china-will-be-dominant-and-the-us-irrelevant-kyle-chan/ of Hidden Forces, Demetri Kofinas speaks with Kyle Chan—an expert on the Chinese economy and China's industrial policy—about why he believes China is poised to dominate high-end technology and manufacturing, and why factories worldwide will reorganize their supply chains with China at the center, as the world's preeminent technological and economic superpower. Kyle and Demetri spend the first hour dissecting China's industrial policy and dispelling misconceptions about the historical foundations of economic prosperity. Their discussion highlights the reciprocal interactions among the state, financial capitalism, and the market economy—dynamics that have driven the technological revolutions transforming modern life over the past two centuries. In the second hour, Chan and Kofinas delve deeper into China's playbook, drawing lessons for the United States. They outline policy choices that are both self-evident and broadly bipartisan: investing in research and development; forging strategically important economic ties with other nations; and fostering a welcoming, attractive climate for international talent and capital. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Joining our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 04/20/2025

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode is Kyle Chan, a researcher in the sociology department at Princeton University and an adjunct researcher at the Rand Corporation. He focuses on industrial policy, clean technology, and infrastructure in China and India. Kyle and I spend the first hour of our conversation discussing the nature of China's industrial model and dispelling misconceptions about the historical basis of economic prosperity

• 0:45Demetri Kofinas?

  and the reciprocal interactions between the state, financial capitalism, and the market economy that are primarily responsible for enabling the sorts of technological revolutions that have transformed our way of life over the last two centuries. In the second hour, we delve deeper into China's development model with a focus on what lessons can be applied to the US today and what sorts of policy choices we should be making that are both obvious and have bipartisan support, such as investing in research and development, forging strategically important economic ties with other nations, and creating a welcoming and attractive climate for international talent and capital.

• 1:24Demetri Kofinas?

  If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you.

• 2:06Demetri Kofinas?

  And with that, please enjoy another phenomenal episode about industrial policy and the US-China competition with my guest, Kyle Chan.

• 2:18Demetri Kofinas?

  Kyle Chen, welcome to Hidden Forces.

• 2:21Speaker 01

  Great to be here.

• 2:23Demetri Kofinas?

  It's great having you on, Kyle. As I was just telling you before we started this recording, I think today's episode will be an excellent follow-up to my recent conversation with Patrick McGee about Apple's role in helping build out much of China's advanced manufacturing ecosystem, because unlike with Patrick, you and I are going to focus much more on the Chinese side of that story and the active role played by Chinese policymakers in helping to shape the industrial development ecosystem in China, expediting the growth of Chinese manufacturing and helping to advance the competitiveness of indigenous companies, many of which, like Huawei or BYD, are now global leaders in critical industries, so

• 3:05Demetri Kofinas?

  much so that the US and Europe are wrecking tariff barriers and instituting export controls to try and impede their development in the hopes that their companies can catch up. In terms of background, you are a postdoctoral researcher in the sociology department at Princeton University, where your focus is on industrial policy, clean technology and infrastructure in China and India, which I guess makes you an expert in the Chinese and Indian economies and their economic and industrial policies. What does that mean in practice? And what is the path that led you to where you are today? And how did you develop an interest in these topics?

• 3:47Speaker 01

  Yeah, happy to get into it. So, yes, I'm a sociologist by training, and that's something that I think is distinctive and very useful, and I'll come back to why. But I actually began studying economics at University of Chicago back in the day. So, those who might not be familiar, UChicago has had a reputation for a long time as being a very intellectual place, a very heavy focus on theory. We read Marx's Faber in the original, Adam Smith, sort of all these great thinkers. And the economics department in particular is famous for its very free market focus, right? So you have Nolan Friedman, Gary Becker, some of the people who really sort of put the free market into the system. Center of American discourse. And at the time, I dragged the Kool-Aid.

• 4:32Speaker 01

  So I was very, very of the mind that ultimately the market was the best solution to most things. And the best that the government could do was sort of get out of the way. And over time, my thinking evolved. And over time, I think one of the biggest experiences that changed my thinking was traveling to both China and India. So I'm Chinese American. My family is actually from Hong Kong and I'm part of this generation of Hong Kong immigrant children who grew up not speaking Cantonese, although I can speak some Cantonese, but actually grew up speaking Mandarin. Because our parents were like Cantonese is good for ordering food at a restaurant. Mandarin is good for everything else.

