Kyle Chan on China's industrial dynamics
Chinese entrepreneurship, how price wars affect innovation (and vice versa), and sovereignty, and policy consistency.
Hi folks, Pranav (Manie) here.
Our conversation today is with Kyle Chan. In many of our past Daily Brief stories that cover China, chances are that we’ve referred to his work.
He runs an excellent, popular newsletter called High Capacity, where he delves into the Chinese economy, Chinese industrial policy and manufacturing, and relations between the US and China. He has been interviewed by international media outlets like The New York Times, Harvard Business Review, BBC, The Financial Times, The Economist, and so on. Currently, he is a Fellow at the Brookings Institution’s China Center, and holds a PhD in sociology from Princeton.
Our chat is about understanding China’s manufacturing prowess, the factors that drive it, what Chinese entrepreneurship looks like, and how it’s a geopolitical power. Each question was its own deep, exciting rabbit hole that Kyle took us through in vivid, illuminating detail. But that also meant that, unfortunately, many other questions were left unasked on our end this time around :)
Some of the things he said stuck with us for long after the chat was over. Below are some quotes that I think deserve their own space.
On the Strait of Hormuz as free marketing for Chinese EVs
We recorded this episode while the Iran war was unfolding and oil markets were jittery about a possible closure of the Strait of Hormuz, through which roughly a fifth of global oil flows. This was definitely the standout quote for me, and it’s pretty self-explanatory:
“Every day that the Strait of Hormuz is closed and every day that the Iran war continues is a month’s worth of free marketing for Chinese EVs and batteries and solar and clean tech. I think back to the oil shocks of the 1970s, and how even when oil prices came back down, they actually left a structural effect on the entire global economy. You think about how much countries stepped up their investment in alternative energy, and how much consumers really emphasised energy efficiency. And you have the rise of Japanese automakers — doing well because they were priced pretty competitively, maybe like the Chinese EVs of today.”
In fact, this isn’t the first time this has happened.
“You think about how much countries stepped up their investment in alternative energy, as it was called back then, and how much they really emphasised — how much consumers really emphasised — energy efficiency. And you have the rise of Japanese automakers, where they were doing well because they were priced pretty competitively, maybe like the Chinese EVs of today. But then with the oil shock of the '70s, you got these Japanese highly fuel-efficient vehicles that seemed suddenly really, really attractive. Not only were they cheap to buy, but they were cheap to own. That caused a huge boom for Japan's automotive industry, which I think might be happening to a certain extent also with China's EV industry and broader clean-tech industry.”
On why “move fast and break things” doesn’t translate
What is the social and political context under which Chinese entrepreneurship is born? What do hero stories of Chinese entrepreneurs sound like?
The first thing to understand about Chinese entrepreneurs, Kyle says, is that the cultural script they’re working from is different from the Silicon Valley one. Disruption is fine — as long as you’re disrupting other firms, not the state.
“There are reasons why in China the disruption idea — move fast, break things — is not as acceptable. Disrupting government policy is a no-no. You’ve seen cases where some of the entrepreneurs have been more outspoken — like Jack Ma, or the head of ByteDance — and have got more than a slap on the wrist for that. That has had a ripple effect on the whole culture, and so people don’t want to go against the system. If anything, they want to show how much they’re working in line with China’s national priorities.”
The circumstances under which today’s dominant Chinese companies, like BYD, Geely and Huawei, were quite unique. They were never assured winners as is often assumed today. On the contrary, they came from the margins of an economy that was far more state-controlled than today.
“In China you have these big state-owned enterprises, and they play a huge role in the economy — they’re the giants in the room. When it comes to the auto industry, there was a very, very strong bias. For a long time, you basically could not start your own private auto company; you needed to go through the state automakers. It was very tightly controlled.
And actually, it was companies outside the system — like Chery and Geely — that broke the rules and were able to sneak past and set up an auto plant. They ended up becoming a new generation, before BYD, but after the old state-owned enterprises of China’s growing auto industry. So you have some players that are more on the outside, and their strategy, I would say, is partly one where they’re trying to creep around in the margins when they’re not immediately brought in.
And actually, Huawei, ironically, was one of those companies. Today, we think of Huawei as being the centre of the storm, deeply aligned with China's national priorities, deeply aligned with Chinese political leaders.”
On why Chinese firms keep building, even when nobody’s making money
A puzzle that keeps showing up in the China discourse: why do Chinese firms keep adding capacity in industries that are already saturated, where margins are paper-thin? Why is this a repeated phenomenon across industries?
