Dan Wang on China 2019

9 minute read

Takeaway

Dan Wang is short term negative, long term positive on China’s technology, and isn’t impressed by China tech today.

China and tech

Thanks to everyone for signing up for weekly updates! There’s an article by Dan Wang that has been circulating recently, including on sites such as marginal revolution [1]. I’ll highlight the parts I find most interesting below:

First, China’s technology foundations are fragile, which the trade war has made evident. Second, over the longer term, I expect that China will stiffen those foundations and develop firms capable of pushing forward the technological frontier

I broadly agree with his two main takeaways, though they seem to be consensus among those who read more about China. We’ll see later how he defines the issues.

there’s not yet much terribly impressive about China’s technology achievements. It’s true that the country leads on mobile payments and the consumer internet, as well as the buildout of infrastructure projects like a high-speed rail network. These however have more to do with differences in the social environment and regulatory regime.

It’s true that the lack of credit cards enabled the leapfrogging of mobile payments, and that the supportive regulatory environment has made it easier to get mass adoption of any particular app. I suppose it comes down to what you find impressive - hardware innovation vs intangible business model innovation. He doesn’t like consumer tech as much, and elaborates later.

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Failure to develop more foundational technologies has meant that the US has had an at-will ability to kneecap major firms, and to be able to impose at least significant operational hassles on Huawei. Over the medium term, US controls will disrupt the ability of Chinese firms to acquire leading technologies.

Agree. In more rational times, people assumed the US would not exercise that ability to damage supply chains. That has changed though and we’re now playing in a different game. This should be a headwind for China for quite a while longer.

My pushback would be, couldn’t you say the same thing of China exporting to the US? While true that a large portion of the China exports are invented by US firms, it would still be a major hassle if all that electronic, electrical, and manufacturing supply stopped.

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so long as substantial US tariffs stay in place, Chinese firms will have worse access to the world’s largest and best consumer market, meaning that they’ll be exposed to less export discipline

Tariffs likely end up hurting both sides; exporters incur higher costs while selling less, and consumers pay more. While true that Chinese firms will have less access, that also means US consumers lose out. For a more nuanced take on tariffs than I can provide, see Michael Pettis’ writing

I’m unsure what he means by export discipline here.

US controls can only be successful in the short term; it’s not likely that it can monopolize key technologies forever.

Agree. I’d also want to seprate the “technology” itself vs “innovation”. Technology is easier to copy and likely spreads over time [2] , especially if you’re manufacturing overseas. The ability to innovate and come up with new technology though is a different component, and what I’d be more worried about for China. They are indeed showing signs of innovative spirit, but that is only just starting to re-emerge.

I find it bizarre that the world has decided that consumer internet is the highest form of technology. It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization.

This is similar to Peter Thiel’s belief that we’ve had a lot of innovation in ‘bits’ but not enough innovation in ‘atoms’, that we’ve had progress in software and the intangible but little in hardware and the physical. That seems true, many of our physics breakthroughs are quite old now e.g. nuclear, space. Without a clear definition of “highest” form of technology though I don’t quite understand the criticism. Is it that the internet companies are the most valuable? That’s usually a mix of profit potential and growth rates investors apply to them vs the hardware companies. Is it that more people talk about them? That’s natural since by definition consumer facing companies interact with more people. This might come down to a philosophical definition difference.

I’m also curious on what he thinks of companies in between the semiconductor layer to the consumer tech layer. If semiconductor tech is impressive but consumer tech is not, what about networking companies (those that connect the computers to each other)? What about software companies (those that build infrastructure software on top)? Consumer tech is more abstracted away from hardware and debateably less subject to physical limitations, should that be a case for it to be “high tech”?

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The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP. (That’s why, I think, that the companies in Beijing work so hard. Since no one has any real, defensible IP, the only path to success is to brutally outwork the competition.)

Unsure about this, and it depends on what IP you consider important. If you think hardware matters more, then you’d naturally discount improvements in algorithms. I think a big difference here is that many of the hardware companies he’s thinking about are all business facing, rather than retail individual consumer facing. Consumers are more fickle than businesses and never satisfied. Hence any innovation that works gets copied quickly, and there’s low defensibility.