• 5:16Speaker 01

  So I learned Mandarin growing up, but traveled to China more as an adult and then India later. And that really shaped my thinking. And I have to say, the first time I went to Beijing as an adult, my first impression was like, things are kind of a mess. Things that I took for granted as working, paying your utility bill or, you know, like dealing with simple transactions were very difficult in China. And I just remember buying things at various markets, like, you know, sort of cheap knockoff electronics goods. And thinking, well, you know, it's cheap. The quality, I just expect to be poor and mixed overall. But over time, I noticed that China was changing very quickly and India as well. And the question was, why was this happening?

• 5:59Speaker 01

  And was it simply a story of, you know, the government kind of stepping back and letting market forces take over? Was there something more to it than that? And so I started to be really interested in particular also in infrastructure. And I grew up in California. You know, we have the high speed rail project, which has now become, I think synonymous with like America can't build things. And unfortunately, that project has been pushed back by, you know, years, if not decades now. And I was traveling around China a lot, just wondering, you know, why China was able to build a high-speed rail system across the entire country? Why China was able to build infrastructure so quickly? What was the role of government in all this? What were the role of private players in all this?

• 6:42Speaker 01

  And then also, my time in India, so I spent a lot of time doing fieldwork there as well, mostly based in Delhi, but traveling all over, it was a really great privilege to do so much fieldwork, going all the way to, you know, parts of the Northeast, often traveling by train, so I got to experience infrastructure firsthand. But the thing that struck me there too was so many daily encumbrances for just everyday people, whether it's getting to work, or getting a job, or enrolling in school. It felt like it was sort of a million coordination problems, you know? Every step of the way, it was, well, you know, there is a better when everyone knows it, but who's going to step in and just sort of coordinate things a little bit more? And so, those two experiences in China and India really shaped my view of,

• 7:27Speaker 01

  you know, what is the role of some kind of coordinating actor? Whether it's a company, or a university, or a research institute, or a government agency, in trying to coordinate some of these loose ends? And at least, shape some direction to it, so that, you know, we don't just have sort of like, a chaotic, you know, a mess of consumer safety scandals every other day, which is, you know, again, going back to my experience in China, which was like, a lot of the dominant sort of news headlines, earlier at least. So, that really kind of set me on this path, and then ultimately sociology, I settled on sociology as a way to think in terms of systems, rather than in terms of just like, a data set, or in terms of just a particular kind of teasing out a particular variable's impact.

• 8:10Speaker 01

  And that's obviously very important, but the systems level thinking in sociology, looking at institutions, org structures, I'm like, a huge nerd when it comes to like, trying to dissect org charts, and not just the formal ones, but the informal ones, like trying to map out how companies operate, how supply chains intersect, and how, you know, local governments interface with central governments, you know? These things, I love digging into the details, and I felt like sociology gave me that ability to... You know, look at those topics and then do it in a way that encompass the full range of sort of like methodological approach, interviews, data, corporate filings, you know, speeches, government reports, you know, everything, sort of the kitchen sink approach,

• 8:53Speaker 01

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

• 9:25Demetri Kofinas?

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

• 9:54Speaker 01

  Yes, I do. And I think ultimately, it was this hope. And you could understand it in sort of the Cold War context, the competition with the Soviet Union, and the obvious massive failures in state planning in the Soviet Union, in China especially. You can understand how the reaction to that would be, this is not the way. And I think it's very interesting to see, there's a whole, you know, history of, of sort of economic thinking, of economic philosophy, that has taken these sort of pendulum swings over time, in terms of attitudes towards markets and states. But I think there has been, I think, a gap in understanding, not just where markets can fail, but where they can fail.

• 10:40Speaker 01

  Structurally, where they can fail systematically. So, you know, again, and I hate to sort of demystify my alma mater so much. I learned a ton, you know, that was a fantastic, informative experience. But to kind of take the free market orthodoxy as a bit of a foil. You know, I think this idea that if we sort of just let these market forces run on their own and we sort of ignore the interventions or the, you know, useful, and this is a very important word, but useful and smart and selective regulatory interventions by, you know, here in the US, you know, we're used to FDA or the EPA, like trying to keep our food safe and our medicine supply safe and our environment safe.

