This week, Noah Smith set his ever-sharp eyes on China’s industrial policy and explained to us how it is “defeating” Western companies such as Tesla. If he stops writing uninformed pieces about China, this series of mine on his China cluelessness will lose steam. But since he keeps at it, my critique is kept alive.
Far too many economic commentators on China tend to be biased against China and at the same time have little direct contact or experience in China - a toxic combination which throws their analysis off kilter.
Worse is when these commentators talk about new technology without proper grasp of new technology - and instead assume you can simply steal new technology at scale in short order.
Yes, China has achieved unprecedented progress in new tech - not by stealing - but by hard work, intelligence, innovation, coordinated policy and above all by fomenting the most competitive industrial ecosystem in modern history. This has been well praised by Bill Gates, Elon Musk and other industry leaders.
It also doesn't hurt that that China has a high national IQ and smart leaders - who got there thru, yes, competition and own accomplishments.
Else, how would you explain that China leads the world in: STEM graduates, science and tech patents, scientific publications, the largest and most advanced high speed rail, green power power generation, UHVDC power grid, national data center network, heavy ship building etc etc in addition to building the world's largest and best Battery, EV and 5G Telecom industries.
China, like much of the Global South, believe in win-win and cooperation - as illustrated by the Belt and Road Initiative, BRICS, trade agreement etc.
China eschews win-lose, suppression, vetos, hegemony and ridiculous sanctions.
Remember, China leads in Trust in Government, Trust in Media and Trust in Business. Did China steal these measures too?
I agree there are a lot of internal things to examine at Tesla for why they are faltering, before getting into any forced technology transfer and other controversial issues between USA and China. I actually recommend https://bradmunchen.substack.com/ who tracks and makes compelling cases for shorting Tesla in the long term.
While Musk puts on a polite/guai face for Chinese authorities his behavior is the complete opposite in US. In fact he has become so erratic and involved in far right politics, conspiracies, and social destabilization it has actually turned me off from getting a Tesla for now.
Also the fact Tesla has scrapped Model 2, Musk divides his time between Twitter/Tesla/SpaceX and other things probably doesn't help. Now they are trying to go all in on AI (instead of just making a solid, affordable EV) just highlights how disorganized Musk's planning skill is.
I hadn't made the connection how much Shanghai factory actually bailed out Tesla during their struggles.
“Work harder and have less fun”? The US already has one of the longest workweeks among more industrialized nations. (What is life about if not having fun?) I think you made a gross generalization of the West, as bad as many westerners make of China. The decline of US competitiveness I believe is due to other factors (short-term profits, financialization of the economy, monopolies crushing innovation, etc). Otherwise, a very interesting article, and I appreciate your point of view!
Just because China “saved” Tesla doesn’t mean they didn’t have Tesla over a barrel and take full advantage of it.
And just because China was employing a “catfish” strategy doesn’t mean they weren’t ALSO forcing technology transfers that ultimately, by your own admission, led the domestic industry to outcompete Tesla.
Many different things can be true at the same time. You are genuinely insightful, but you also keep insisting that only either nation’s narrative can be true. Both can have aspects of truth and falsehood at the same time.
I would argue that the IRA saved Tesla, specifically by strongly incentivizing all of the other auto brands in America to adopt the infrastructure that Tesla is built on. So while Tesla cars may dwindle in sales, the U.S. charging infrastructure will essentially be a Tesla-charging system.
Honestly Tesla should be doing a lot better if huge chunks of potential consumers are not actively boycotting the vehicles because the don't like Elon Musk. That anti-Musk sentiment is weighing on the company, highlighted by 10% layoffs last week and, much like SpaceX, I don't think this company would be much without serious help from the U.S. government.
I get that China is worth about 40% of its sales numbers, but I think they would have aggressively pulled back from their international market if the US sales started to seriously falter.
Anyway, I agree that China is not killing Tesla, but I also don't think it's the reason for Teslas sort of surge.
Very informative as usual! Yes, introducing an high end foreign competitior to jolt the domestic market while also improving the industries parts and services providers ecosystem was an apt move indeed. It never ceases to amaze me how current day China (it seems the center may be making moves that run the risk of changing this, lets hope not) and the old American Republic which was gone from all governance structures at all levels* by 1961, are the mirror images of each other. There are no other systems in the history of the world like them and only they are like each other and their physical forms are the inverse of each other. They are each others mirror image.
