Years of Restrictions Didn't Slow China's Quest for Tech Dominance

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1:28Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe. Yes. Do you realize it's almost the end of 2024? Yeah. Well, yeah. It's crazy. You know, it's been a really warm month in October. Yeah, I know. So I feel like we got this free month of summer. And so, yeah, like we're basically almost here and we sort of like got a free one less month of winter. It feels like I feel like the warm weather is also throwing everyone's sense of time off. But anyway, we're almost done with 2024. Who knows what the rest of the year is going to look like? But that means that 2025 is coming up.

2:06And you know what I think of when I think of 2025. You and I think of the same thing. And we're the only two journalists in America that don't think of Project 2025. Yeah, of course. OK, so Joe and I are thinking of Made in China 2025, which, of course, was the big program that China launched 10 years ago, almost 10 years ago now, back in 2015, to bulk out strategically important advanced technology sectors. And so I'm kind of curious what exactly happens in 2025, how much progress China has made on this front. You know, next year, are they suddenly going to, like, declare victory in advanced technology and that'll be the end of it?

2:48What criteria are they actually using to judge its success? I have a bunch of questions. You know, I just have to say that I appreciate things like made in 2025 initiatives or even like, you know, five-year plans or 10-year plans or whatever, just because they provide a very convenient spot to go back and look, did the goals get hit or not? It's one thing to talk about moonshots and like, oh, we're going to lead all this. But unless you put a date on when you want to achieve it by, you don't really know whether you're successful, right? Because you never really know where you are in sort of the arc of progress.

3:24But if you have a system that puts dates on where you want to be, at least you can go back and judge, well, were we successful or not? And so now we're on the verge of being able to look at the start of that initiative and the end of that initiative and sort of say whether it worked or not. Is that your pitch for All Thoughts World Domination 2025? Well, we'd have maybe 2035. OK. And we need some like very specific metrics. You know, we have to like really know what that means in advance. And then, yeah, we'll see if we hit it or not. OK, you're right, though. Deadlines are very important. So speaking of deadlines, why don't I go ahead and bring in our very perfect guests for this particular episode?

4:02We are speaking with Gerard DiPippo, Senior Geoeconomics Analyst over at Bloomberg Economics. as well as Rebecca Chung-Wilkins, senior correspondent for the Government and Economy Team Asia. I knew her back when I was in Hong Kong, and she covered China credit, and she was so good at it. So who better to kind of draw the connection between technology and finance and economics than these two? So Gerard and Rebecca, thank you so much for coming back on All Thoughts. Thank you for having me. Such a pleasure to be here. Let's start with the beginning, I guess. 2015, China decides to launch this Made in China 2025 program.

4:41What was the thinking behind it? What were the goals? Well, I think one thing to remember is this sort of a whole Made in China industrial policy. This comes just a couple of years into President Xi Jinping getting his leadership underway in China. So this is also very much President Xi's vision for the Chinese economy, his idea that these key sectors, these key industries are essentially going to underpin the national development. So this is not sort of, I suppose, just a discussion about China's strategic ambitions, but also specifically Xi's own vision for the direction for China. I'll also add that in the context of Chinese industrial policy, so Made in China 25 is an example of an iterative process and also sort of a reflective process with the rest of the world.

5:27So there obviously were other industrial policies before, and that would include something like the medium long-term plan from 2005, which is a 15-year plan. There are, of course, five-year plans. But also Made in China 25 was partially inspired by Germany's Industry 4.0 plan, which is much less detailed and ambitious. But there's a sort of a reactive effect there, which ends up having knock-on effects because then the U.S. reacts to Made in China 25. And so it's just part of the cycle. I think what makes Made in China 25 different than other plans that China had had is it was more comprehensive, more ambitious, and much more focused on not just catching up but actually leading in 10 strategic sectors.

6:05Previous plans have been more about, say, lower value added or mega projects, right? And this is basically they wanted to be the world leader in all the technologies that circa 2015 they had identified as being the most important. That's interesting. So one way of thinking about development is like, OK, we're going to build lots of bridges and rail and housing and hospitals and other sorts of things. But this is about really leading the technological frontier. And of course, this is what is the source of tremendous angst in Washington, D.C. and various U.S. industrial giants and so forth. I mean, I don't know if we need to list all 15, but what are the big areas that China felt it had to pursue?

