China, China, China. Breaking Down China’s Tech Surge | BG2 w/ Bill Gurley and Brad Gerstner

29:12All those things are signs of recognizing that we've built mud in our system that prevents building and how do you start to remove that and move in the opposite direction? specifically, you know, thinking about the tariff. So, you know, I think that the president tweeted yesterday morning, if we don't get it, it was appearing that we're on a glide path and making a lot of progress with China, we may very well be. I think he tweeted yesterday morning that if we don't get rare earth magnets from China, he could raise the tariff rate to 200%. There was some talk that he was going to visit China in the first week of September.

29:55So that's, you you know, right around the corner, I said on a couple pods ago, I thought that, you know, the way to understand this president is that he's a self -described deal junkie. He's a pragmatist, he's not an ideologue. It seems to me that when he's talking with Jensen Huang and others, he falls in that kind of pragmatic, centrist category. He certainly wants to rebuild stuff in the United States, but at the same time, it appears to me, he wants to get a big deal done on China. Where do you come down again if you were advisor on the tariff side of things Bill? Do you think he's gonna get a big deal done with China?

30:33Do you think that's the right thing? To do and how do you think that influence is? Some of the building that you're talking about okay? This is I Have zero inside it ladding I didn't I didn't meet with anyone in the in the CCP or the government So I have no idea what with their mindset. It is a pure speculation on my point my part. You already brought up the fact that we're a much smaller percentage of their exports than people realize and people think about. And as a result, I think that they're going to be China's going to be far more biased by what they view as fair and face saving, then they are necessarily like numeric.

31:27And so I think if we, if someone were to approach them in a pragmatic way, I think a pragmatic deal could easily get done. I, you know, if they are engineers, as Dan Wayne said, it's not like, you know, they wouldn't accept a pragmatic outcome. I think they would. But if we're intent on being derogatory in our language, and by the way, that's the thing that I just really don't understand that you see in Washington, you see it on that select committee of the CCP, and you see it from some of the people in Silicon Valley. I just don't understand the value of being a belligerent. But people clearly are.

32:10I mean, they have four times the number of citizens on this earth than we do. And everybody's country of birth is something that happens to them outside of their control. So I just don't know why vilifying a billion people is a good idea. So I think it's possible. I think they would do a deal. And I just don't know if we get caught up in a silly tit for tat verbal war with the benefit of that is and anything like that and this is one of the point Saxomakes Jeffrey Saxon, David, you might provoke war three. So what do you, what's, how do you put that into your MPV calculation? Is it fair to say that, you know, I think if you look at tariffs heading into this year, they basically doubled on China.

33:07But if we put tariffs on particular industries in order to incent building and industries in the United States, imagine it was a deal a bit like Japan bill where we also cut a deal with the Chinese that they had a trillion dollars of investment the way we have with other companies that go into the U .S. into some of these industries. and that we perhaps get some reciprocity and reduction of barriers to some Chinese goods into China. How would you handicap that? Did you get any sense or do you get any sense from the stuff you read in the United States as to the probability that? I think it's one of the biggest influences as we look at growth in the back half of this year, as we look at market sentiment in the back half of this year, just curious where you stand on that.

33:59Ironically, one of the things that, I mean, like I said, I met with companies and founders and and a few academicians, but I did and some journalists, but I didn't meet with with the government. But in general, there's just not any hostility from their side, from that group of people that I met with. In fact, most of those, most of those people look up to the US founders that have done great things, the jobs and the Elon's, and most of them aspire to compete globally. The same way a founder in the US would like, and so they would like to see all this rhetoric die down and they would like to have the opportunity to come to the US market.

34:40They'd like the opportunity to compete in your up in South America. Many are, Xiaomi and BYD are already are. And so I think, like I said, I think there's a pragmatic deal to do to the extent. And if that led to the types of programs that I just talked about, this kind of JV thing where there's a market there, a leader in, and we have that company come to the US and help us understand how to compete in some of these technologies and get to lower price points, I think that'd be fantastic. Do you feel like over the last 20 years, who do you think's gotten the best out of the relationship, Bill? You know, I haven't read this Apple China book.

35:23A lot of people have been talking about it and I aim to.