*The sole exception is the governance of the city of Chicago, which managed to hang on until the 80s or 90s
I don't entirely agree with all of your points, but I think they're well presented, and I'm not in a position to dispute many of them anyway. I'm reluctant to make too many inferences based on my own experience (I'm an American employed by the US subsidiary of a Chinese company, so I have many Chinese colleagues both in the US and China, and our manufacturing is done in China). I will refrain from generalizing, but I'm very curious if some of the issues we face
Chinese people work 72 hours a week to save money to buy US treasuries so Americans can consume more than they produce. Both countries, but especially China, fund this by chewing through their demographic dividends.
It's an unhealthy relationship with an unsustainable pattern of specialization and trade.
But fixing it would require lots of changes by lots of parties, many of which Noah wouldn't like. It's easier to blame Elon Musk and nameless executives while calling for more political power for people like himself.
I have seen this manufacturing play out in the apparel space. We had an apparel factory in the US for decades before finally moving it to China. The factory floor workers here want to work hard and do overtime. We actually limit overtime sometimes because we see a rise in quality issues and a dip in efficiency. Folks in the US bemoan the flight of factory jobs but many Americans don’t want to do those jobs. Honestly, more than a few Chinese folks don’t want to do those jobs either but there’s just more Chinese folks working their way into a middle class living that they’re willing to do it.
Great post, and I complete agree about the competition between the people being determinate of future outcomes.
I'm not 100% sure if the west will take up the challenge of Chinese manufacturing. I think the culture of having Work Life Balance, 4 day work weeks and other worker centric policies is too ingrained (not to say that it's bad). It's a shame that the highest paid roles and the most competitive people in the west seems to be in finance and not in engineering.
The question for me is whether the west is willing to suffer relative economic decline as a trade off for better working conditions (assuming the current comparative advantage of resources, education, services and financial products stay in the west).
For me it's a classic case of you can't have your cake and eat it too. Either the consumer has to pay more due to tariffs, the populace needs to work harder to be more productive or the consumer has to put up with worse products.
Bear with me as I'm a complete novice with trade policy, Chinese industrial policy.
Full disclosure, I've never been a fan of Tesla, I respect and admire the work, am giddy about Space X but would have much preferred the Hybrid market to flourish fully after the Prius. So I'm going to back even farther than 5 years.
I do think it's corporate shortsightedness along with with short term thinking for profit. I'd have to dig in all the way back to the early days of Walmart. Again if as people were contemplating real Free trade (NAFTA) for us and had invested in local supply chains like Canada and Mexico, South America 20 years ago, perhaps we wouldn't be having this conversation. The relationships started to evolve after WW2 based on politics and governance philosophies which were not, but should be agnostic. Barring extreme human rights of course.
I entirely agree about self inflicted wounds. Corporate greed, short-sighted governance policy screwed the pouch. I support globalization but regionalized first. Neighbors have a vested interest in peace.
I dont think I'm making the cognitive error of confusing people/state or painting the Chinese in a particular light. It's a fools errand for integrated technologies/economies and global well being. But just as the Chinese economy is closed to regions like the Defense sector, in a competition, regional supply chains make much more sense and so does a little bit of fencing
When Noah says the China cycle - not to speak for anyone - I take it to mean poor corporate domestic governance choices as well.
My two cents. Great read by the way. I've enjoyed your writing.
I think you make some good points but you are a bit unfair to Noah’s article. Even as he argues that Tesla’s investment in China damaged it in the long run, he recognises how at the time it didn’t really have a choice, citing how“Tesla benefited enormously from its Shanghai Gigafactory, which now produces more than half of all Tesla vehicles and helped save the company from the verge of bankruptcy”.
And in response to your quip, “Noah, please get out of your theoretical armchair, travel back in your time machine to go back to 2018, and elaborate for Musk about your “far-sighted” strategy to make Tesla survive when its life was hanging on a thin thread”, Noah finishes with the suggestion of countervailing subsidies: “In 2018, the U.S. government could have thrown Tesla a lifeline by giving it the loans and other assistance it needed to ramp up its Model 3 production without going bankrupt.”
Much like the vaunted CCP all I really care about is war fighting.
However, just like the CCP I recognize there are economic aspects of war.