• 11:22Speaker 01

  So these things, I think, got downplayed, perhaps, especially as the US was becoming more dominant economically in the world. And I think it sort of reinforced this view that the way that America became sort of this global economic juggernaut was because we had stepped back. And I think we forgot some of our own experiences, you know, going back to certainly before World War II, but then especially in the post-war experience when, when in fact, we were building a lot of those institutions that were the foundation for, you know, for our companies being so successful today. So I, you know, I don't see it in sort of either end of the spectrum. I think there's some useful middle ground to understanding, but I think some of the big gaps are this short-term focus on immediate profitability, a focus on sort of narrow

• 12:07Speaker 01

  interests, right? So like, if you're a shareholder, you want the company that you are invested in to do well, but there are some gaps between things that are good for our country or for society and what is good for a company or what is good for a set of companies in an industry. And I think that gap there, we have been trying to address it for a long time. I think that just got downplayed and now we're realizing that there's a special role for that. I think other things like national security, and especially now with competition with China, has brought that back into the fold. And I think obviously also the shock of supply chains with the pandemic and the realization that actually there are certain critical nodes in the entire sort of global supply chain.

• 12:49Speaker 01

  There are certain bottlenecks or fragile points where if those break, if those even get mildly disrupted, they can have huge repercussions. And again, these are not priced into the thinking for any individual company or any even a whole industry because they can have broader spillover effects across industries that that we might not be able to capture in terms of immediate shareholder interest or managerial interests at the corporate level. So those are some of the the gaps that I see as persistent and that keep coming up again and again.

• 13:21Demetri Kofinas?

  So I feel like a lot of people, there's a large cohort of Americans who view this debate along the lines of free market economics versus central planning. What do you think is wrong with that framing? What does that framing miss?

• 13:38Speaker 01

  Yeah, so I think it misses the reality on the ground in both, say, the US and China. So it's really interesting to look at the Chinese case because I think right now, perhaps a lot of people's views are colored by a top down sort of command economy approach that China really did have, especially before the reform era of the 1970s and 1980s. But the reality is then, since then, you have this sort of hybrid approach, a hybrid approach in China, a hybrid approach in the US, a hybrid approach in many other parts of the world. You have this sort of broader spectrum and it depends on industry. It depends on point in time. But I think this hybrid approach is really interesting. So in the Chinese case, right, they not only did take a step back

• 14:22Speaker 01

  in terms of pulling the state back in certain areas and letting market forces play a stronger role, but they did so selectively and they did so in a gradual manner. And they did so in a way that tried to harness, I would argue, some of what Chinese policy folks saw as the advantages of the American system, you know, trying to harness the advantages of competition or at the very least of like trying to avoid the monopolies of the past that created that kind of rigidity and lack of resilience, as well as, of course, a political challenge even to central government control in some cases. So those lessons, I think, were sort of learned. And still an ongoing process from places like the US as well as elsewhere. Japan played a huge role actually in all this.

• 15:07Speaker 01

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

• 15:39Demetri Kofinas?

  One more question along these lines before we get into a recent New York Times op ed you wrote titled, "In the Future, China Will Be Dominant, the US Will Be Irrelevant," which is what prompted this conversation initially. And the question has to do with what I think is a myth, which is that the government doesn't already play a major role in the economy. I think there's this sense in the US that we've had a free market here, or we've gone through periods of having a free market. How would you respond to that framing? I mean, how far removed has this country been during its development from what we consider to be a classical free market?

• 16:17Speaker 01

  Yeah, so I think the US system, yeah, has never been a true classical free market in the sense that was theorized by, again, some of the marquee thinkers like Milton Friedman, perhaps. And I think, you know, one interesting element in all this is just the visibility of the different players involved. So I think today, understandably, a bright young entrepreneur who has a startup in Silicon Valley that changes the world is celebrated and rightly so. You know, some kind of technological breakthrough or a business model innovation that is striking, that affects, you know, that creates some new product that I think has been celebrated. What is less celebrated, I think, is these, for lack of a better term, the bureaucrats

• 17:02Speaker 01

  who are sort of day in and day out trying to measure the lead levels and other sort Impurities in your water treatment systems or the people who are doing research at the more fundamental level in, say, Department of Energy National Labs and that research then feeds into the private sector. Right innovations in and breakthroughs in say solar technology or battery technology. You know, that feeds into the broader sort of American system. American companies can take advantage of that. You know, of course you have the classic case of the COVID vaccines and mRNA technology being built on previous work done. Universities and at public research institutions.