35:31I think the problem with looking at it that way is, you know, you and I have talked about this finite versus infinite game, is, you know, where are we in the time of the planet? And what do you think the planet is going to look like, you know, 15, 20, 30 years from now. I mean, I think it'd be very easy to say, you know, using your framing to say the US took advantage of your post -World War II and a lot of the manufacturing that existed prior to World War II shifted to America. And so you could then with that same frame say, yeah, China, you know, grew on the back of America and, you know, from, from that time.

36:12But I I kind of look at it another way, which is there have been different periods where these different countries have industrialized. We were a huge beneficiary post -war war, too, because most of Asia and Europe had been blown up and there was no production capability whatsoever. And a lot of the kind of glory day mindset that we have about what life and generational change should be like in the US come from that time, which is a bit unfair, I think, from a global perspective. But there's a ton of hard working people over there, you know, Dengjiao Ping brought capitalism underneath the Chinese government and led to the biggest increase in standard of living of any.

36:58It's like 500 million people came out of poverty as a result to that. And, you know, when people say, oh, we should have never let the jobs go over there. I don't think they really want to say, well, we shouldn't have let 500 million people out of poverty, you know, it's the same people that want to talk about aid in Africa and whatnot. So a lot of people benefited in China, but they're also hardworking people. And we talk a lot about meritocracies, right? And some of the same people that talk about meritocracies are anti -China. And so that's a hard thing to square, because if someone's willing to work twice as hard, you know, as you and, you know, willing to study harder and all that kind of stuff, are they doing not deserve a chance at a life like you have?

37:50I think the bigger complaint is that we were naive in our trade policy, and therefore we allowed huge advantages to flow to other areas. And, you know, by the way, as Dan says in his book, at the same time, we were actually moving to more of a regulatory state in the United States. So, you know, like our companies were getting less competitive at the same time, we were helping their companies get more competitive. And there was a lot of collateral damage in the United States during that period of time. And I think right now people are saying, okay, we're moving into this age of AI, but we have to get back to driving reform in the United States that levels that plane field a bit.

38:34it. And so, you know, you can't undo the past, but I do think there's a recognition that, we need to do the things in order to incentivize US industry to compete more effectively in a lot of these different categories. I think it is going to be tricky though. If you say, you've got 100 competitors in the EV industry in China, they're all willing to work on razor thin margins and they're willing to sell cars into Europe at $20 ,000 or $25 ,000. Today, as Farley said, there is not a U .S. manufacturer, Sons, perhaps Tesla, that comes anywhere close to being able to compete in that way on a global basis.

39:21Correct. One thing I've been studying a bit is I do think that the Chinese government's more, has There's more scrutinists of monopolies. I don't think that they would consider it a negative if there were seven companies worth $3 trillion or whatever. I don't think they care about market cap. I think they care more about employment and global competitiveness, which would cause you to support low -margin companies. They get to choose to make that choice. I'm not judging it, but it would result in this outcome. You know, in addition to the Farley quote, the Mercedes CEO said, we need a reality check when he was talking about Chinese EVs and then Stelantis, I guess is the new name.

40:08Stelantis. Who rolled up a bunch of other car companies. They said Chinese EVs are, quote, possibly the biggest risk facing his car maker and Tesla. And he criticized, this is Carlos Tavarez, He publicly criticized EU tariffs on Chinese electric vehicles calling them a major trap for automakers And this is this is you know you talk about what policy would fix things I'll tell you what policy will make things worse You know you start protecting US industries by putting export tariffs on the most competitive products around the world Which I talked about earlier now your consumers don't have access to those price points And so you're buying inferior goods at inflated prices and that's going to lead to inflation and prosperity and standard of living levels dropping in the US.

41:02So there's a lot of variables. I would say that's generally true. I think if there was a national strategy to improve competitiveness in an industry that had been, let's just say, had an unfair plane field for a period of time. Like I could see a national strategy, for example, we talked about pharmaceutical manufacturing, we talked about chip manufacturing, we talked about rare earths, where you would say, okay, we're going to actually impose a tariff because these other goods are flooding and it deprives us of the ability to build our own domestic industry. But I think we have to be very careful when you do that bill to your point.