UNlike most other non-Chinese people I don't equate Russia and China, partly because I speak both those languages fluently, studied their ideologies, know their cultures and the relevant history. Example: Qin rose without allies. Thus China thinks it can and should so rise. No one at State seems to have noticed, but they are soft handed professional hypocrites so who can blame me for pointing all that out.
China isn't Russia and Russia isn't China.
Back to economics: "lure trap kill" is not any invention of my bourgeois finance capital mind.
However: having sought to radically reform China and actually gotten about 60% of the way there (or more) Western finance capital is having a massive case of buyers remorse.
I have to tell them: you can't put the genie in the bottle, and simply are stuck with Chinese governance such as it is and can
a) Have a new cold war with arms race and i won the last one but this will be very hard and not at all profitable.
b) Go mutual isolationist on national security issues, which is really unlikely
c) Finish what you started by fostering even more "high quality reform and opening up". This is likeliest to happen, since there will be opportunities for opportunists to profit.
I expect Tesla to go the way of NorTel.
I don't expect the CCP to go the way of the CPUSSR
I do expect the CCP to continue liberalizing, and ignorant stupid greedy liberal internationalists will moan, whine, scaremonger, and profiteer all the way.
Like I said, ALL I care about is war fighting.
Russia will lose in Ukraine. The quicker that happens the better for China. The more completely Russia is defeated, the better it will be for China.
See? I'm an equal opportunity kinda thug. But I don't do it for money.
I totally get your point about self-inflicted pains Apple, Tesla, and others have inflicted and about the in the great, terrible hell of fire that Chinese EVs have all gone through. But are you saying that forced technology transfer and subsidies no longer occur?
While theft of IP shouldn't be encouraged, it is the reality. There are countless examples the other way around. Easy ones are typically in the industrial space - see the book Powerhouse by Levine; or just speak to people in the battery minerals / rare earths space, plenty of theft by the West.
I guess my point is where do the accusations start and end? Should we go back to when gunpowder was invented by China? Or do we also want to turn IP theft into another Middle East type discussions where tit for tat and revenge is the only thing that happens?
The more constructive perspective is for humanity to work together to share IP through negotiation to reach some equitable arrangement.
Noah is clueless about most things. He's a perfect example of making a living on the internet by peddling conventional wisdom with a very slight edge
Thanks Robert. You make excellent points.
Far too many economic commentators on China tend to be biased against China and at the same time have little direct contact or experience in China - a toxic combination which throws their analysis off kilter.
Worse is when these commentators talk about new technology without proper grasp of new technology - and instead assume you can simply steal new technology at scale in short order.
Yes, China has achieved unprecedented progress in new tech - not by stealing - but by hard work, intelligence, innovation, coordinated policy and above all by fomenting the most competitive industrial ecosystem in modern history. This has been well praised by Bill Gates, Elon Musk and other industry leaders.
It also doesn't hurt that that China has a high national IQ and smart leaders - who got there thru, yes, competition and own accomplishments.
Else, how would you explain that China leads the world in: STEM graduates, science and tech patents, scientific publications, the largest and most advanced high speed rail, green power power generation, UHVDC power grid, national data center network, heavy ship building etc etc in addition to building the world's largest and best Battery, EV and 5G Telecom industries.
China, like much of the Global South, believe in win-win and cooperation - as illustrated by the Belt and Road Initiative, BRICS, trade agreement etc.
China eschews win-lose, suppression, vetos, hegemony and ridiculous sanctions.
Remember, China leads in Trust in Government, Trust in Media and Trust in Business. Did China steal these measures too?
DT
Good read Robert.
I agree there are a lot of internal things to examine at Tesla for why they are faltering, before getting into any forced technology transfer and other controversial issues between USA and China. I actually recommend https://bradmunchen.substack.com/ who tracks and makes compelling cases for shorting Tesla in the long term.
While Musk puts on a polite/guai face for Chinese authorities his behavior is the complete opposite in US. In fact he has become so erratic and involved in far right politics, conspiracies, and social destabilization it has actually turned me off from getting a Tesla for now.
Also the fact Tesla has scrapped Model 2, Musk divides his time between Twitter/Tesla/SpaceX and other things probably doesn't help. Now they are trying to go all in on AI (instead of just making a solid, affordable EV) just highlights how disorganized Musk's planning skill is.