• 17:47Speaker 01

  So I think all this is sort of happening in the background and until now we've almost taken it for granted. You know, we don't have a culture of celebrating. You know, this is very sort of Max Faber. Max Faber was this, you know, famous German sociologist who was a theorist and student of bureaucracy. And he was probably one of the few people who made a name for championing civil servants and bureaucrats. But you know, for him, he saw that there was this sort of almost, you know, I don't want to downplay it too much, but almost kind of a drudgery or a uncelebrated part of what makes a modern economy run in the background. That we just, you know, we don't see in the headlines until they break.

• 18:25Speaker 01

  Right until they come under attack or until there's a failure with say the FAA and air traffic control issues in Newark. I'm near Newark Liberty Airport, that's my main airport, so I experienced it. But until those things go wrong, we're just like, oh, you know, of course they're going to do that. That's not the interesting story. The interesting story is everything that's being built on top of that infrastructure.

• 18:47Demetri Kofinas?

  So it's interesting that you mentioned the air traffic controller issue over in Newark Airport. Cause I also live in this area and I have a flight that I'm dreading coming up soon. And it, you know, stuff like this and this story in particular has prompted me and I'm sure millions of other Americans to ask themselves, what the hell is wrong with this country? What exactly is going on where we have this persistent problem of air traffic controllers quitting because of trauma or other issues that they cite, saying that they have these near misses of airplanes, where we've actually already seen tragically a helicopter, a military helicopter crash into a commercial airliner heading into Reagan National Airport in DC? And it's not clear that there's a solution. In the past, at least, and I'm not saying this is necessarily a good thing, but you

• 19:30Demetri Kofinas?

  would have seen the president and members of Congress come out and say, "We're going to fix this right now. It's going to get fixed right now." Whether or not they'd been able to fix it is a different story, but there seems to also be a kind of sort of inertia that's been building up in the system and as if like we can't solve these major problems. So, anyway, we'll have a chance to sort of delve into all those things, but let's bring it to the New York Times op-ed that I mentioned earlier, titled "In the Future: China Will Be Dominant, the U.S. Will Be Irrelevant." In that op-ed, you wrote, quote, "When historians look back, they may very well pinpoint the early months of Trump's second term as the watershed moment when China pulled away and left the United States behind." And then you went on to say that Trump is, quote, "Taking a wrecking ball to the pillars

• 20:15Demetri Kofinas?

  of American power and innovation. His tariffs are endangering U.S. companies' access to global markets and supply chains. He's slashing public research funding and gutting our universities, pushing talented researchers to consider leaving for other countries. He wants to roll back programs for technologies like green energy and semiconductor manufacturing, and is wiping out American soft power in large swathes of the globe. China's trajectory couldn't be more different." Walk me through the argument you make in this op-ed. Why will China be dominant and the U.S. irrelevant? And why have the last few months validated this outcome in your view?

• 20:53Speaker 01

  Yeah, this piece was really meant to be a wake-up call, not necessarily a prediction about the future, but a thought experiment for rolling forward the trajectory that I saw the two countries being on, if we take current trends and project them ahead by, you know, years, maybe even a decade or two. And The argument I'm trying to make is ultimately a simple one, which is China's trying to do a lot right now to become competitive in many, many different industries. From robotics and AI, these so-called industries of the future, to even industries that we take as more mundane. You know, the inputs that might go into some of these industries, steel, aluminum.

• 21:38Speaker 01

  And across all these industries, there's broad belief in sort of the Chinese political establishment that these areas require support, that they are too important to be left on their own. And that China should aim to become, if not a leader, at least a very, very strong player in many of these industries. And you know, a lot of this comes back to a desire to build up national resilience. So we can come back to that later perhaps. But on the other side, I see the US as potentially squandering a really, really good thing.

• 22:18Speaker 01

  Which is all of these strengths that we have, all of these factors that we have going for us, our incredible universities, which still to this day, you know, despite the attacks from the Trump administration, are just these beacons of, you know, free discussion and cutting-edge research that international students from around the world flock to, to our companies, to even some of actually our institutions. And we can come back to this, this comes back to your point, you know, even the ones that have faced issues along the way, you know, government regulatory agencies, things like that, they still are the model for much of the world.