The answer, Kyle argues, is as political as it is economic.
“Chinese firms don’t always operate in terms of profit maximisation, at least in the near term, like you would expect a normal firm in a normal market. Sometimes they’re trying to volume-maximise rather than profit-maximise. And some of this is politically oriented — local governments have their own KPIs. Their ability to be promoted, to get better jobs within the party-state hierarchy, is contingent on showing they’re in line with national goals — that they can point to, ‘Oh, we got this new factory in our jurisdiction.’”
On Beijing’s contradictory signals
The tendency of China to build excess capacity often causes extremely bloody price wars, or involution. And the Chinese government has made it a priority to crack down on it.
However, that might also mean that China may have to wean off its proneness to spending more on investment: in factories, infrastructure, and so on. It is sending two messages at once — and the resulting confusion is less a bug and more the texture of the system.
“The central government in China is trying to put its foot on the gas and the brake at the same time. They keep saying, ‘These are priority areas, continue to invest, we want to be the leaders in these areas, local governments should follow suit.’ And at the same time, they keep warning local governments and the companies themselves: ‘Don’t over-invest.’ It’s probably pretty confusing — like, ‘I thought I was doing what you told me to do. But now what I’m doing is exactly the opposite. So what is it that you want?’”
On why Chinese industrial policy looks like foresight (it isn’t)
There's a popular framing of Chinese industrial policy as a kind of multi-decade strategic chess — Xi Jinping playing 5D moves while the West plays checkers. Kyle pushes back on this hard. The success stories don't look like prescient bets when you read them backwards from today. They look like prescient bets because you're reading them backwards from today. When the bets were made, nobody — including in Beijing — knew they would pay off.
“In the cases where the Chinese industrial policy strategy has worked, it’s because they stay consistent. It may take decades to finally get there, but when they do, it can look to the rest of the world like, ‘Oh wow, they were able to predict the future.’ And it’s like, no, no, no — China just kept throwing resources at the issue. The key thing for China’s approach was that they believed this was going to be the future and that they needed this technology even back when the commercial environment was not amenable to it.”
On India’s democratic edge
We ended on India. Kyle is one of the more bullish observers on India's industrial prospects, partly because he sees the same ingredients in India today that China had a generation ago — a large internal market, real scientific and technical depth, an existing industrial base. He also argues that India’s status as a democracy is also to its benefit rather than hindrance.
“The advantage India has, that China did not have, is that India is a democracy. India is viewed as important to the West, important to the US, important to Europe — in a way that India can, and has already started to, take advantage of. You see some of this offshoring from China, the China Plus One strategy. India is one of the major countries taking advantage of this opportunity.”
The full conversation goes much deeper — into the Huawei and BYD origin stories, the debate around China’s low-end manufacturing, why the Chinese EV industry was an energy-security bet long before it became a commercial one, and the difficult question of what Chinese FDI into India would actually look like.
The full conversation is available on YouTube, Spotify and Apple Podcasts. If you prefer reading instead, you can find the full transcript of the podcast below.
Please note: this transcript has been generated using AI, and may contain minor errors or inaccuracies.
Pranav Manie: Kyle, thank you so much for joining us, from a completely separate time zone, entire worlds apart. We at Markets are huge fans of your work — honestly surreal to be speaking to you.
The first question is not necessarily economic or industrial policy related, but it’s a question that I think people keep wondering, and I have kept wondering: in China, entrepreneurs seem to operate in a very different social and political context. All entrepreneurship, to a degree, works in a certain social and political context. What do hero stories of entrepreneurs sound like in China? What is it that exactly gets rewarded in the Chinese system, which we’ll also be delving into?
Kyle Chan: Yeah, that’s a really interesting question. I don’t think there are many of these hero stories where entrepreneurs have gone around the system, and I think that’s a more popular theme in the US, where you have the disruption idea — you know, move fast, break things. There are reasons why in China that is not as acceptable, and we can come back to that in a second.
For Chinese tech entrepreneurs especially, the idea is that if you tackle a really hard problem or are able to scale the business really, really quickly — the more barriers you were able to overcome — and especially this idea of grinding. I guess it’s also big in Silicon Valley, but there’s just a really heavy emphasis on how hard you work, on sheer effort. For better or for worse, it can definitely go way overboard in terms of demanding hours out of your team that are inhuman. But that is a big part of it.
And also — this is maybe true across many different countries — the underdog story. Especially when it comes to the comparison with American competitors, this idea that for a lot of Chinese tech founders, they’re an underdog compared to the Chinese big tech companies like Alibaba or Tencent. But then they’re also underdogs relative to the global big tech, which is largely American big tech.