6:42Sure. So they have 10 strategic sectors, but then within that, there's any number of technologies. So the big ones would be like information technology, which includes things like semiconductors, 5G, artificial intelligence, and then things like aviation and space technology, energy equipment, which include things like solar panels, and then new energy vehicles, things like electric vehicles. So it spans pretty much everything, but it skews towards the industrial sector, and it's really a manufacturing-based view of development. So one thing that was interesting, Jared, is you said that it was an iterative process.

7:17How has it changed in your mind from like 2015 to now? Has there been maybe more of a focus or a shift in direction? A few things. The original Made in China 25 blueprint, which is what people treat as being the plan, that was announced in early 2015. But then actually, when people talk about all the targets, those mostly come from something that's commonly called the Green Book, which was published by the Chinese Academy of Engineers. and that's where you have the 250 plus targets that are looking at specific technologies over time. It is sort of like an authoritative addendum. But then on top of that, there are something like 400 plus other authoritative documents going through technologies, going through different levels of government.

7:59So it's not just one thing. And that's part of the fact that those other plans don't come out at exactly the same time. That makes it iterative. The other government realized around 2019 that the phrase made in China 25 was provoking antibodies in the West, particularly in the US. I would say that along with Belt and Road Initiative are the two slogans that ended up having the biggest effect on the discourse. But BRI is more favorably viewed in a lot of parts of the world, whereas made in China 25 was considered more of a threat by a lot of industrial economies. So what did China do? They actually tamped down on it.

8:35So you will struggle to find any direct references to it now in Chinese official documents, at least publicly, but it's not dead. So a lot of the key goals are now incorporated into the 14 five-year plan, which is the one that we're currently in going through 2025. The other thing to keep in mind is that the targets were what they thought circa late 2015, right? So I would think that within the Chinese government, they actually have adjusted some things or realized that maybe that wasn't the right forecast. Some of them were actually quite vague for things like what nanometer technology would semiconductors be circa 2030, because of course, they didn't actually know.

9:11But my strong suspicion is that this framework still remains in place. But it's sort of an evolution because the point is not necessarily to hit all those individual targets. It's are you basically fulfilling the plan in the broad sense? Are you actually achieving leadership on all those key technologies? I'd just add there that, you know, some of that antipathy among Western powers around the idea and even the phrase of Made in China 2025 is still sort of quite live. I was at a meeting with some policymakers, think tankers at university recently, and there was still this quite lively discussion, I call it politely discussion, between a visiting European political advisor and Hong Kong officials and Chinese officials about precisely what Made in China is, whether it's just an industrial policy or in the view of this particular visitor, something much more sort of malign.

10:00I just got to say, so weird to me the idea of like technological development along these lines being malign. I mean, you know, this is human progress, right? Technology advances and countries want to be technological leaders. And I understand why governments and companies around the world feel threatened by it. But anyway. Well, this is one of the main tensions, right? Because, for instance, the U.S. will say, well, we want to develop more clean energy technology domestically because it's important for the environment. But on the other hand, you could probably have more progress on the clean energy front if you just imported a bunch of stuff from China right now.

10:41One of the challenges here or the differences here is precisely over what it means when Beijing says it's going to back a certain sector, right? The idea that if Beijing identifies, let's say, electric vehicles or solar panels as a sector to back, it really can throw its weight behind it. It can ask banks to provide cheap credit. It can ask local governments to provide land at cheap or no cost. It can get state-owned enterprises to pour those significant resources, talent, innovation into those industries. It really has sort of a huge machinery that it can redirect, which, you know, other countries feel is quote unquote unfair.

11:18And in some ways that's sort of behind the whole accusation around unfair use of subsidies, for instance. I will try to channel both Beijing and Washington to address your comment. So from Beijing's perspective, I think they would say it's a bit ridiculous that the West was more or less fine with China moving up the value chain as long as it wasn't in sectors that are too high value added or too competitive with advanced economy industry. So textiles, fine. But when you say, oh, we want to have our own jet airliners, that becomes a problem. And I think there's actually truth to that, right? So what changed is that China went from lower to higher value added, and now its companies are direct competitors in many cases with like G7 companies.

