China Decode: The AI Race Just Took a Stunning Turn

21:49James Kynge:This obviously is an exceptionally important relationship. I mean, I don't think people understand enough that China's only ever signed one mutual defense treaty, and that is with North Korea in 1961. This relationship obviously has been very rocky And there's, it seems like, a third wheel in the relationship in the form of Russia That comes every now and then to destabilize or somewhat threaten the relationship What was your take on both the optics but also the substance of this visit?

22:20Alice Han:Yeah, the optics are always impressive when it comes to North Korea I think that there were people lining the roads for the entire trip that Xi Jinping took from the airport to the place where he was meeting Kim Jong-un. People lining the roads, cheering, you know, in an uproarious way. But we must remember that this is all stage managed. None of this is spontaneous in North Korea. And to be honest with you, I think that this relationship remains very complex. And although, as you mentioned, Alice, North Korea is China's only formal diplomatic ally, the true state of the relationship remains much, much more complex than that would suppose.

23:05Alice Han:And I think the big issue here is North Korea's nuclear arsenal. Kim Jong-un said recently that, quote, there would be an exponential expansion of North Korea's nuclear arsenal. And this would be in order to take on, quote, the most ferocious enemies. North Korea is the master of sort of blood-curdling rhetoric, so we shouldn't sort of read too much into that. But to me, there is effectively what's happening here is a kind of two-sided leverage game going on. The first leverage is North Korea trying to use its nuclear arsenal to gain concessions from China. And the second order of leverage is China trying to use North Korea's nuclear arsenal to gain leverage from the US.

23:59Alice Han:We've seen this in the past. Excuse me for being somewhat cynical about this, but I reported on all of the meetings of the so-called six-party talks between 2003 and 2007, when I was based in Beijing as a journalist for the Financial Times. And effectively, those talks were an extended charade. They were a way of both North Korea and China extracting concessions from the United States. So the way it went was that the U.S., because it had no way of appealing directly to North Korea, would try to go through China to influence North Korea and stop North Korea from developing those nuclear weapons.

24:44Alice Han:And in order to go through China, China extracted concessions at most steps of the way, sometimes big concessions, sometimes small concessions. But there were concessions given by the U.S. towards China in an attempt to prevent North Korea from developing those nuclear weapons. And effectively, the US got nothing for it because in the end, North Korea did indeed develop nuclear weapons and now is creating this arsenal of intercontinental ballistic missiles that it can use to deliver those weapons to pretty much anywhere in the world. And so what we have now is potentially a kind of take two of that leverage game.

25:28Alice Han:North Korea is inviting Xi Jinping to Pyongyang. And then I would guess that the US will now try to use China's influence over North Korea to prevent North Korea from weaponizing and using the nuclear weapons it has in ways that would obviously disadvantage the US or its allies in the region, i.e. Japan or South Korea. But the truth is, I feel anyway, and this is my opinion here, so it may be wrong, but I feel that China has very little leverage with North Korea. And I feel that we were shown that during the failure of these six-party talks that lasted five years from 2003 to 2007. And so if the U.S.

26:18Alice Han:falls for this leverage game again, then I think it'll just end up losing concessions yet again. That's my rather jaundiced view of the whole thing. I may well be wrong. I kind of hope I am, but I suspect I might not be.

26:34James Kynge:When I was reflecting on this, I was thinking at how in the last couple of years with the Russia-Ukraine conflict, I would say the great power politics game has shifted. In the past, it was very much about US, China, North Korea. I mean, obviously, there's the South Korea dimension, which we can get into just a bit. But in general, China almost used North Korea as a bargaining chip anytime the US wanted certain things. Like, for instance, China going ahead with sanctions a couple of years back during Trump 1.0 on North Korea when they were unhappy with their nuclear buildup, or that China was somewhat of a back channel for American diplomats to engage with North Korea.