So those are some of the elements. There are so many interesting cultural quirks, and there are structural reasons too. The idea of disrupting government policy is a no-no. You’ve seen cases where some of the entrepreneurs have been more outspoken — like Jack Ma, or the head of ByteDance — and have got more than a slap on the wrist for that. That has had a ripple effect on the whole culture, and so people don’t want to go against the system. If anything, they want to show how much they’re working in line with China’s national priorities.
Pranav Manie: That’s a great answer. The reason I asked you this question is because I very recently read House of Huawei.
Kyle Chan: Oh yeah, amazing book.
Pranav Manie: I think one of my favourite pieces was by Kevin Xu, where he wrote about Wang Chuanfu — please correct me if it’s wrong. I was very enamoured by the story of Wang Chuanfu and broadly the story of BYD.
Kyle Chan: Yeah, yeah.
Pranav Manie: To what extent are the go-to-market strategies of companies like Huawei or BYD — Huawei has the famous, infamous rather, sales wolf pack, where they supposedly borrowed some playbook out of Mao Zedong to market their technologies — how much of these go-to-market strategies of different Chinese firms, the biggest ones, are driven by individual firm-level decisions versus the broader structural state-driven ecosystem that they operate in?
Kyle Chan: Yeah, I think that’s a really interesting question. I think it depends on where you stand in the system. As you probably know, in China you have these big state-owned enterprises, and they play a huge role in the economy — they’re the giants in the room. When it comes to the auto industry, there was a very, very strong bias. For a long time, you basically could not start your own private auto company; you needed to go through the state automakers. It was very tightly controlled. And actually, it was companies outside the system — like Chery and Geely — that broke the rules and were able to sneak past and set up an auto plant.
They ended up becoming a new generation, before BYD, but after the old state-owned enterprises of China’s growing auto industry. So you have some players that are more on the outside, and their strategy, I would say, is partly one where they’re trying to creep around in the margins when they’re not immediately brought in.
And actually, Huawei, ironically, was one of those companies. Today, we think of Huawei as being the centre of the storm, deeply aligned with China’s national priorities, deeply aligned with Chinese political leaders. There are so many photos of Ren Zhengfei with Chinese political leaders jointly selling Huawei gear abroad. So that’s what we think of today. But early on, Huawei was an outside player trying to get in on the game in China. They tried to pursue this strategy of targeting smaller markets, local governments, maybe knowing that they had an uphill battle. And BYD was kind of similar too, right? They really started with the very, very cheap, almost laughed-at cars when they were starting off.
Globally, it’s interesting that they follow a similar strategy. They’re not going to go straight for the American market for telecom gear or for the automotive market. They know that would be the holy grail in terms of revenue and profitability, but that is a distant dream. Instead, they begin by targeting countries in the Global South, maybe markets that are more similar to China’s — Southeast Asia, Asia more broadly, maybe Latin America, Africa — and then maybe starting to enter the European market, and then maybe the US last.
So you see this happen again and again, where knowing that you can’t jump straight to 100, you see them go around the margins and gradually work their way up. And of course, it doesn’t always work. Sometimes they end up being stuck where they are, and sometimes being stuck is actually not so bad, because the global market is pretty huge. Even if you don’t make it to the US eventually, if you’re able to sell to virtually every other country, that’s not bad either.
Pranav Manie: Makes sense. As Chinese firms globalise, as they look to other markets to sell, does their model — whatever marketing model they followed earlier — translate well, or do they find themselves pivoting really hard to figure out how to sell in a different market?
As a very wild example, it’s going to be an uphill battle for any Chinese EV brand, notwithstanding whatever regulations are there currently — for a Chinese EV brand like BYD or Geely to sell in India immediately. The entire idea of a Chinese good here is under question.
Kyle Chan: Yeah, yeah. So that’s a really important point. One big thing is just how does that market view Chinese goods, and the Made in China brand? It can be a neutral thing for some countries, but for a lot of countries it is a liability — a kind of stigma that Chinese companies have to work against. And it could be on multiple dimensions: it can be on the security front, or it could be on the quality front. Probably for most consumers in the US, in India, there’s a long-standing association with lower-quality, cheap Chinese goods. And then maybe more recently, there’s a greater concern about security issues, and maybe that’s for more high-tech goods.
Overall, that presents a pretty steep initial uphill battle that Chinese companies have to deal with. On top of that, in some cases they circumvent it. MG, the automotive brand, is owned by SAIC, which is a Chinese state automaker — so that’s one way. It looks like a British brand, maybe, to some consumers. But that can be one way around it.