11:59On the US side, I think part of the response would be, well, the threat part of it is it's not development per se. it's that the Chinese government, particularly of late, is quite clear that self-reliance or self-sufficiency are the maybe primary goal. This is clear in the third plenum that came out in July that it's about self-reliance. And self-reliance has a heavy national security undertone. So I'll go back to what I was saying earlier, that I think both sides sort of feed off each other. So why is China so worried about self-reliance? Well, part of that is a response to Western tariffs and U.S.

12:34export controls. But the fact is, they are basically saying, we want to be free to the extent they can be from the Western technological supply chain. And they're doing that because they're worried about national security. So of course, in Washington, they would think, well, why are you worried about national security? Right? So it sort of goes in both directions.

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13:47Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform. All while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. I guess I could see this sort of malign angle also if it's like this is not real technological development. This is just loss-making companies that are backed by the government that are going to then bankrupt and destroy the industrial base of the West and not actually make any progress.

14:29I guess I get all of these debates and nuances and why people talk about China overcapacity as a problem and all that stuff. But OK, the other thing that happened over the last several years is in addition to these ominous sounding phrases and slogans like made in 2025 and the Belt and Road Initiative that created anxiety in the West, the U.S. like actively started to try to suppress Chinese technological development, starting under the Trump administration and then obviously continuing under the Biden administration. and it may get ratcheted up even further under the next administration, whoever that is.

15:06What's that done? How would you describe specifically what the U.S. has tried to do in terms of constraining China's technological development? And what's the basics of the impact that these efforts have had? What the U.S. is trying to do is somewhat subject to debate. The official line is that the United States is not trying to stop China's development. It's not about overall delinking of the economies. It's just about select de-risking. It's about remaining ahead in the strategic and critical technologies of the future. But it's not about sort of stifling the macro economy of China. In Beijing, the view is that it's all around containment and that the United States, mostly but some other Western countries, are trying to encircle China and basically prevent it from moving up the ladder economically and technologically.

15:53Is it working? It's complicated because there's a series of policies, right? So when we talk about what started, the thing that people mostly focus on is, of course, the trade war, which effectively started in 2018 in the Trump administration. The purpose of the trade war is complicated. It wasn't really to stunt China's growth, although there were people in the Trump administration would have hoped that. It was actually for the president, for President Trump's perspective, to try to balance trade and get a deal, which we got in the form of the phase one deal as, you know, whatever you think of that.

16:23But the other thing that happened that I think was actually a bigger deal from the Chinese perspective was when the U.S. added Huawei to the Commerce Department's entity list in early 2019. Because what that signal was that the United States was effectively trying to kill what was arguably China's best global technology company. The U.S. would say, we're not trying to kill it, but the restrictions are pretty draconian, and there's very much that vibe. And so what it did was convince not just Beijing, but the local governments and Chinese companies that otherwise would have preferred to just use sometimes cheaper or better foreign inputs like for semiconductors, that actually what Beijing was saying about self-sufficiency was indeed a national security imperative.

17:05Is it working? It's complicated. But our basic take is that at the macro level, what's happening in a Chinese economy is primarily due to the property sector. You could call it a meltdown because it's pretty dramatic. The Chinese government arguably started that with a three red lines policy. But I would be careful about conflating the idea that China's economic weakness is due to basically industrial policy when really there's clearly a more obvious macro phenomenon that explains it. On the technology side, the export controls, I think, are really the crux of the question of are they slowing China's development?

17:37I think there the focus on the U.S. side is primarily on semiconductors. And there's even recent news, as Bloomberg has reported, that, for example, TSMC, the famous semiconductor foundry in Taiwan, might have been sending some NVIDIA chips to Huawei through some indirect body. Maybe they didn't know about it. But there's all this debate about how far ahead is China really and are they actually able to make the most advanced chips on their own. And I think that is really the question of when you get to how effective are the export controls. It looks like they are having some effect, but not a lot at a macro perspective.

18:09We're also sort of discovering in real time precisely the sort of miscalculation. The idea of export controls, initially the belief was that it would help the US stay ahead by 8 to 10 years. But last year we saw Huawei launch their Mate 60 smartphone, which included a 7 nanometer chip, that suggested actually that Huawei's chip making partner, SMIC, was actually somewhere between sort of 4 or 5 years behind. So there have been these sort of series of nasty surprises and have led to recalibrations of precisely where Chinese tech advancement actually is. So just on the idea of what the U.S. needs to do here, I mean, one of the criticisms of some of its response is that the problem really is the cost of these technologies.