I hadn't made the connection how much Shanghai factory actually bailed out Tesla during their struggles.
Happy Friday.
“Work harder and have less fun”? The US already has one of the longest workweeks among more industrialized nations. (What is life about if not having fun?) I think you made a gross generalization of the West, as bad as many westerners make of China. The decline of US competitiveness I believe is due to other factors (short-term profits, financialization of the economy, monopolies crushing innovation, etc). Otherwise, a very interesting article, and I appreciate your point of view!
Just because China “saved” Tesla doesn’t mean they didn’t have Tesla over a barrel and take full advantage of it.
And just because China was employing a “catfish” strategy doesn’t mean they weren’t ALSO forcing technology transfers that ultimately, by your own admission, led the domestic industry to outcompete Tesla.
Many different things can be true at the same time. You are genuinely insightful, but you also keep insisting that only either nation’s narrative can be true. Both can have aspects of truth and falsehood at the same time.
I would argue that the IRA saved Tesla, specifically by strongly incentivizing all of the other auto brands in America to adopt the infrastructure that Tesla is built on. So while Tesla cars may dwindle in sales, the U.S. charging infrastructure will essentially be a Tesla-charging system.
Honestly Tesla should be doing a lot better if huge chunks of potential consumers are not actively boycotting the vehicles because the don't like Elon Musk. That anti-Musk sentiment is weighing on the company, highlighted by 10% layoffs last week and, much like SpaceX, I don't think this company would be much without serious help from the U.S. government.
I get that China is worth about 40% of its sales numbers, but I think they would have aggressively pulled back from their international market if the US sales started to seriously falter.
Anyway, I agree that China is not killing Tesla, but I also don't think it's the reason for Teslas sort of surge.
Very informative as usual! Yes, introducing an high end foreign competitior to jolt the domestic market while also improving the industries parts and services providers ecosystem was an apt move indeed. It never ceases to amaze me how current day China (it seems the center may be making moves that run the risk of changing this, lets hope not) and the old American Republic which was gone from all governance structures at all levels* by 1961, are the mirror images of each other. There are no other systems in the history of the world like them and only they are like each other and their physical forms are the inverse of each other. They are each others mirror image.
*The sole exception is the governance of the city of Chicago, which managed to hang on until the 80s or 90s
I don't entirely agree with all of your points, but I think they're well presented, and I'm not in a position to dispute many of them anyway. I'm reluctant to make too many inferences based on my own experience (I'm an American employed by the US subsidiary of a Chinese company, so I have many Chinese colleagues both in the US and China, and our manufacturing is done in China). I will refrain from generalizing, but I'm very curious if some of the issues we face
Chinese people work 72 hours a week to save money to buy US treasuries so Americans can consume more than they produce. Both countries, but especially China, fund this by chewing through their demographic dividends.
It's an unhealthy relationship with an unsustainable pattern of specialization and trade.
But fixing it would require lots of changes by lots of parties, many of which Noah wouldn't like. It's easier to blame Elon Musk and nameless executives while calling for more political power for people like himself.
I have seen this manufacturing play out in the apparel space. We had an apparel factory in the US for decades before finally moving it to China. The factory floor workers here want to work hard and do overtime. We actually limit overtime sometimes because we see a rise in quality issues and a dip in efficiency. Folks in the US bemoan the flight of factory jobs but many Americans don’t want to do those jobs. Honestly, more than a few Chinese folks don’t want to do those jobs either but there’s just more Chinese folks working their way into a middle class living that they’re willing to do it.
Great articles as usual!
Great post, and I complete agree about the competition between the people being determinate of future outcomes.
I'm not 100% sure if the west will take up the challenge of Chinese manufacturing. I think the culture of having Work Life Balance, 4 day work weeks and other worker centric policies is too ingrained (not to say that it's bad). It's a shame that the highest paid roles and the most competitive people in the west seems to be in finance and not in engineering.
The question for me is whether the west is willing to suffer relative economic decline as a trade off for better working conditions (assuming the current comparative advantage of resources, education, services and financial products stay in the west).
For me it's a classic case of you can't have your cake and eat it too. Either the consumer has to pay more due to tariffs, the populace needs to work harder to be more productive or the consumer has to put up with worse products.
Bear with me as I'm a complete novice with trade policy, Chinese industrial policy.