Another factor, even beyond just the China label, is the differences in cultures, markets, customers. In some cases, Chinese companies are able to understand emerging markets better than maybe even some of their American or European competitors, because they know what people really want.
At the same time, when they’re adapting — especially looking beyond the Asian markets — there can be a lot of interesting friction points and learning curves along the way. One example: for the electric vehicle market, within China a lot of people buying EVs are younger first-time car buyers, and they might be used to buying smartphones and consumer electronics, and they expect a degree of software integration and fancy features in their cars. So Chinese EV companies are catering to some of that domestically. But when they go abroad, it might be other variables that are more important — an association with reliability, or safety ratings, or things like that — and they need to cater to those tastes.
In fact, maybe consumers in the US or Europe wouldn’t want so many fancy features. They just want a car that works. So there are all sorts of ways they need to adapt depending on the market, depending on how big the cultural difference is between the Chinese consumer market and wherever they’re heading next.
Pranav Manie: I recently saw an ad for a Xiaomi phone that advertised a 200-megapixel camera. In India, phone camera quality is one of the biggest attractive features that any Indian smartphone user looks at, and that’s partly why brands like OPPO, Vivo, Xiaomi have seen a lot of success.
Kyle Chan: Yeah. Oh, Leica! I think they have a recent phone where the camera has a giant Leica logo on it, because they have the partnership with Leica — which is an iconic brand from my understanding in India, right? There are a lot of camera enthusiasts, people who love photography, and Leica is one of the gold standards for high-quality optics. So yeah, the phone itself is, like, 90% camera and then the rest. It’s like a camera with a bit of smartphone attached to it, versus the other way around.
Pranav Manie: Yeah, we’ve seen quite a bit of that.
So Kyle, I wanted to move from entrepreneurship and product to also talking about — I mean, it’s not right to probably call it an elephant in the room — but understanding Chinese manufacturing.
I think you had an interview with Dr Lu Feng, I believe, where he described the concept of Chinese industrial maximalism. From what I understand, it’s the idea that you should continue to prioritise quote-unquote “low-end manufacturing” — or a lot of the nitty-gritties of manufacturing that are not necessarily high-tech — because you need that industrial base to complement any advances that you make in, say, robotics or other high-tech industries. Dr Feng projected that power as something similar to the dollar’s reserve currency status or Russia’s oil reserves.
Throughout history, manufacturing is something that gets offshored the moment profits decline. How do you think about Dr Feng’s thesis, and is China really trying to keep this industrial base intact as they try to move ahead in the value chain?
Kyle Chan: Yeah, so there’s actually a big debate, an ongoing debate among especially Chinese economists about these issues, and there’s not necessarily a full consensus. There are some people, like Lu Feng, who argue that China should go all in on every industry — essentially, that China should continue on the so-called lower-end or more traditional manufacturing lines while moving into the higher end. And there are others who argue that no, China should start to leave some of those behind, that they are the kinds of jobs that people might not want any more. Wages are rising. They tend to be more pollutive and worse for the environment. So China should follow the path of other countries and leave them behind as China gradually upgrades.
This debate is still unfolding. In practice, we see a mix. In some cases, China is really tightly holding on to some of these older industries. You can see that as in part a resilience strategy — it helps to be the largest steel or aluminium producer in the world at a time when some of these supply chains are in flux, and that can still feed into all of your other downstream industries: automotive, shipbuilding, and everything.
There also is this argument, as you pointed out, that it provides China with a kind of geopolitical leverage. This is something that I think in some ways is a bit newer. So there have been discussions about critical minerals and rare earths, for example, as a special point of leverage that China could use. But I really think a lot of that got stepped up in the rise of geoeconomics more generally. I don’t think they were necessarily intended to be quote-unquote “weaponised”, but now they can form a point of leverage.
And then, especially given the most recent round of trade wars between the US and China, I think China felt very vindicated when President Trump tried to up the ante and really raise tariffs over 100% on Chinese goods. China retaliated as well. But ultimately, the difficulty with trying to raise tariffs so high on China is that Americans need those goods, and they’re very hard to source elsewhere. So even if China hadn’t retaliated, there’s a sense of: was it the US punishing China, or was it the US embargoing itself from goods that it needed?
That’s where the argument is China’s unique position as the provider of so many different goods — consumer goods, pharmaceutical ingredients, inputs for industrial production in the US — that gave China unique leverage. Going forward, there are some, including Lu Feng, who say China should hold on to these industries, and that recent history has proven the value of retaining them.
