Deep Dive: How China Built Its Industrial Power
How did a country once known for cheap toys leapfrog into EVs, solar, and AI? How far will China’s newfound assets allow it to scale before its debt and demographics start to weigh it down? Read on.
About 6 months ago, I had an eye-opening dinner with two CEOs building an American supply chain for EV battery materials and rare earths.
Back then, I tweeted:
“...the difficulty in beating China won’t come down to tariffs but mercantilism.
The Chinese have 1-2 ‘National Champions’ for critical parts of the global economy. They then subsidize these NCs as necessary, dump product to impact spot price markets and shape profitability with loans and grants that, collectively, make these National Champions impossible to beat…”
With further research, I want to expand on what China’s playbook has been.
Beijing doesn’t simply pick “National Champions” and back them with unlimited capital. That would be highly inefficient.
Rather than selecting a winner, Beijing designates an industry a “national priority”. It then instructs its 31 provincial governments to nurture that industry. Those 31 provincial governments in turn back over 300 prefecture-level governments (think of one prefecture as a medium-sized city plus its surroundings). Then, the 300+ prefectural governments compete against each other in what you could think of as a national tournament.
China’s process for fostering “National Champions” is both top-down and bottom-up. It’s top-down in the way that Beijing designates priority industries. And it’s bottom-up in the way that 300+ local governments compete to back their own firms with subsidies and cheap credit, hoping some become national champions.
This tournament-style competition creates some national champions (like BYD), but it also generates problematic overcapacity (we’ll go over in more details inside the Deep Dive).
China has many considerable assets:
For one, take infrastructure.
After the 2008 Great Financial Crisis, China invested hundreds of billions of dollars into infrastructure
The country now has one of the world’s best transportation networks, high voltage transmission lines, and digital infrastructure
It built more solar energy capacity in 2024 than the U.S. has in total
Second, look at technology and innovation.
China added more robots per capita than any other country from 2018 to 2023
Its R&D spending is close to rivaling the U.S.
It produced a bigger share of the 100 most well-cited research papers than any other country in 2023
Lastly, look at sheer industrial capacity.
China adds more manufacturing value than the U.S. and EU combined
Its workforce has deep process knowledge from assembling goods for international firms
The country has 7 out of 10 of the world’s busiest ports
This is what China has going for it.
However, there are several massive forces pulling it down (demographics & fleeing capital to name a few).
So how did a country once known for cheap toys and textiles leapfrog into EVs, solar, and AI?
How far will China’s newfound assets allow it to scale before its debt and demographics start to weigh it down?
How does China’s coordinated approach to tech development compare to the West’s market-driven competition?
That’s part of the macro question I wanted to discuss in this next deep dive of Learn With Me.
This deep dive showed me which parts of China’s economic strategy we should learn from - and which parts should serve as a cautionary note.
I hope you enjoy reading and learning about China with me. Let me know what you think in the group chat and comment section.
Chamath
Deep Dive PDF below ↓