• 22:55Speaker 01

  Even China has tried to replicate, even going as far as to name some of their institutions after our institutions in the US. So these things have been, I argue, the pillars of American strength. The things that our great companies are built on top of, the things that allow us to become an economic and technological leader in the world. And these things are really for us to lose. And that's why this piece was meant to be a wake-up call to To say this moment right now is a make or break moment. And I actually, you know, I know these op-eds, they tend to be loud and try to make a very, you know, a strong point, but in this case, I really feel very, very much that we are at a

• 23:40Speaker 01

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

• 24:16Demetri Kofinas?

  You said something earlier about free discussions. I wasn't entirely clear of the context you were describing. Were you saying that the universities were beginning to lose that kind of freedom of speech on campus? Or that was something that, I didn't really understand what you were saying, to be honest.

• 24:31Speaker 01

  Oh, yeah, no, that just meant universities as places where you could debate all sorts of issues.

• 24:37Demetri Kofinas?

  Yeah, so I think that's obviously been a problem in recent years, and the Trump administration has been trying to address that, some of its measures. To be honest, I don't really know. I haven't looked into what those measures are to see if they would be effective enough. So I don't have an opinion. I will say that something I read recently that seems rather alarming, and my initial reaction to this was this cannot be true, I thought to myself. But honestly, I feel like I have that reaction to so many things these days, and I didn't look into it further. But is it true that the Trump administration has issued an order that prevents Harvard from recruiting foreign students? Is that real? Have you seen this?

• 25:10Speaker 01

  Yeah, yeah, so they tried to remove a certain kind of accreditation, or basically like a license that Harvard has to be able to enroll foreign students. And I think it's tied to their visa status and things like that. So this was enacted and then blocked, at least temporarily, by, I believe, a federal judge.

• 25:30Demetri Kofinas?

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

• 25:40Demetri Kofinas?

  That is incredibly dumb.

• 25:44Speaker 01

  Yeah, and it's just amazing because, okay, so I'm at Princeton right now. There are lots of international students. They're a huge, huge part of the community, not just in terms of their numbers, but in terms of what they contribute to campus. They are very active in my classes. You know, I have some friends who do work on quantum and they're international. And they're just like, the US wants to be a leader in quantum technology. And I, and I think it's a really, really critical technology that, that we need to be moving forward on as quickly as possible. China is definitely pouring a lot of investment into quantum technology. And the last thing you want to do is scare away these incredible researchers who are really pushing the envelope and really bringing up the level of, you know, yeah, of our entire country, so.

• 26:26Demetri Kofinas?

  That's infuriating of the people coming up. These policies are really, really misinformed in my view. And no one would advocate this for US sports. No one would say that we have to stop admitting all these European basketball players to the NBA because they're, they're somehow negatively impacting American competitiveness or the opportunity for US basketball players to find a job in the NBA. I mean, no one would say this, but somehow we think it's appropriate in, in the areas of science and technology or other places. Remarkable and concerning. So let's bring it back to Beijing here because we're going to go back and forth between comparing the US to the Chinese industrial model or like thereof. And you wrote in the same piece that Beijing is, quote, "bringing a Manhattan Project

• 27:11Demetri Kofinas?

  style focus to achieving dominance in high tech industries." I want to understand how exactly they are doing this. And please feel free to go into as much detail as possible. I want to try and understand top level, how we go from ideation to implementation to evolution and iteration of the model over time. Because this is something that Patrick McGee and I discussed. Briefly and in sort of various ways in our conversation, but one way which it came up was how the Chinese had a particular model of industrial policy that they implemented with the joint venture that led to the growth of Huawei and the dominance in telecommunications. That was not what they applied in the case of Tesla, because they'd learned from what

• 27:53Demetri Kofinas?

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

• 28:15Speaker 01

  Yeah, so this is a big question, and there's a lot to say here. Definitely Patrick McGee's book is fantastic and gets into a lot of the detail, especially for one especially important company. But from the big picture perspective, right, what is the goal? What is Beijing trying to do in the long run? And how long has this been happening? And I would argue that Beijing's goal is there's sort of several fold. One is economic development, which they talk about all the time. I mean, it's just like their favorite term. Everything is about not just GDP growth, but sort of this broader sense of elevating the level of the country, quality of life, competitive of its firms across the board. But in particular, there's a very, very strong focus on two dimensions that I would really stress. One

• 29:00Speaker 01

  is these strategic industries, these target industries that come up again and again. Made in China 2025 is one example, and I'll come back to that in a second. But these industries are literally just, it's often the same ones, aerospace, high speed rail, obviously now with AI, but AI and next gen information technology has long been one of these sort of pillar industries. There's a whole bunch of these target industries that the government has been focused on supporting. Okay, so that's one dimension. The other dimension is a very, very strong focus on manufacturing and sort of like the physical world. And I know you said, well, we'll kind of go back and forth between the US and China. Like, it's interesting to see how much I think perhaps the US offers.