So we’ll see. At the same time, some of this is actually being moved out of China. Parts of the solar supply chain, or consumer electronics — some of that is being relocated to Vietnam, Thailand and India. So there’s that story happening as well. Maybe it depends on sector by sector, even down to the sub-sector level.
Pranav Manie: We’ll come back to the India side of things towards the end of this conversation. But China very recently just released its latest five-year plan, and where Xi Jinping’s focus seems to be is high-quality development. To me, it seems like it denotes a shift from the old sectors to the new sectors. That’s where I see the debate. How do you see this clash ever being resolved, if it needs to be resolved?
Secondly, how do you see the tech-industrial overlap that you talk about — where you have one industry empower the other, and that industry empowering another, and there are players who operate at the intersection of those industries? In Dr Feng’s idea, I see that paradigm being more reflective.
Kyle Chan: Yeah, definitely. So right now, China’s at this inflection point in its growth strategy where the old engines of growth are running out. The real estate boom is over. The infrastructure boom — well, we’ll see. People keep calling it as reaching the peak, and maybe they still keep going. And then the older, lower-value manufacturing is no longer a source of growth, if China can even hold onto that.
So the idea, especially with the latest five-year plan, is to look to the engines of future industries — industries that will become the kinds of pillars for economic growth that will create not just jobs, but high-paying jobs. Jobs for college graduates, skilled workers, that kind of idea.
It’s interesting because they target a range of different technologies and sectors that, in and of themselves, are each fairly multipurpose or even general-purpose technologies. Things like semiconductors, or energy — especially clean energy — or even the broader automotive supply chain and transportation. You can argue that these industries are important in and of themselves, but then they have huge spillover effects onto the rest of the economy, onto other sectors as well.
Overall, we see this picture where China’s trying to leverage multiple strengths and to make this interlocking, mutually beneficial ecosystem of different industries that compound on each other. We already know that China is very strong on smartphones, consumer electronics, LCD screens, some of the chips that go into them — and they can leverage some of these capabilities to feed into their EV industry. Electric vehicles borrow from some of those components, or at least some of those industrial capabilities, and that can overlap with other things like drones, or robotics. And of course, AI is the layer on top of all of this.
When you put that all together, the idea is that China’s not just trying to become a really strong player in one of these sectors, but pushing for it across all these sectors at once, creating this mutually reinforcing effect. So you have these companies that sit, as you mentioned, right at the intersection of a whole bunch of these. Huawei is probably the most prominent example, but then you have other, more recent upstarts like XPeng, that are making EVs and AI foundation models and autonomous vehicles and robotics, all at once. BYD make their own chips. They’re also doing a lot on the autonomous vehicle front.
So you can pick these different Chinese companies. They’re branching out at the same time that the Chinese government is trying to do this multi-pronged bet on industries of the future.
Pranav Manie: One of the things that the five-year plan obviously talks about in quite some detail, and that people have been debating about for a long time, is the idea of involution — where everyone’s involved in a price war to the death, so to speak.
But at the same time, I’d seen a tweet very recently that said when profit margins shrink, European car firms might cut costs or investments, while Chinese firms end up spending even more — expanding capacity, expanding R&D. Yet one might also say that that same increase in investment is what causes an excess capacity problem, which creates an excess supply problem, and therefore deflates all prices.
What is the dynamic between involution and technological innovation in China? Because I personally don’t think it’s very clear-cut. I know people say that one happens at the expense of the other, but I’m not so sure, having read whatever I have.
Kyle Chan: Yeah. So the involution question is really huge right now in China. They used to use the term overcapacity more directly, and I think it became politicised when the EU and the US started to use that term, because they were upset about getting flooded with Chinese exports. So China has pivoted, but the concept is basically the same: Chinese firms don’t always operate in terms of profit maximisation, at least in the near term, like you would expect a normal firm in a normal market. Instead, sometimes they’re trying to volume-maximise rather than profit-maximise.
That is, they’re trying to step up production capacity and make greater and greater investments. Sometimes there is a temporal logic to this — that even though today, in the early stages of an industry like the electric vehicle industry, it might be harder to be profitable, in the long term you want to have that capacity to ramp up. So it’s a bet on the future. That’s some of the justification.
Some of the other justification is that some of this is politically oriented, where local governments themselves have their own KPIs, their own key performance indicators. Their ability to be promoted, to get better jobs within the party-state hierarchy, is contingent on their ability to show that not only do they post higher GDP growth, but that they are in line with national goals — that they’re boosting production, and they can point to concrete cases of, “Oh, you know, we got this new factory in our jurisdiction,” or, “We got these new factory jobs.”