41:43We know that unfettered competition will lead to, you know, is going to lead to much better products much lower prices. And when you start protecting these industries, what I worry about is you protect the regulatory grift and the overlawiering that Dan talks about in his book, right? We got to face up to this fact that we have to reform some of these, you know, basic things in the United States. And that's why you see companies like Tesla moving to Texas where those reforms are moving forward. And I think, you know, I think we are making progress on that. But I you know I think you there is a rationale for those critical national industries but I generally agree with you that if we move to high levels of protection because we simply can't compete because it takes you know us you know ten people in an auto plant to do what they do with one person in an auto plant I think that's unsustainable.

42:39And I think we need to be careful with the rhetoric we throw around so so give an example so if you to read what comes out of the biggest hawks. They say, well, everyone in China just steals things and the government subsidizes everything. So I brought that up with the subsidization with Stella Leah, BYD, and she said, she said, if I'm getting all this government subsidy money, can you please find it and show it to me? We're a public company. Come show me the money I'm getting from the government. She just said, I'm getting nothing. And then you look at the US, like we give companies subsidies all the time to build factories.

43:20We've had EV credits for the past 10 years, both at a state and a federal level. Intel's getting money from the US government. Like I don't understand where we're sitting. Like it's very unclear to me like what we're pointing at and accusing and why it doesn't, isn't the same thing here. And then lastly, you know, Elon's published all the Tesla patents. Okay, so there's free IP for Ford and GM and I would ask you with that free IP if we gave Ford and GM subsidies Do you think they'd immediately be competitive with China? No, sir, okay, and if I ask a hundred smart investors that question, what would they say?

44:01I think they'd agree with me. Yeah, so so so so the thing we're accusing them of being the reason they're succeeding if you flipped and gave that to the US companies, none of us have confidence that would work. So that's what I'm saying. You just gotta try and get as much information as you can, learn as much as you can, so that I just want people to have a pragmatic view and an accurate view as they make decisions. I did a deep dive on your favorite product chat, GBT, $300 version deep research, and on the 24 members of the select committee for the CCP. And I think all but form have never been to China.

44:43Right. And the ones that went, it was seven years ago. I just encourage them to go visit if they're going to sit there and have such strong opinions. It'd be good if they were educated. I wouldn't want, if you were putting together a committee inside of your corporation that's going to be in charge of something, wouldn't you want the most educated people on that committee? I can already hear the criticism. Oh yeah. You know, of course, people would say, well, we don't expect the CEO of BYD to tell you the truth necessarily about government subsidies or things like that. Here's the one thing I want to get across in, you know, kind of this pragmatist camp.

45:25We do have to be self -reflective, right? If we have this, if we have this view, the only reason China's competitive or winning is because they're stealing or they're subsidized, I think what that view does is it allows us to dilute ourselves into believing we don't need to get better ourselves. Yeah. It's like if you're playing a competition and your kids out there playing in a football game or a swimming race and they lose the race and they come back to you and they say, or the only reason that person won was, you know, they cheated. You know, like you're in mice, I think, is no, you've got to get better yourself.

46:05We've got to get better. How can we get better? And I think that's why in coordinating this balanced and realistic view of China, what's actually happening on the ground? How hard, right? Folks are working. What the level of innovation is, the fact that the United States is a diminishing part of their trade, of their GDP, e, et cetera, I think that should cause us to look a little bit inward about how the hell do we accelerate? How do we build more? How do we invest more? How do we get more globally competitive? Why does it cost us four to five times to build a fission reactor in this country?

46:43Why are we building no nuclear reactors in this country? And so the good news is this, I feel like there's a lot of momentum under this administration that was building before this administration around investing in America, getting more globally competitive, right? A lot of people want to build things here again, you know, and you got, you have somebody like Jensen Huang who says, both can be true. We need to sell age 20s and B30s into China. We need to stay relevant in their ecosystem. But at the same time, we need to build plants in Arizona. We need to rehabilitate and invest aggressively in our own domestic chip program.

47:19Those things can be simultaneously true. And it's interesting seeing that all of those CEOs who spend the most time competing in China, they all fall in that pragmatist, realist camp. In the center about the United States needs to get serious about the work that it needs to do if it wants to remain globally competitive. With that said, Bill, can we shift for a second? I want to look at this through the lens of just what's going on in AI. I know you spent a bunch of time over there looking at the key players on the model side, thinking about the chipside, etc. So maybe just round out that other conversation and then shift there.