• 29:44Speaker 01

  The contrast in some ways of what China doesn't want. It doesn't want a consumer focused economy. It doesn't want one where all the manufacturing got moved outside to other countries. And it doesn't want one where the focus is more on just, you know, design and software and things like that. A lot of the policies in China really geared towards making things physical, you know, tangible, even even the policies on AI. Often it's paired with policy support for robotics and autonomous vehicles and autonomous systems, drones, things like that. Industrial automation, you know, sort of hard tech applications. But those are sort of the two broad dimensions in terms of like the goals for a lot of Chinese industrial policy.

• 30:26Speaker 01

  And what has happened over time is a whole series of plans, policies, initiatives, programs that go all the way back to the early years of the reform period. They go back to even the eighties. You can argue even pre-reform. They include a longstanding investment in public spending in science, in certain target scientific areas like satellite technology or space or solar and semiconductor technology. A lot of that R and D, especially at public research institutes and universities, that has been happening for a long time, for decades. Then, you know, in addition to a focus on scientific research,

• 31:10Speaker 01

  there is in particular focus on industry, sort of targeted industry level support. And that's where you get programs like Made in China 2025. That was launched back in 2015. Again, targeting those key industries that I mentioned. And the way that Beijing tries to support those industries, it's very interesting. And I'm glad you you actually sort of framed it the way you did. It's not any one particular tactic or any one particular strategy. It's a whole playbook of different tools that Beijing tries to use in order to push its own industries forward. And that playbook evolves and the different actual tactics and strategies evolve.

• 31:54Speaker 01

  Over time. So one example is you can get into the auto industry. So long before electric vehicles and long before companies like B Y D started to steal the headlines. China has been trying to build up its automotive industry. And has used a number of different strategies that have changed over time. There was a long standing effort to have state owned enterprises, state automakers, take the lead. And the, you know, there's a sort of an overlap with military transportation equipment there in the early days. And then later on, they tried a joint venture approach, right? So you have companies like G M, Ford, Volkswagen, Toyota, all forming joint ventures with Chinese automakers in China

• 32:36Speaker 01

  to produce mainly for the Chinese domestic market. And that process was seen by some as a success, but also by a lot of other analysts as a huge failure. It was a success in the sense that China's auto industry, this is the traditional one, did expand and became in the 2000s, the largest in the world by sort of sheer volume. But almost all of that was for the Chinese domestic market. And you did not have a Chinese version of G M or Volkswagen or Toyota on a global stage. And so there was a worry that some of the technology that was supposed to be acquired and absorbed and adopted in that process, right?

• 33:15Speaker 01

  So the point of bringing in, say, a Volkswagen was to bring in all these manufacturing techniques and know how, including ideally some aspects of the combustion engine technology into China in some way. And then that the idea was that would diffuse to the rest of the country, whether it's to other state automakers or perhaps to the broader auto supply chain in China. So there was that hope that bringing in these foreign automakers will upgrade the entire industrial ecosystem in China. And to an extent it did, but it didn't yield those actual sort of national champions that later on would become so critical.

• 33:51Demetri Kofinas?

  Was it not successful because the major components of that supply chain were still outside of China or outside of China's influence or control? What was the reason?

• 33:59Speaker 01

  Yeah, so one of the reasons was trying to master the core technology for combustion engines. That was very difficult and that was closely guarded by the foreign automakers. Another big thing, though, was the incentives for the industry structure within China. You had a few state automakers, SAIC, BIC, that were complacent, essentially, that they each, through their joint ventures, had a really secure hold on the Chinese domestic market and they were fine with that. The Chinese government kept a tight lid on the number of new entrants into the space. And there's a whole historical background here with Japan and South Korea doing something similar. But the idea was, we would build up these

• 34:42Speaker 01

  handful of state automakers and they would own the Chinese domestic market and they were happy with that and didn't really see a need to innovate at the cutting edge and expand to international markets. So there was a huge incentive problem along the way that became comfortable. So this idea of now China being able to leverage its huge market as a competitive edge. There are a lot of people who are pointing out that that could be a huge liability as well. You got too comfortable just selling to your own customers, selling to your own market and you don't have really motivation to take that really hard step and compete at the international level.