So there is a rationing effect where different local governments are trying to boost their production. They’re trying to bring in more EV factories or battery plants or solar plants, and that looks good at the individual local government level. The officials themselves might feel like they’re doing what they’re supposed to be doing, what they’ve been incentivised to do. But in aggregate, you do get this effect where everyone’s piling in, and there’s not a sense that the aggregate capacity will match the current market demand. So there’s that mismatch.
Right now, Chinese firms are responding in a number of ways. One is that it does hurt margins a lot. It makes it very hard to have those profits that you can drive back into R&D and improve on features and other higher-quality aspects. Another thing they’re trying to do is look to overseas markets — for areas where they can find that margin.
BYD, I think, is actually an interesting example. They’ve been taking a hit domestically within China, but they’re really focused on not just selling overseas, but building plants overseas. I don’t know how they feel about the long-term prospects within China, but they feel like the future of their business depends on winning the global market for automotive. So that’s an example of some of the responses.
But the central government in China overall is trying to put its foot on the gas and the brake at the same time, where they keep saying, “These are priority areas. Continue to invest. We want to be the leaders in these areas, and local governments should follow suit.” And at the same time, they keep trying to warn local governments and the companies themselves: “Don’t over-invest.” So it’s a mixed message, and I think it’s probably pretty confusing — like, “I thought I was doing what you told me to do. But now what I’m doing is exactly the opposite. So what is it that you want?”
I think right now, overall, the bias is still in favour of trying to boost up capacity. Although that could be changing — it depends on how strong the different signals are.
Pranav Manie: Got it. Just as a side question, because you mentioned BYD now moving to overseas markets to expand their profit margins — is it fair to expect them to double down in the wake of what’s happening in the Strait of Hormuz? Because I think it was Financial Times that reported that a lot of people are now buying EVs in Europe because, obviously, petrol and diesel are quite short. Do you think that’s an important inflection point for a firm like BYD?
Kyle Chan: Oh yeah. Definitely. I’d tweeted this earlier — every day that the Strait of Hormuz is closed, and every day that the Iran war continues, is, like, a month’s worth of free marketing for Chinese EVs and batteries and solar and clean tech.
It’s really interesting because maybe one day, hopefully soon, this disruption will be cleared up. We’ll be dealing with the cleanup of everything that happened. But the psychological effect, I think, will continue to reverberate. I think back to — I mean, I wasn’t alive then — but the oil shocks of the 1970s, and how even when oil prices came back down, they actually left a structural effect on the entire global economy.
You think about how much countries stepped up their investment in alternative energy, as it was called back then, and how much they really emphasised — how much consumers really emphasised — energy efficiency. And you have the rise of Japanese automakers, where they were doing well because they were priced pretty competitively, maybe like the Chinese EVs of today. But then with the oil shock of the ‘70s, you got these Japanese highly fuel-efficient vehicles that seemed suddenly really, really attractive. Not only were they cheap to buy, but they were cheap to own. That caused a huge boom for Japan’s automotive industry, which I think might be happening to a certain extent also with China’s EV industry and broader clean-tech industry.
So that’s what I’ll be curious about. People were worried about this for a long time. We’ve had so many different supply chain disruptions, COVID and everything. I think this one really will add fuel to the fire in terms of people’s efforts around the world to try to reduce dependence on oil and gas and shift to renewable energy.
Pranav Manie: There’s a piece, I think, on your newsletter where you said that Chinese EVs are going to be strong, but they won’t dominate. Has that thesis changed since this crisis erupted?
Kyle Chan: Yeah, that’s a good question. So that piece was meant to be kind of provocative. I wanted to counter this narrative that goes kind of extreme in one direction — like, well, Chinese EVs are just going to completely swamp every single market. I found that very unsatisfying, so I wanted to lay out why I didn’t think that would necessarily happen.
The auto industry in particular is really, really interesting because it is not a commodity market by any means. Brands matter tremendously. People have incredible brand loyalty, and they also have country loyalty in terms of their producers. Actually, the Japanese story is useful here. You see that it’s not always the case that the cheapest or the best-value vehicle wins out in the market — whatever that means — because consumers have different tastes, they have different preferences, and they have ideas and even dreams associated with certain car brands.