18:56So in order to make them domestically and maybe internationally competitive, the U.S. really needs to bring down the cost curve. And that's hard to do when you're competing with China and it has maybe fewer regulations and certainly cheaper labor. Is there anything that can be done on that front to make American technology more competitive, for instance, via more tariffs? In theory, if the U.S. erects tariff walls, which we already have, but if Trump is reelected, he's promising 60 percent tariffs on China, which would be huge and might shut off eventually a good share of direct U.S.-China trade.

19:35His theory, as he explained recently on his Bloomberg interview with John Micklethwaite, is that essentially that will compel all these companies to reshore or onshore production back in the United States to sell in the United States. Now, generally speaking, import substitution has a pretty bad track record internationally. But the U.S. has the advantage of being the largest economy in the world, right? And it's the largest consumer market. So there is some feasibility to it, but I think something that might be underemphasized in a general discourse is that the tariffs, particularly as they're constituted now, but especially if they increase them, also hit a lot of intermediate goods, right?

20:11So it actually makes it more expensive to import things like steel or all the components you need to build a factory or inputs for whatever. And so you have to sort of decide. So the U.S. wants to protect its steel sector. Okay, we can do that. We do do that. But that also means that steel costs more in the U.S. and it means construction costs are up, which means making a factory in, say, Taiwan or China or whatever is cheaper. So there are tradeoffs there. In my personal view, I don't think tariffs are a good way to go about it. I think industrial policy, which is a much wider set of tools, has some promise.

20:42But tariffs to me are like a sledgehammer. I think this is a really interesting point about intermediate. I imagine that even if you were to go into an Intel factory or fab somewhere in the United States. They're just numerous imported goods of all sorts. So if we want Intel to be a powerhouse, the idea that tariffs are going to make that much easier, I think it's complicated. And then, of course, there's all the questions about like, well, how do you know it's coming from China? Or what if the final assembly is somewhere else, et cetera? Let's get into specifics. Both of you talk about some key industries where China was in 2015 and where they are today in 2025 and what kind of progress has been made.

21:21Well, I think the sort of really obvious consumer ones where we've seen these kind of extraordinary leaps in EVs and solar panels. I mean, I think a company like BYD, which is basically unheard of, I think, globally a couple of years ago, now a Chinese leader outpacing its global competitors. It thinks it's going to sell half of its products overseas in the future. So certainly also doesn't really see tariffs or potential tariffs as an impediment to its expansion overseas. And I think in a way, it's sort of unimaginable. I remember reporting in China about a decade ago, around the time that Made in China was actually announced.

22:01And officials, local government officials were very excited to take me to a lithium battery factory, which batteries were going to be used for electric vehicles. And it seemed, I have to say, like something of a pipe dream. I can say I totally misunderstood the future of this sector and the future of the company. But even at that time, it was something that, you know, local officials were really had this sort of razor sharp focus on. EVs are probably the best example because they are the technology where China has exceeded the plan, so to speak, right? They've done much better than their internal forecast would have suggested in the 2015 documents.

22:39But there are other sectors where they've also done well. So unmanned aerial vehicles, which is to say drones that DJI makes, China is clearly the world's leader in that the U.S. tries to restrict imports and use of that in the U.S., but elsewhere they're dominant. There are other things like solar panels that China clearly has dominance in. Other areas, they're not exactly the world leader, but they're clearly starting to catch up and they're better off than they would have been, say, circa 2015. So semiconductors are one area where they're not the world's leader, but they are on a relative basis stronger than they were five years ago.

23:09industrial robots, things like machine tools. There are other sort of maybe more obscure things like large tractors. So part of the plan talks about things like agricultural equipment and pharmaceuticals. They're also making gains. So really, in all areas, except arguably for maybe commercial aircraft, they're making relative gains. I guess the other element, though, is in China, in some ways, China sort of had set itself up to succeed because there are some areas, right, Gerard, where China was already a global leader. Yeah, well, so that's a good point because the new energy vehicle plans go back to, I believe, 2009, right?

23:43So when they're deciding in 2015 where is this going to go, some of those technologies, they already had plans in place that were underway. And so they could sort of project, OK, we already know how this is starting to work. Whereas other things like artificial intelligence, yeah, it was a thing people spoke about in 2015, but it wasn't nearly as real as it is now, right? So that was much more speculative.

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