I disagree on the hard work as a result of this. Many tech companies are known for a chill lifestyle, particularly for engineers. I think the Beijing example is more culture specific.

I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.

Again I think this depends on what you consider important. Imagine you have a country where citizens enjoyed life playing games while its companies fast followed hardware improvements or just imported them. You don’t have to be the one researching all the improvements in order for your people to benefit from it. Moreover, you could be a laggard in hardware but a leader in consumer apps. You don’t need to lead in all areas of tech, and I’m not sure if that’s even a possible thing in a globalised world [3].

but in my view the milestones of our technological civilization ought to be found in scientific and industrial achievements, not the creation of consumer internet companies

Not sure I agree here, since it implies anything consumer related is not scientific. As discussed above, I wonder what his opinion of software companies is, and would infer that he doesn’t include them as a scientific achievement either.

China has a strong position when it comes to manufacturing industrial goods. […] The bulk still has a long way to go however before they can really be considered the peers of German, Japanese, Korean, and American giants

Agree, don’t think this is controversial. We do see firms starting to move away from China to lower cost regions though e.g. Vietnam.

How about emerging technologies like AI, quantum computing, biotechnology, and hypersonics, and other buzzing areas? […] So far however these fields are closer to being speculative science projects than real, commercial industries.

Agree, for now it seems most of these are buzzwords aimed at fooling customers into purchasing something. The AI capabilities of Baidu, for instance, have largely been discounted by investors

And if US tariffs stay on for an extended period, Chinese firms will not be able to learn to improve their products in the world’s largest market of sophisticated consumers.

I’d disagree this is necessarily true or bad. I don’t think the sophistication of the American consumer is significantly different than that of the Chinese consumer, let alone the European one. In fact, given the lower quality of some things in the US (mobile payments, group messaging, integrated apps) you could make a case US consumers are less sophisticated than Chinese ones.

I consider two advantages to be important. First, Chinese workers produce most of the world’s goods, which means that they’re capturing most of the knowledge that comes from the production process. Second, China is a large and dynamic market. On top of these structural factors, Chinese firms have stiffened their resolve to master important technologies after repeated US sanctions

Agree. When you’re squeezing a competitor, your end game has to be permanently crippling or destroying them. I doubt that China will cease to exist in the next 50 years with 95% certainty. Hence, all the current turmoil is doing is to further drive home the point that they can’t rely on others and need to speed up their own improvement. Ironically they’d probably have taken longer if not for the US pressuring them. Just like learning has a J curve though, it’ll feel worse before getting better.

We should distinguish technology in three forms: tools, direct instructions (like blueprints and IP), and process knowledge. The third is most important

This is an interesting framework. I suppose that in modern economies where getting every step in the process is key to having a successful outcome, as described by the O-ring theory of development, exact process knowledge derived from experience is critical. Knowing how to troubleshoot when things go wrong and are not described in the instructions is key.

The tangible is easier to copy by definition, whereas the intangible is harder and likely takes longer as well. And perhaps you need expert knowledge in the intangible before you can start creating new technology from scratch?

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It’s true that Chinese firms haven’t yet had much success in creating global brands, but perhaps they can be forgiven for focusing on the world’s fastest-growing large market.

Think it depends on what you count as global. In terms of smartphones, Xiaomi has more share than Samsung in India, and Huawei is third in Europe. It could be premature to compare too, given that competitors started in the 1800s and China’s modernisation is recent.

China’s technology foundation has been fragile, but it will patch up now that everyone has realized it […] And I’m constructive on the idea that many of these ideas will be successful.

Largely agree, and think this will take quite some time.

Overall, I agree broadly with the short term pessimism, long term optimism view of China. China has gotten good at the manufacturing process and the consumer app layer, but has lagged behind in actual hardware innovation. Even outside of tech, however broadly defined, it still faces debt, social pressure, and demographic concerns, just to name a few. None of these are simple issues to solve. It might seem slightly hand-wavy to say they’ll figure something out, but I think they will out of necessity. When the alternative is untenable, you tend to find a way.

Footnotes

  1. A site worth following btw, though you might get overwhelmed by the amount of content.
  2. For a reverse, ancient example, recall how silk was copied from China.
  3. What does it mean to be a leader in a field of research?

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