27:14James Kynge:But in recent years, I've noticed, and this came up in some discussions over the last year or so in China, that the other third wheel in this new relationship is Russia. And I remember a couple years ago, there was this viral image of Putin hanging out with Kim in his car in Moscow, just two dudes in a car together, smiling and laughing. And as you know, James, North Korea apparently has sent 14 ,000 troops to the conflict between Russia and Ukraine. Some of these troops have gained a battlefield experience in return. Apparently, the Russians have sent over military and technological equipment.

27:55James Kynge:And Kim has learned, I think, from watching the great power politics game that actually it pays to be a nuclear power. I mean, look at what's happening in Iran. The fact that Iran isn't yet fully nuclear capable puts it at constant risk from the Israelis and other countries, both in and outside of the region. And North Korea has quietly been building up its nuclear arsenal. To your point, James, this is a cause of consternation for the Chinese. But before this trip that she has been taking, North Korea unveiled a new facility to produce nuclear fuel. And so the big question is, what is China's strategy when it comes to North Korea?

28:37James Kynge:Because on the one hand, I think it wants to improve relations. I think it has been worried about how North Korea is getting closer to Russia in the last couple of years. And we've seen that with the resumption of flights and trains going in and out of China between China and North Korea. But on the other hand, the Chinese are very worried about a nuclear buildup just across its northeast border. And the Chinese do care about its commercial relationship with the South Koreans, right? Part of, I think, what has allowed the South Korea-China relationship to be relatively strong compared to, say, the Japan-China relationship is this kind of tacit understanding that the Chinese could hold North Koreans back from really radical positions on the nuclear issue, for instance.

29:27James Kynge:What is China's strategy going to be? Because it is trying to improve things on the one hand with Pyongyang, but on the other hand, can it do that if Pyongyang just believes it should continue to build up nuclear arsenal because of what it's seeing on the world stage?

29:42Alice Han:Well, I mean, it's a great question. My answer is fairly simple. I think the answer is no. China does not have sufficient leverage over North Korea to influence it on its nuclear policy. It has leverage over North Korea. It can, you know, persuade North Korea to do lesser things. But when it comes to North Korea's nuclear arsenal and whatever weapons it's building up to transport those nuclear warheads to wherever in the world, I think China has almost no leverage whatsoever. And that's for the reason that you've just given. North Korea is an ostracized state. It has, you know, tenuous links with Russia and China.

30:30Alice Han:And it feels itself as a victim of all kinds of international currents over the last, you know, several decades. And it has this very oppositional sense, even when it comes to so-called allies. It feels very oppositional to China. It feels oppositional to Russia. It doesn't want to be bullied. That's why it has created this extraordinarily ultra-independent state with an ultra-independent foreign policy and, you know, is known around the world as the Hermit Kingdom, because it's almost impossible to travel to North Korea. North Korea has very few links with any country in the West. I've personally been to North Korea, and I have to say, it is the strangest country I've ever been to.

31:19Alice Han:You know, you're watched everywhere you go. You're tailed by an individual agent who is supplied to monitor you. It really is. It's like a country on a constant war footing, which, of course, it is on a war footing because North Korea never signed a peace treaty with South Korea. Officially, these two countries are still at war. There is wall-to-wall propaganda being piped out of every loudspeaker. You know, there are video cameras we hear in most of the flats and apartments in Pyongyang. It's a very, very militarized society and a very suspicious one. So, I really don't think that China could possibly influence North Korea when it comes to the most important agenda that Kim Jong-un has, which is building up his nuclear weapons, for the very reasons that you've given, Alice, because that is North Korea's insurance policy.

32:18Alice Han:It not only uses those weapons, you know, potentially to defend itself, but also to win leverage and gain concessions from its biggest partners and its potential enemies, such as the US.

32:30James Kynge:Yeah, I agree with that. Although one other way to look at this is if China can build economic leverage, because China is the biggest trading partner, basically, to North Korea, then maybe that has something, some element or factor in the relationship. I'm skeptical of that view because as you've listed out eloquently, James, this North Korean regime is more interested in nuclear buildup than actually getting richer or making the people richer. Although I had heard a couple months ago in Beijing that this was during Wang Yi's visit to Pyongyang meeting with Kim, that there would be high-level meeting between Xi and Kim, and that Kim was finally getting out of the post -COVID confinement phase and seeking to improve the economy, and largely doing this by resuming trade and travel with mainland China.