• 35:20Demetri Kofinas?

  Well, so why did that not happen in the case of telecommunications equipment or handset manufacturing?

• 35:25Speaker 01

  Okay, yeah, so telecom is another really, really interesting industry, right? So telecom equipment, now we know, sort of looking back, we know about the rise of Huawei and how dominant it has become globally as a technological player across a number of industries, not just telecom. But you go back to the early days when China was very dependent on foreign telecom equipment, Alcatel, Lucent, Ericsson. And it was really interesting because you can even go back further and see that China's whole telecom industry was really starting to take off after. The reform era and leaders in Beijing were recognizing that this industry was not just

• 36:07Speaker 01

  one of many, but sort of, again, one of these core backbones of the entire economy, as well as being a national security issue. So they were very focused in their industrial policy efforts, they being the Beijing policymakers, in trying to eventually indigenize or localize some of this technology and bring it into China. And this was a long process that was phased out over time. So originally it began with, again, these joint ventures. So this model you see appearing again and again, where you have, you know, China opens its markets, but to foreign telecom equipment makers on the condition that you form a joint venture that you manufacture within China for the Chinese

• 36:48Speaker 01

  market and that you help share technology and sort of upgrade the R and D for Chinese labs or Chinese companies along the way. Shanghai Bell was, I believe, the earliest of these joint ventures and many others follow it. But then there was another phase after that, where over time, a lot of the production was done domestically within China through these joint ventures. But then you have the emergence of the sort of like pure play, pure Chinese companies like Huawei that were pure Chinese companies in the sense that they were not joint ventures, but were not pure in the sense that they were building off of a lot of this foreign technology that was brought in. This ties back to your conversation with Patrick McGee and the role of Apple in all this. So that foreign technology got diffused through these joint

• 37:31Speaker 01

  ventures across the broader Chinese telecom equipment industry to places like ZTE and Huawei that were not originally part of those joint ventures. And that became sort of the technology foundation upon which China's own industry and own companies emerged. So that's really some of the background. You see it again and again. And again, you know, it changes over time, right? There are different periods in time when the joint venture approach seems to be the one that's more dominant. And there are other times when there is more of a focus on, say, a newer technology like electric vehicles or lithium batteries.

• 38:04Demetri Kofinas?

  Right, because in that case, while there certainly must have been diffusion in some of the supporting industries that created this flywheel. The electric vehicle market itself, I mean, we had Tesla in the US, which was an innovator in electric vehicles, but we had no comparative industry from which China could sort of steal competing technologies or sort of emulate or replicate a domestic ecosystem. And as you said, they struggled to do that with internal combustion engines. And without necessarily getting unduly fixated on this particular example, and if it's not appropriate the way I'm framing it, please feel free to say so, but what was the tweak that happened between internal combustion engines and electric vehicles that led to

• 38:48Demetri Kofinas?

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

• 39:21Speaker 01

  Yeah, so it's really interesting to see the EV space because what we're seeing internationally is these Chinese EV companies sort of breaking through the surface and it looks like they're emerging. It feels like an overnight transformation, right? But the reality is this longer process happening in the background that led up to this moment. And some of the factors there were there is in particular one minister for science and technology named Wang Gong, who actually had experience Audi before and Volkswagen. And he was an auto engineer and he in particular has been credited with this political focus on so-called new energy vehicles. So this includes, you know, battery technologies, battery, electric vehicles,

• 40:05Speaker 01

  hybrids, hydrogen fuel cells, sort of the broad range beyond internal combustion engines. And he was hoping that this would be a way for China to catch up, maybe even leapfrog, or at least get around some of the barriers that it was facing in traditional automotive. And along the way, you had a very heavy investment. So I mentioned earlier, the public spending, the research that was being done at institutions affiliated with the Chinese Academy of Sciences, at various Chinese universities focused on this. And then you also have the emergence of a consumer electronics industry. So iPhone actually comes back into the story again and again, where some of these battery companies, for example, were focused originally, like BYD, on consumer electronics.