Why, for example, in the United States is the most popular vehicle... actually, I think the three most popular vehicles are all pickup trucks. How many Americans actually need a pickup truck on a daily basis? I think the Ford F-150 is still the number-one selling vehicle in the US. In theory, you might be able to get by with either a four-door sedan or maybe an SUV, for most people. But the pickup truck — it has that association, especially the American pickup truck, of being rugged and independent, and those things matter tremendously.
I can tell you in Europe too, right? It’s not that Germans suddenly just abandoned German cars and switched to Japanese cars. They love their own Volkswagens, and there’s a loyalty there as well.
Another big factor is that it doesn’t have to be so neatly divided into the Chinese automakers versus the non-Chinese ones. The supply chains can be mixed and matched, and you can have these kinds of partnerships. Again, the Japanese experience is useful, because Japanese automakers invested abroad. They even formed joint ventures with other companies — like GM and Toyota in the US. Right now we’re seeing that happening with the Chinese auto supply chain, where battery makers like CATL are working with German automakers, or Stellantis has this partnership with Leapmotor, which is a Chinese EV company.
There’s a lot more messiness and grey area. I would expect companies like BYD to do very, very well, but I wouldn’t predict that they would take up 90% of the global auto industry any time in our lifetimes, perhaps.
Pranav Manie: I’ve been meaning to also ask you about Chinese FDI, because that’s something you’ve written about extensively. Since we’re now talking about the auto sector, it just felt like a good time to ask.
I think it was in one of your testimonies with the US-China Security Commission where you’d said that China’s auto sector for a while was not considered a full-blown success, because they could never build a domestic brand and couldn’t build deep linkages with domestic suppliers. What changed when that was deemed, “Oh, this didn’t work out”? And what changed with EVs, where China was able to incentivise those linkages to be formed? How did China adapt in that situation?
Kyle Chan: Yeah. So the broader story of industrial policy in China for the auto industry is a really interesting one, and it’s a very messy story. Right now we see the success of the Chinese EV industry. But for a long time, for traditional internal combustion engine cars, they had this joint-venture approach. It helped in some areas — it did help to build out some of the supply chain domestically within China, and it ended up turning China into the world’s largest actual producer of cars.
But almost all of that was for the Chinese domestic market. So you don’t have these truly globally competitive homegrown players. You had large volumes of — back then, the reputation was very, very middling-quality cars, just for Chinese consumers. A key barrier there was the engine technology itself.
So what changed was the shift to battery electric vehicles, hybrids, and even an investment in hydrogen fuel cells. If Chinese automakers can’t catch up to their global competitors on the actual combustion engine technology, there are other ways Chinese companies could overtake on the curve. This is a very common business term in China — if you can’t beat them on the straightaway. Imagine you’re on a racecar track: if there’s a pivot, a paradigm shift in the technology, maybe you can overtake at that moment.
Way before EVs seemed like a viable global commercial market, China was already trying to create an EV industry. They were investing in battery technology and R&D. They were investing — especially at the local government level — in getting their public bus systems electrified. They were investing in building out charging infrastructure. It’s interesting, because when you go back to that time, there was a debate in China about whether this was really going to pan out. It was a bet on the future. It was a bet that these technologies would eventually scale, that prices would come down — especially for batteries — and that they would be a real viable competitor to traditional combustion-engine cars. At the time it was seen as, “Well, we’re not sure if this will really work out, but we’re going to just go for it.”
And actually, part of it is energy security. A big part of why China kept going with the EV story is energy security. So it’s interesting today, the situation with the Middle East — that is the kind of situation that China is always worried about. The Strait of Malacca, oil supplies going through, feeding into China’s auto sector and industries. So the EV story was not just a bet on technology for the future, but also a bet on trying to build resilience to what is still actually a major liability for China, which is dependence on oil and gas.
When you go up to the present and you see the effects of all this, it can look like a far-sighted, genius-level master plan to become globally dominant. But in reality, it was a bet. The key thing for China’s approach was that they kept going at it — they believed that this was going to be the future, and that they needed this technology even back when the commercial environment was not amenable to it. So that long-term bet ended up paying off.
In the cases where the Chinese industrial policy strategy has worked, it’s because they stay consistent. It may take decades to finally get there, but when they do, it can look to the rest of the world like, “Oh wow, they were able to predict the future.” And it’s like, no, no, no — we all kind of had been talking about this for a long time, but China kept throwing resources at the issue.
Pranav Manie: Makes sense. One reason I asked the question around FDI is because a lot of countries have had very mixed experiences with it. I think now people know that FDI is not the catch-all, be-all solution to economic development. But China is one country, and to a degree so have Taiwan, so has Japan — these are all countries that used FDI and got as much know-how as they could from foreign firms.