33:24James Kynge:We'll have to see if that bears fruit. But I thought that was an interesting data point, suggestive of the fact that, you know, this is a deeply impoverished country, the economy's in shambles, and maybe we're seeing a leader in Pyongyang that is trying to change the tide there and actually prioritizing economy for once. I'm a little bit skeptical, but it's worth mentioning as a potential form of leverage in the future if China develops that. All right, let's take one last quick break and stay with us.

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36:24James Kynge:Welcome back. We've covered AI competition and international competition. But before we close, a peek at a potentially even more competitive world, that of food delivery apps in China. The issue at hand is so-called ghost kitchens. businesses that have sprung up because of the fierce demand for and competition amongst restaurants and apps offering food delivery services. They're restaurants that exist only on food delivery apps with no physical presence, which outsource orders to the lowest bidding third-party vendors. James, I remember a couple years ago when Travis Kalanick, the erstwhile founder of Uber, went all in on ghost kitchens.

37:05James Kynge:I think that this model has proved really ineffective, at least in America. There was apparently a lot of legal reasons for that in terms of liability in shared spaces and food safety. Now this has become an issue in China where ghost kitchens, I think, have been more prolific. And the government is really cracking down. It was interesting to see that, you know, the state administrator for market regulation, this is the anti-monopoly body in China. the director of food safety at that body has basically said that the food delivery platforms like Ilama and Meituan, quote unquote, must truly assume the primary responsibility of being gatekeepers of food safety in the food delivery industry.

37:46James Kynge:And just recently, the seven e-commerce platforms, including Meituan, have been fined a combined$530 million over these ghost kitchen deliveries. Every time I go to China, I do use these apps and they're so effective and efficient. I didn't know that this was actually an issue, so it was a little bit surprising to see. But it really, for consumers, is deeply worrying because you obviously got food safety, hygiene concerns, but also lack of transparency as to who is actually making your food. Have you experienced this, James?

38:21Alice Han:I have been wondering how many deliveries I've ordered in Beijing, Shanghai, Tianjin, Shenzhen, or wherever I was in China recently, came from ghost kitchens. And some of the details that I turned up did rather turn my stomach. I mean, so when you get on the app, it shows you a beautiful restaurant, and you might have a picture of a restaurant, or the food that's being made in that restaurant, and then you think, oh, that looks great, and then you order it. But the ghost part of this comes in because actually the food you're getting delivered to you doesn't come from that restaurant. It comes from somewhere completely different.

39:04Alice Han:And after various investigations by Chinese state media, they had some true horror stories come up. There was one where they went to a place that was making pig trotter soup. And, you know, the restaurant was listed online, looked great. But then they traced it to where it actually came from. And it came from a filthy, cramped kitchen in a junkyard. And this stuff was being slopped out and put into, you know, delivery boxes and then taken by the drivers on scooters to the people who were consuming it. Of course, all of the scooter drivers are on ultra low wages because, you know, in this game, the food delivery game in China, it's all about margins.

39:52Alice Han:You have to undercut your competitors. So margins are wafer, wafer thin. So you pay as little as possible for the food that's being made and to the drivers who are delivering it in order to preserve whatever tiny margin you may have. And there was all kinds of other stories as well. There was stories of well-known eateries advertising online, but then the food that was being made supposedly under the brand of these eateries was actually made in hovels, infested with cockroaches and all of that. So it really does sort of make you think. I mean, I'm not saying that this is the majority of food that you order in China.

40:38Alice Han:I simply don't believe that. But because this is such a huge market and hundreds of millions of Chinese have takeout food deliveries every week, and the industry is supposed to be worth about 200 billion US dollars a year, this is a big issue. And some of these delivery companies like Meituan that you've already mentioned, they have about 7 million delivery drivers on their books at any one moment, mostly on scooters, kind of picking all of this stuff up and delivering it to your apartment or wherever you live. And incredibly quickly, I mean, this is the other thing about this industry. These delivery drivers are under such pressure to get you the food within, I don't know, Alice, what is it, like 15 minutes or something?