48:02Yeah, so one thing to note that isn't in the Dan Wing book, but I think that we can infer from it. The government every five years publishes this five -year plan. The last one was the 14th, and I think the next one will be coming out soon. I would encourage everyone to read that because that's where they tell the provinces what's important to work on, and that historically is led to these areas where they're investing heavily. And they might make a mistake in what they say to focus on, but when they've gotten it right, it's led to a lot of global competitiveness. So I would watch that. But in the last one, in the 14th, they literally talked about open source.

48:47And so, I'll put a link in, I found a document that covers all the history of Chinese open source, but it goes back 20 years. This isn't an overnight thing. And our government recently said they were pro open source in this new AI executive order, but this was kind of pushed out to the provinces. And so two things I would say about the eye market there. First of all, no one's particularly concerned about there being a monopolist because there's so many open models. So there's in general, I think, from the entrepreneur's perspective, a more relaxed, you know, opinion because they can work on products and they can take in all these different models.

49:30I think deep sea has the most intellectual brand because of how that arrived and almost the national pride that came along with it. Quinn is a really important player mainly because Alibaba leads in the cloud market over there. You and your team may know more of these stats than me, but I think they're like a 70 % player in the cloud market. and so that just gives them a natural place to deliver models from that makes it important. And then on the consumer side, you know, bite dance seems to be the company to watch on anything consumer and they already have an app. If someone said whose app is close to Stopen AI's in China, it's already an app from Bite Dance that's out there.

50:19On the watch list, people are very curious if Tencent's gonna do something, you know, obviously they, We chat still extremely important in China. And so that's a great asset if they were to bring something, but they haven't been particularly aggressive. And then, Jao Mi, because of Lesion, everybody wonders what he might do. And owning the phone and that big of market share might give you some advantages. And we've talked about that with the US players. So that's kind of, that's what I would say is the state of affairs over there on when it comes to AI. On the model layer, do you think there's an acknowledgement or a belief that they're basically, they have the tools, they have the chips with Huawei, etc., to be competitive?

51:06Like is there a sense in China that, you know, Quinn code is going to be competitive with Claude code? We know they're all open source. Do you think there is a sense that they all say at the frontier? here? Like, I had that sense before I went just because of the number of competitive open source models in the way they can trade, train each other. You just have a much more natural environment to have this kind of hyper competition that we talked about in EVs or solar, like having that many open source providers gives you that. I would say even maybe more because of the way the models can help one another, at least in the EV case, like you can't take someone out to the EV and make yours better, but here you can.

51:50Can I talk about that? Just open for a second. Let me double click on this. You know, obviously we saw OpenAI open source, you know, a model a few weeks back. Now we have comments this week out of Elon. They're getting back to more aggressively open sourcing. You've obviously got meta already, you know, with Lama out there on the open source front. And I saw you at a tweet yesterday, maybe Bill, just on, you were surprised that Google had not taken a more aggressive position with respect to open sourcing Gemini. Do you think they will? Why do you think they haven't? And why do you think it would be the right thing for them to do that?

52:29Well, I had some replies to that tweet to get into this, but this goes back to where you started the podcast. I don't think public companies understand or I don't think they've internalized. And really come the terms with the fact that the private markets are willing to bet so aggressively on these new players. And we're talking about AI today, but this could be true of any new disruption in the future. When I was going through the Uber lift wars and we'd be in board meetings and look at these burn rates and all this money we were spending, you'd talk about whether or not to raise another round.

53:06And certainly thought about doing what Sam did and trying to talk capital out of the market, which never seems to work. But you get frustrated with that game and you wanna, but you're dealing with business decisions that you would never see in another industry. And so getting back to the question you ask, I just don't know, like if everything's extinct for Google, should they be willing to lose five or $10 billion? Because the startup that's attacking their space is willing to lose that amount of money. And I think it's an ironic situation we're in where the private markets and the startups are willing to be more aggressive, perhaps, and more risk -seeking than the public incumbents are.