• 40:50Speaker 01

  They were focused on making lithium batteries at scale for laptops and later other sort of portable consumer devices. They also benefited from cooperation with Japanese and South Korean battery makers along the way. So this was actually, so it may, some of these joint ventures, it depends on which country and which industry, but in this case, a lot of it was really coming from Japan and South Korea, at least in the earlier days. And at the same time, and this is, I think, something like really crucial to understand about China's approach to industrial policy. It was a two-way or a two-sided approach to dealing with foreign technology. On the one hand, it was a very concerted effort to bring in foreign companies, to

• 41:33Speaker 01

  learn from them, to absorb, again, not just sort of like the stuff that you can patent and license, but the just engineering and manufacturing process know-how. There was that. But there was also an effort to insulate Chinese domestic players, to use this process that's often referred to as an infant industry strategy, where you use various tariff or non-tariff barriers to protect your domestic industry, at least temporarily, to give them a chance to grow and scale up and reach a level where they might be able to compete without being completely squashed by the Panasonic's of a previous era. So that was happening in China.

• 42:15Speaker 01

  And there was a sense among the Chinese battery companies and the Chinese EV companies that there was writing on the wall, that these protective policies weren't going to be around forever. And a battery maker like CATL, their CEO, like talked about how Time was limited. At a certain point, they would have to face the music. They would have to face actual direct competition with the top dogs in the space. And in the meantime, they needed to take advantage of that opportunity to ramp up, to acquire and build up and develop their own technology and scale up to a way that they would survive when those sort of walls were lifted and they were forced to compete. And so I think that whole process,

• 42:57Speaker 01

  again, it's sort of a sequential or staged process, right? At different times, you want different policies. And I think Beijing has tried to, where it's successful, has tried to sequence it appropriately. So they've been trying to protect their industries to a certain extent when they felt like they were just starting, but then subject them to really, really fierce, you know, domestic and then also international competition later on when they felt like these sectors were ready. So I think that kind of sequential staging of this whole process has been really crucial. You know, again, I keep thinking back to the US approach, even going back to, you know, the Biden era, Inflation Reduction Act, the CHIPS Act, and, you know, trying to think carefully about when to protect some

• 43:38Speaker 01

  of your budding industries, protect even maybe some of your startups or even some of your incumbents from just getting flooded with, let's say, Chinese batteries or Chinese EVs in the near term. So I can understand that policy for sure. But then the key is you need to have that sort of fire under their feet, driving them to want to innovate and not get too comfortable thinking that, oh, these walls are going to be around forever, that they can just be, you know, like these Chinese state automakers of the past, comfortable in their domestic market. So this is really crucial. I feel like, you know, eventually the competition is coming. And, you know, to tie back to the broader US-China thing, the competition is here now. So, you know, thinking about that kind of urgency, I think, is really crucial.

• 44:19Demetri Kofinas?

  Yeah, I mean, one of the things that comes across in reading your work, and I want to mention your Substack, hi-capacity.com, is that the Chinese were very adroit in fostering domestic competition. It wasn't that they had a couple of state champions and they just gave them all the money that they had. They created conditions that were competitive. So they kind of, it was very mixed market. They supported them, they protected them from foreign competition without not allowing them to be exposed to foreign competition, which they could use to learn. And also, they pitted firms against each other, or they fostered environments that enabled that. You know, all of this is so difficult for someone like me to understand because it's also hard to reckon with the Chinese industrial model.

• 45:02Demetri Kofinas?

  And I want to spend some of the second hour kind of delving into that more deeply to understand the relationship between the party, the Chinese Communist Party, the local governments, and these companies. And what lessons we can draw here in the United States around what maybe we can learn from what China has done. Also, what can we relearn about what we've done in the past and disabuse ourselves of some of the, let's say, wrong frameworks that we've been working under for the last several decades? And also, what are the consequences of inaction? I mean, that's something else I want to get into in the second hour. Kyle, for anyone who is new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you.

• 45:44Demetri Kofinas?

  If you want access to the second hour of today's conversation with Kyle, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device, using your favorite podcast app, just like you're listening to this episode right now. Kyle, stick around, we're going to move the rest of our conversation onto the premium feed. Sounds good. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page.

• 46:29Demetri Kofinas?

  Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter @Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.