Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Dan Wang
[00:00:00] S0: Can you teach us the origins of that aspect of their society? [00:00:00] S1: So China's a country I call the engineering state, because they want to engineer the physical environment, the economy, the people as well. And I want to be just pretty playful with this framework that they're a country of engineers. In part, the roots are from the fact that in recent years, if you take a look at the most senior leadership, the entirety of the Standing Committee of the Politburo had degrees in engineering. And I also draw this back to slightly older roots. If we take a look at the Chinese emperors way back in the past, let's say 1,500 years, two of China's biggest projects include the Great Wall as well as the Grand Canal—so a fortification system in the first case and then a big water management system in the second case. That is a country that has built a lot of big projects in the past. A lot of the emperors barely hesitated to completely reorder a peasant's relationship to the land. And throughout Chinese history, they've really moved a lot of people around to settle the frontiers here or defeat the nomadic tribes over there. And so that's kind of my playful framework for saying that China is really ruled by this engineering mindset that really wants to build. They're often very illiberal-minded about governing society, as if people were just a series of chess pieces to be moved around. And that extends from the imperial times all the way to the modern day.
· Dan Wang, Patrick O'Shaughnessy
[00:00:00] S1: So China's a country I call the engineering state, because they want to engineer the physical environment, the economy, the people as well. And I want to be just pretty playful with this framework that they're a country of engineers. In part, the roots are from the fact that in recent years, if you take a look at the most senior leadership, the entirety of the Standing Committee of the Politburo had degrees in engineering. And I also draw this back to slightly older roots. If we take a look at the Chinese emperors way back in the past, let's say 1,500 years, two of China's biggest projects include the Great Wall as well as the Grand Canal—so a fortification system in the first case and then a big water management system in the second case. That is a country that has built a lot of big projects in the past. A lot of the emperors barely hesitated to completely reorder a peasant's relationship to the land. And throughout Chinese history, they've really moved a lot of people around to settle the frontiers here or defeat the nomadic tribes over there. And so that's kind of my playful framework for saying that China is really ruled by this engineering mindset that really wants to build. They're often very illiberal-minded about governing society, as if people were just a series of chess pieces to be moved around. And that extends from the imperial times all the way to the modern day. [00:00:00] S0: What do you think the greatest aspect of the US system is that you have the hardest time imagining getting truly adopted in China?
· Dan Wang
[00:00:00] S1: Pluralism. I spent six years living in China. I moved to China at the start of 2017 to be a technology analyst at an economic investment research firm called Gavekal Dragonomics. At the time that I moved there at the start of 2017, Trump had just taken office. I remember watching these strange confirmation hearings for his cabinet officials right when I left. And I lived through this period when Trump launched a trade war that quickly morphed into a tech war. I wrote a lot of research notes about what exactly was happening to companies like Huawei and other sanctioned entities. And throughout this time, I was open to the idea—I didn't necessarily believe it, but I was open to the idea—that we're at the start of something like an Asian century in which China and India were going to become much bigger powers. By the time that I'd left in 2023, when I returned to the US to be a fellow not too far away from here at the Yale Law School's Paul Tsai China Center in Connecticut, I thought that the experiences that I lived through—some incredible technological successes, along with worsening repression, along with a worsening geopolitical environment for China, along with the centerpiece of Zero-COVID, all three years of which I was there—I started being skeptical that China could tolerate debate, could really encourage some measure of useful dissent inside the official system. That they were going to be able to figure out these persistent problems with autocratic systems in terms of figuring out succession planning, for example. That they were capable of a great number of successes, but because there is this official voice that is meant to speak over everyone else, because that official voice is a little bit idiosyncratic in terms of all of the values that it really cares about—some degree of national power, some degree of sovereignty, some thin skin about anything that could be critical of the regime—I don't feel like the Communist Party has mastered some autocratic formula in order to really build the future because they cannot have anything like debate, discussion, and long-term stable society.
· Patrick O'Shaughnessy
[00:00:00] S0: You have this great Andy Grove quote in the book about the difference between the mythical, magical moment of creation and innovation that the US has so dominated, and this ability to innovate on the factory floor, the scaling up that China has done so well. Based on everything you just said, how do you relate to their ability to do more innovation in the future? There's that famous stat of only one Nobel laureate has ever been from China or something—I think it's that low. Say a little bit about your conclusions around their current ability to innovate and how that might change in the future.
· Dan Wang
[00:00:00] S1: One of the things I want to try to do in this book is to try to tackle this idea of what is innovation. I think we here in the US, and I as someone who spends a lot of time in Silicon Valley as a research fellow at the Hoover Institution, I think there is this mythical moment of invention in which you have an amazing genius like Steve Jobs hang out in a garage, or many other geniuses hang out in garages, and some incredible product pops out of the garage and world-leading product takes shape. And that is certainly an American strength. I think what the Chinese have been able to do was to become a technological superpower without taking this Silicon Valley view of we need to just be in nature, take a lot of LSD, go into our garages and an Apple computer comes out. That's not the way that they tend to do things. The way they tend to do things is to import a lot of managerial expertise, including from Apple computers, work with Apple standards, to put together and assemble a lot of other components from the US, Japan, Germany, whatever else, and then slowly iterate and learn a million and one things on the shop floor and then build a highly sophisticated product that America is no longer really able to build. Still, most iPhones are being built in China, increasing share in India and Vietnam, but still most iPhones in the world are being built in China. I think the Chinese method for becoming a technological superpower is to take this vast manufacturing workforce. There's about 70 million manufacturing workers in China versus about 12 million in the U.S. The 70 million manufacturing workers in China are working with some of these high-end products that cannot be built here in the US. They're learning to solve three new problems a day before breakfast, and they are really at the cutting edge of figuring out how to do new things, do it better, build up ecosystems of suppliers, build up new ecosystems of labor, and just generate all of this process knowledge which can't easily be written down, which can't easily be encoded in tools and equipment, and just use that to catapult into new forms of products.
· Dan Wang
So if you are an iPhone manufacturing worker who was there at the original assembly lines in Shenzhen in 2008, it's no accident that Shenzhen is now the capital of the hardware industry of the world, because that worker might be able to start building a Huawei phone in the next year, and a few years after that maybe start a drone company. Shenzhen is also the center of the drone business in the world. And then maybe a few years after that start an electric vehicle battery business, which is also highly complex and something that the US isn't building very much of today. So I want to try to dissolve this idea that innovation is something that is holding back China too substantially. I think the statistic about Nobel Prize winners, only a handful of Nobel Prize winners in the sciences have emerged from China, I think that is a true statistic, but a lot of these Nobel prizes are backwards-looking by decades. We're still giving out prizes for work in Japan or the US in the 70s. It is pretty arbitrary. It's very rate-limited. And what I want to propose is that China's other major advantage in being a technological superpower is that it can just wait for the Americans to invent a lot, be the spark, and then they set the fire. So they're the prairie fire that uses the American spark. So I think about something like solar photovoltaics, which was invented in New Jersey by Bell Labs in 1954. The US mostly treated it as a scientific project and not a giant manufacturing industry, and now about 90% of the solar industry is in China, everything from the polysilicon processing down to the final module assembly. So China can just wait for a lot of these labs in the US and Germany, Japan to figure out these new sparks and then they set off the prairie fire. And this is also one of these crucial points in the classic Andy Grove essay published in Bloomberg Businessweek in, I believe, 2010, that the US, in my words, is really great at setting a lot of ladders in place, but its firms are no longer really great at climbing these ladders. It is really the Chinese firms that are able to climb all of these big technological ladders.