41:26James Kynge:Sometimes it's even less than that. It's 10 minutes. It's crazy. It's really crazy.

41:30Alice Han:I think it says a lot about the type of economy that China is the cutthroat competition that people have to deal with all the time. And then, and then, and so then it's easier to understand why the phenomenon of ghost kitchens exists, you know, why people cut corners, because they're under such competition for margin. And I think, you know, without belaboring the point, we can also see it in other sectors. I mean, there, what is it? There's supposed to be more than a hundred electric vehicle companies in China and only a handful or a tiny handful are making a profit, that's because, again, cutthroat competition in that sector and many others.

42:09James Kynge:And even in the traditional industry as well. You know, when it comes to steelmakers, for instance, you know, some of these plants, they turn the lights on, but nothing is coming out of it because they're subsidized by the local government and they need to keep employing people. I thought it was interesting that the regulators identified 67 ,000 of these so-called ghost shops. and that in a bid to meet the new regulations, some of these merchants are actually pivoting very quickly to building, quote-unquote, transparent kitchens with something that's very popular in China, as you know, live streaming.

42:44James Kynge:So they do live stream feeds of cooking from their restaurants so the consumers can watch how the food is being prepared in real time. And some provinces like Anhui, for instance, are signing food safety agreements with major platforms so that there's a level of AI monitoring of these kitchens. And they're trying to incentivize, in some cases, delivery riders to report illegal restaurants by giving them cash rewards as well. So the regulation is moving fast. The industry is also moving fast to meet the new regulation standards. But when I did research, it made my stomach curdle a little bit to think about where your food is being prepared.

43:24James Kynge:But I generally am supportive of this regulation. I think it's good for the industry. And as you mentioned, this is a growing industry, James. It's 200 billion US dollars by 2033. Apparently, it's largely dominated by white-collar workers who are obviously looking to get a quick meal. And that's an interesting cultural observation and change, as you know, James. This is a culture that, you know, growing up, for instance, prides itself in home-cooked meals. But it's really pivoted, especially in the urban areas, with white-collar workers to being very, very supportive of online food deliveries.

44:01James Kynge:And generally, this whole market is controlled by the three platforms owned by Alibaba and Tencent. And then JD.com is the third provider in a platform. But generally, it's interesting to see the regulators holding the platforms to account and saying, actually, you guys are responsible for food safety. You guys should be going above and beyond to make sure that you're meeting the standards as a platform and protecting consumers.

44:28Alice Han:Absolutely. And I remember also the days when I worked in Beijing, our company had about maybe 200 people in it. I would say 90 % of the people always had food deliveries to their desks during the working day for lunch. And, yeah, I mean, you know, I've been raking up all the horror stories, but actually a lot of the food looked really good. And to be frank, looked better than a lot of the sort of fast-dish food or food delivery that you get in the West. So I don't want to give everyone the impression that all of the food in China that you get delivered is made in ghost kitchens. That's clearly not the case.

45:07James Kynge:Yeah, I mean, I shouldn't say this, but I just in general have found takeout in China to be way better than takeout in the UK, but maybe biased there.

45:18Alice Han:I don't think so. I think that's fair enough.

45:20James Kynge:I actually saw a photo from Fuchsia Dunlop, who, as you know, is a British Sinophile, but she specializes in Chinese cuisine. And she showed a picture of industrial workers in China who are getting these cheap meals. And they say, we do not have them for pleasure, but just for convenience. And I looked at it thinking, actually, that looks really good. They've got bok choy, pork belly, a bit of rice. It's a very balanced meal. And, you know, in the UK, that would have been a very different kind of convenience meal. All right, James, you know what time it is. It is prediction time. As you look into the crystal ball for the future this week, what do you see?