53:52And I think, you know, our friend Rich Barton took a lot of heat at Zilla when he chased open door. But he was faced with a situation where a private company was claiming it was going to out innovate him and disrupt his game and some of Wall Street had come to believe that. And so he engaged and he played that game on the field. Now that eventually turned out to not be true. And maybe if he hadn't engaged competitively with Open Door, maybe they wouldn't have kind of tripped and fallen, but it was probably the right thing to do. And I don't think a lot of public companies think that way. Now Google historically, when it came to AWS, open source Kubernetes and went after him when it came to Apple, they open source Android.

54:37And certainly some of their lower models are open source and competitive on open router. But maybe they should be more aggressive even still because of what it's at stake. That was my point. Okay, shifting back real quick and we'll round up here in China. The VC market in China, we just rewind the clock, not that long ago Bill. And there was a lot of US enthusiasm. There were a lot of US firms investing directly in China, right? From Sequoia to GGV. A lot of those firms either shut down or spun off their operations in China. Benchmark has taken a lot of heat for doing an investment, manness that I've read.

55:26Benchmark explained really isn't even based in China. What do you see? You know, when you were there, do you see a lot of US investors actively investing on the venture side in China? And then what does the Chinese venture ecosystem look like? So a couple different things. So first of all, there's a real lack of Westerners. For all my trips, this was the the fewest Westerners that I've ever seen and the high -end hotels and the high -end restaurants were fairly empty. And I think that it just has to do with the thawing of the relationship. that's caused less travel from Westerners. The VC market is in a bit of a lull because when these policies all changed and when the Jack Moth thing happened, when DD got pulled back from the US markets, when the for -profit education companies got taken out and when we chat, I mean, a 10 cent went flat for a couple of years because of games reforms, All those things took a lot of air out of the system and caused a lot of people to reconsider.

56:35And then you also had, and I don't even know if this was more led by the US government or the China government, you had the splitting of the venture capital firms, Sequoia Split and Half GGV Split and Half. And so there are much fewer Western dollars available to invest in China. And so there are a few firms that have stayed, Neil Shin at Hongshan had raised a ton of money right before all this happened. He's very active, has a huge staff of people, and a fang and Zen fun, which is an angel group of very active, and IDG is highly present and has been active. But that's only three firms, you know, and compared to where things were six years ago when every one of our competitors in in the venture industry, we're making an annual trip.

57:23It's kind of night and day. And then there's not that many R &B dollars available to the venture market. A lot of the, you don't have the foundations and university endowments that you do here. And the billionaires that have made wealth, typically are looking to diversify offshore. And so you just don't have a lot of R &B dollars seeking a home. And now you have the provinces entering the investment space, which is an uncomfortable reality for some of the VCs. I hear they're asking for terms that you and I would consider non -starters. And so that's, it's all a little bit messy. It's funny because it's simultaneously with some of these markets, EVs, autonomous robotics, where the country is doing extremely well.

58:18So I found those things off a little bit. And everyone's very aware that if the government decides your company is doing something that's not in the best interest of the citizenry that that's going to get corrected. And so there's a phrase, I don't know if it was in Dan's book, or I read somewhere else called, don't be the tallest tree. That's a problem for you. Yeah, exactly. Yeah, in that regard, do you think, you know, that's what I was wondering, you know, there seems to be a ton of entrepreneurial activity, despite the fact that, you know, VCs have retreated that you have companies that are not going public and have been shut down.

59:05You have entrepreneurs that have gone missing. It doesn't really seem to have diminished, you know, the activity around, you know, around AI, as we're talking about, clearly. Or startups or entrepreneurs, and in fact, a lot of the locals heavily dispute that financial times graph that was going around about the number of startups that said it just mismeasured the whole thing. And so, no, I don't sense that there's any lack of enthusiasm from entrepreneurs. And towns like Shinson, where DGI and B .I .D. and Huawei are all located. I mean, that town is a new young 20 million people, highly energetic, you know, town with lots of stuff happening, you know, lots of stuff.

59:52You said something to me. Well, before we wrapped, is there anything else that we didn't cover that you want to hit on? There's two things I would hit on. You know, you talked about innovation. One thing that you notice very quickly as a westerner is no one takes credit. cards. They used to like the last time I went, but it's almost 100 % we chat pay and I'll I pay. And if you can't get those to work on your phone, you're screwed, man, you can't pay for anything. What's the government's position on crypto? I don't know the answer to that question. I don't. But because they've been using these apps for so long, you've started to see incremental innovation around that.