Now that we’re in the situation where foreign firms have understood how China was able to extract a lot of this know-how very successfully — do you think FDI-led economic development is in the future? Will firms now become even more protective about the secrets that they hold, the knowledge that they keep? It’s not even about capital — it’s purely about the managerial, the technical know-how, which I think anyone would argue is just as important.
Kyle Chan: Yeah. So I think there’s still a future for that strategy, for the FDI and technology transfer story, and I think it depends on two things. One is: can you generate leverage in negotiating with these foreign firms? And two: do you have adequate investment in your own scientific and technical foundations?
In China’s case, where that strategy worked was where, frankly, the Chinese government was pretty aggressive in demanding that foreign companies that want to sell to Chinese consumers, that want to access the growing Chinese market, had to localise production, work with Chinese partners, and localise — in particular — their supply chains, to help upgrade Chinese suppliers.
We saw this with Tesla, we saw this with a whole bunch of high-speed rail companies. That was part of this implicit deal, or sometimes very explicit deal, between China and these foreign companies. The foreign companies, for their own sake, made a ton of money in many of these cases. So it was worth it, and they were also going into this with eyes wide open. There were long-standing concerns about IP issues, about sharing core technology, and so even back then, they were never going to be giving away the crown jewels. You saw that, for example, with the combustion-engine technology, or with some of the software for signalling control systems for trains.
But at the same time, China also invested very heavily in the scientific foundations that allowed for that absorption of knowledge, of know-how. I think that was really crucial.
The irony is, when I look at other countries in the world, I think of India first and foremost as the country that can do this. Because you have an enormous market, you have the scientific and technical talent there, and you have an existing large and diversified industrial base to build off of. It’s not like you’re trying to bring in car factories when you’ve never produced a car before. India is one of the largest auto producers in the world.
But the final variable is the most critical one: can government policy provide that kind of leverage? Can it harness these advantages that India has in order to get the best deal from the foreign firms? That’s one thing where the foreign companies will push back as hard as they can, and sometimes they’ll even bring in their own foreign governments to give them some backing. So there’s always going to be that push and pull.
But the other advantage that India has, that China did not have, is that India is a democracy. India is viewed as important to the West, important to the US, important to Europe, in a way that India can — and has already started to — take advantage of. You see some of this offshoring from China, or China Plus One strategy. India is one of the major countries taking advantage of this opportunity.
So yeah, I do think the potential is there, and I think you do see it happening in some spaces. We can get into, for India, some interesting cases of FDI working. But that process really boils down to: can you generate that kind of leverage? Because at the end of the day, when you have all these advantages, how much do you want to give away for free — of course consumers benefit — versus how much do you want to leverage that to upgrade your own industries.
Pranav Manie: Great. Which also quite aptly leads me to my last couple of questions. Because you mentioned India — and at this point, I think it’s not in debate that for a lot of these new-age industries, India will need Chinese know-how, will need Chinese expertise. Which makes it very tricky from a geopolitical standpoint, even if there is a very obvious economic win-win in many of these situations. India has a huge market that Chinese firms facing declining profits can take advantage of, and obviously India can learn a lot of new things.
How do you see a world where Chinese FDI into India increases, benefits both sides, without having the geopolitical implications?
Kyle Chan: Yeah, that’s a tricky question, because as you point out, just on the sheer economics and technology and market fit, it would seem natural that there would be a lot of cross-border investment flows, a lot of commercial partnerships. I still remember when — I believe it was Alibaba — was the largest shareholder in Paytm. This was way back in the day, before Doklam and before Galwan.
But on the other side of the ledger is the geopolitics, and the security risks, and the conflicts. The India-China case in particular is kind of unique to me as well, because these are two countries that have not had many deadly military clashes with other countries. So the fact that they’ve had it with themselves, not so long ago, just makes this whole relationship much more complicated. Even where the US is very wary of China, there’s not that kind of history.
Overall, I think there could be a path for creating those kinds of avenues for partnership, but it would have to be tightly constrained by these security risks, these economic security risks. Maybe, from the India standpoint, if you can identify certain key industries where the risk-reward trade-off is that you would want to bring in some Chinese technical know-how, and maybe deal with some of the security issues — like data sharing — or, you know, keep Chinese firms out of critical infrastructure, that would make sense. You kind of create — I don’t know how to call it — basically a more nuanced framework for dealing with China.
Pranav Manie: That was our conversation with Kyle Chan. We hope you enjoyed it. I certainly did. Until next time!