Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy
[00:00:00] S0: If I oversimplify this to the US is the leader in 0 to 1 and China's leader in 1 to n scale-up in manufacturing, which would be harder for the other to get? Would it be harder for the U.S. to get really good at the scale-up in manufacturing or harder for China to get good at the 0 to 1? Based on everything you know about both, what's more likely?
· Dan Wang
[00:00:00] S1: I think that it is harder for the U.S. The task is comparatively simpler for China, and China has already gotten significantly better at a lot of these scientific projects that used to be only the preserve of American universities and a few other places. By most metrics that we can identify, Chinese scientists are producing better qualities of work, not just quantity. If we take a look at the top 1% cited scientific papers, Chinese researchers are producing an increasing share of many of these top papers. We can see that China has produced a lot of really good scientific projects, to say nothing of the moon missions. I think there's a pretty strong sense now that China will get to the moon by the end of the 2020s and America might not be able to get back to the moon, that it has forgotten a lot of these skills, that China has invested a huge amount in trying to improve its universities. We can see that a lot of American researchers, often American researchers of Chinese descent, have decided to move to China because there's better funding, there's more grad students they can work with, there's a more stable environment for them to do their science. And conversely, I think we have not seen that the US is really learning the hard parts of manufacturing really well. I think there are some successes. We can see that the TSMC FAB in Arizona is actually doing fairly well now, according to the latest reporting. But if we take a look at many of America's apex manufacturers, companies like Boeing making aviation, Intel making chips, Detroit and Tesla making vehicles mostly, that's been going downhill. The US isn't making a huge number of iPhones, it's barely making a huge number of Apple's desktop computer. And so I feel the Chinese are learning at a much faster rate to patch up their deficiencies than the Americans have.
· Patrick O'Shaughnessy
[00:00:00] S0: What should the US do that it's not doing? If you were the dictator of the US economy and your goal was to make it catch up in this regard as much as possible, because it seems like the consensus is, wouldn't it be great? And there's some people that are trying to do this in small ways so far. If we had manufacturing excellence back here again and controlled vertically our whole destiny, we have the spark covered. What would you do if you were fully in control?
· Dan Wang
[00:00:00] S1: I am against fully in control. I want no dictator in China, and so therefore I renounce being dictator of the US. I think what I am really thinking about for this particular book project, as well as my broader writing over the past 10 years on China, is to be less focused on policy prescriptions, fixing statutes, fixing regulations. What I really want to do is to inspire Americans to treat technology as a political project as well as an aesthetic project. I think this is one of the things that China really does well is that it takes manufacturing super seriously, and the US has not taken it super seriously since various points in the 1980s. I'm fond of quoting a former chairman of the economic advisors who said in the 1990s in this glib quip, which is quite funny, but computer chips, potato chips, what's the difference? As if these things could all be fungibly measured in quantities of dollars. And I think there is something qualitatively different between high-end semiconductors as well as a spud. So I think that various parts of the American elite have decided that manufacturing is not so important. We don't need to manufacture socks and T-shirts, fine. We don't need to manufacture televisions. And here’s where I start getting a little bit nervous. We don’t need to start manufacturing iPhones or munitions or all sorts of other goods, and that is where I get really nervous. What I really want is for Americans to feel the importance of having a robust manufacturing base—to feel the need to try to recover some of that and err more on the side of doing more manufacturing rather than less. And so again, I have those great policy prescriptions. I am critical of some of the policies of the present administration. But I think that if we are all much more committed to just building out and recognizing some of these problems that we have, and recognizing China’s trends, then I think the conversation flows much more naturally about what we need to do and which statutes and regulations we need to fix.