1:00:39So most restaurants you go to, not the very high in ones, there's a QR code on your table. That QR code not only represents the restaurant, but it represents the table. And you can order from that, you can pay from that. Like, like, so if you are done eating and want to pay and leave, you just scan and pay and go, you walk right out. And, um, you know, we're far away from that in the US, that amount of automation around payment. And it's just interesting. And that goes from, you know, the high -end hotel and restaurant will take WeChat pay and the street vendor will take it. Right? It's universal.

1:01:18So that's one thing. The other thing that I would just mention, very recently, China announced something called the KVSA. And one of the things that's happened recently, because of, I'd say, an increased agitation between the two countries is there've been a number of very recent policies in America that are impacting skilled immigration, especially at the university level. And I did hear stories over there of groups of 50 or 100 PhD students who had been admitted into a university and were now being told they can't attend. And you and I and And everyone have talked about skilled immigration and how that's been kept flat in the US.

1:02:06And now, you know, at least with regard to China, we're starting to put up blockers. And on top of that, you've seen these other charts were like 50 % of the AI researchers in America are Chinese. And so that's something that's super interesting to watch. And this K visa thing, which they've never done before, says, if you are studying technology, I don't know the exact rules, you don't even have to have a job. So this isn't like in the US you need to, you're welcome to come. They're going to give you a visa. So China's basically inviting everyone to come to the university system from around the globe.

1:02:45I don't know how successful they'll be. I don't know if Europeans will go there. But it's an interesting thing to see. Again, it's just a reminder to me. Like I continue to think that the US is in an incredible position on a global basis, an incredible position, vis -a -vis China. But decisions matter. And we talked about stapling a green card every diploma as the president did as part of the presidential race. And certainly, I think there's ample opportunity for upside to accelerate, to attract, to build in the U .S. And I hope that one of the takeaways of this conversation, the many conversations we ought to have, and that's why I think being overly dogmatic leads us astray, is we got to reflect on the things that we can be doing better to run a faster race ourselves.

1:03:42Right? I've heard you say this before, you know, the old quote from the Godfather, Never Hate Your Enemies, you know, it clouds, it affects your judgment. And I think there's a lot of that going on in Silicon Valley and other places that, you know, we're going to be a lot better off if we're very pragmatic about, there's no slowing down in China, they're going to be there in AI, they're going to build chips at Huawei, they're going to build models at deep seek, And the way to beat them is not to, you know, try to cut them off at the knees. We don't need to make it easy on them. But the United States needs to accelerate our race.

1:04:20And I think by, if we focus too much on how do we slow down China, we take the eye off the ball on how to accelerate our own race. So it's fun spending one of these just digging deep on a particular topic. It sounds like an incredible trip. Yeah, and I would just echo what you said. like especially just on learning. Like my main point to anyone dissension as topical would be just make sure you have the exact right information as you then go to make decisions, especially around policy. And you know, read what these global car CEOs are telling you, they've been over there, they're seeing it with their own eyes.

1:05:02They don't have a reason to be as candid is there being necessarily, but they are. And then Read Dan Wings book, I think it's fabulous. Like Tyler Collins said it might be one, it might be the best book of the year. It's very well written and enjoyed to read. And I would encourage everyone to go pick it up. It's called Breakneck. And I think it's out now today. Now you literally can go on chat GPT and just ask it, you know, So what your favorite CEO, what's Jensen Wang think about the level of competition in China? What's Tim Cook think? What's Elon Musk think? The reality is the people who spend the most time on the ground in China have the most respect for the innate capabilities and ongoing competition that we're going to see with China.

1:05:53And I thought that Dan had a really balanced view at the end, which is we should be go out of our way to make it really easy on China, but at the same time, we got to engage, we got to be, you know, pragmatic. We can't stick our head in the sand and we have to know that we got to reform ourselves. We got to run a faster race ourselves. Bill, it's great seeing you. I'm glad we're kind of getting back in the swing of things and look forward to continuing the conversation.

1:06:27As a reminder to everybody, just our opinions, not investment advice.