45:59Alice Han:Well, Alice, I'm just about to have a holiday in France. So my mind has naturally turned to wine. And I was looking at what's happening in the Chinese wine industry. We've already got several Chinese wineries issuing asking prices for wine at more than 1 ,000 US dollars a bottle. And so my prediction is that there will soon be wine in China sold for about US dollars 5 ,000 a bottle. Wow. At the moment, according to my research, the most expensive bottle of wine on the market at the moment in China is 4 ,300 US dollars a bottle. That comes from the Changyu Winery and it's called AFIP No. 1. But that bottle is set with 28 gems and 18-carat gold plating.

46:55Alice Han:So you're paying a lot for the bottle as well as for the wine. But there are others as well. There's a winery called Domaine Franco Chinois. That's in Beijing. Those wines are selling for 1 ,360 US dollars a bottle. There's another very famous winery called Ao Yun, which is an LVMH winery that's in Yunnan province in southwest China. Those bottles are very expensive as well. But my point is that Chinese wine, which 20 years ago used to be regarded as a bit of a joke, is very far from a joke now. Most of this Chinese wine has now won multiple prizes at some of the biggest wine expos in the world.

47:40Alice Han:And my prediction, therefore, is that soon, I don't know how long, we're going to see a Chinese wine, let's say, sell for more than 5 ,000 US dollars a bottle.

47:51James Kynge:Is that driven by domestic demand? Are there domestic Chinese that are buying this or some Westerners too?

47:57Alice Han:I think this is primarily Western demand. And we can also see that quite a lot of French sales of wine in China has fallen. Because, frankly, according to many of the judges at the Wine Expos, you can't really tell the difference between, you know, the best French wine and the best Chinese wine. There isn't a gap anymore.

48:20James Kynge:Gosh, it'll be like a repeat of the 70s between Californian wines and French wines, that kind of competition. And I wonder to what extent climate change plays into this because you've heard this theory, James, that apparently we'll start to get some good wines coming out of Britain relative to France and Spain and Italy because of climate change. I mean, it's just going to get hotter in a lot of these historically renowned wine regions in Europe, right?

48:48Alice Han:Completely. I have a good friend who's just started selling wine from his vineyard in Hampshire in the UK, and it's absolutely outstanding.

48:57James Kynge:And shout out to Hasse of Roosevelt. This is not a shameless plug, but I was just there recently in Shanghai and they offer really good Chinese wines, Chinese red wines, white wines from the local dewa. So if you're ever there on the Bund in Shanghai and you need a good bar spot, House of Roosevelt is awesome. So my prediction is in the robotics domain. I have been looking a lot at magnesium. This is the lightest structural substance that is increasingly being used for robotics. and I predict that we'll start to be focusing a lot on magnesium alloys being used in humanoid robots and so for some of the more dexterous tasks that you mentioned James so for instance the robotic arms and hands because ideally you want as lightweight but as durable a material as possible to conserve energy but also make sure that the robot doesn't break down so I think magnesium alloy is going to be the next thing that we're going to talk a lot about in the same way that we've been talking a lot about, say, helium for semiconductors, mainly because of the Iran conflict obstructing supply.

50:02James Kynge:But I've been looking quite deeply into that structural substance.

50:07Alice Han:Interesting.

50:08James Kynge:That's all for this episode. Thank you for listening to China Decode. This is a production of Prof G Media. Make sure to follow us wherever you get your podcasts so you don't miss an episode. Talk to you again next week.

50:33Scott Galloway:Support for this show comes from Odoo. Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other? Introducing Odoo. It's the only business software you'll ever need. It's an all-in-one, fully integrated platform that makes your work easier. CRM, accounting, inventory, e-commerce, and more. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. That's why over thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com.

51:14Scott Galloway:Support for this show comes from Odoo. Running a business is hard enough. So why make it harder with a dozen different apps that don't talk to each other? Introducing Odoo. It's the only business software you'll ever need. It's an all-in-one, fully integrated platform that makes your work easier. CRM, accounting, inventory, e-commerce, and more. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. That's why over thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com.

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