Full disclosure, I've never been a fan of Tesla, I respect and admire the work, am giddy about Space X but would have much preferred the Hybrid market to flourish fully after the Prius. So I'm going to back even farther than 5 years.
I do think it's corporate shortsightedness along with with short term thinking for profit. I'd have to dig in all the way back to the early days of Walmart. Again if as people were contemplating real Free trade (NAFTA) for us and had invested in local supply chains like Canada and Mexico, South America 20 years ago, perhaps we wouldn't be having this conversation. The relationships started to evolve after WW2 based on politics and governance philosophies which were not, but should be agnostic. Barring extreme human rights of course.
I entirely agree about self inflicted wounds. Corporate greed, short-sighted governance policy screwed the pouch. I support globalization but regionalized first. Neighbors have a vested interest in peace.
I dont think I'm making the cognitive error of confusing people/state or painting the Chinese in a particular light. It's a fools errand for integrated technologies/economies and global well being. But just as the Chinese economy is closed to regions like the Defense sector, in a competition, regional supply chains make much more sense and so does a little bit of fencing
When Noah says the China cycle - not to speak for anyone - I take it to mean poor corporate domestic governance choices as well.
My two cents. Great read by the way. I've enjoyed your writing.
I think you make some good points but you are a bit unfair to Noah’s article. Even as he argues that Tesla’s investment in China damaged it in the long run, he recognises how at the time it didn’t really have a choice, citing how“Tesla benefited enormously from its Shanghai Gigafactory, which now produces more than half of all Tesla vehicles and helped save the company from the verge of bankruptcy”.
And in response to your quip, “Noah, please get out of your theoretical armchair, travel back in your time machine to go back to 2018, and elaborate for Musk about your “far-sighted” strategy to make Tesla survive when its life was hanging on a thin thread”, Noah finishes with the suggestion of countervailing subsidies: “In 2018, the U.S. government could have thrown Tesla a lifeline by giving it the loans and other assistance it needed to ramp up its Model 3 production without going bankrupt.”
Much like the vaunted CCP all I really care about is war fighting.
However, just like the CCP I recognize there are economic aspects of war.
UNlike most other non-Chinese people I don't equate Russia and China, partly because I speak both those languages fluently, studied their ideologies, know their cultures and the relevant history. Example: Qin rose without allies. Thus China thinks it can and should so rise. No one at State seems to have noticed, but they are soft handed professional hypocrites so who can blame me for pointing all that out.
China isn't Russia and Russia isn't China.
Back to economics: "lure trap kill" is not any invention of my bourgeois finance capital mind.
However: having sought to radically reform China and actually gotten about 60% of the way there (or more) Western finance capital is having a massive case of buyers remorse.
I have to tell them: you can't put the genie in the bottle, and simply are stuck with Chinese governance such as it is and can
a) Have a new cold war with arms race and i won the last one but this will be very hard and not at all profitable.
b) Go mutual isolationist on national security issues, which is really unlikely
c) Finish what you started by fostering even more "high quality reform and opening up". This is likeliest to happen, since there will be opportunities for opportunists to profit.
I expect Tesla to go the way of NorTel.
I don't expect the CCP to go the way of the CPUSSR
I do expect the CCP to continue liberalizing, and ignorant stupid greedy liberal internationalists will moan, whine, scaremonger, and profiteer all the way.
Like I said, ALL I care about is war fighting.
Russia will lose in Ukraine. The quicker that happens the better for China. The more completely Russia is defeated, the better it will be for China.
See? I'm an equal opportunity kinda thug. But I don't do it for money.
加油!
解放西伯利亚!
I totally get your point about self-inflicted pains Apple, Tesla, and others have inflicted and about the in the great, terrible hell of fire that Chinese EVs have all gone through. But are you saying that forced technology transfer and subsidies no longer occur?
While theft of IP shouldn't be encouraged, it is the reality. There are countless examples the other way around. Easy ones are typically in the industrial space - see the book Powerhouse by Levine; or just speak to people in the battery minerals / rare earths space, plenty of theft by the West.
I guess my point is where do the accusations start and end? Should we go back to when gunpowder was invented by China? Or do we also want to turn IP theft into another Middle East type discussions where tit for tat and revenge is the only thing that happens?
The more constructive perspective is for humanity to work together to share IP through negotiation to reach some equitable arrangement.