Is China defeating Tesla? - Noah Smith is clueless about China (Part 3)

This week, Noah Smith set his ever-sharp eyes on China’s industrial policy and explained to us how it is “defeating” Western companies such as Tesla.

If he stops writing uninformed pieces about China, this series of mine on his China cluelessness will lose steam. But since he keeps at it, my critique is kept alive.

Why am I doing this? Because Noah represents a perfectly worded body of thoughts that mainstream Western elites have managed to attain about China. Some of those thoughts are valid, but most of them are simply based on cultural hubris and an uninformed understanding of a country they barely understand. So by critiquing Noah Smith, I essentially see him as the whipping boy for this whole group of people.

Now buckle up and let’s explore.

In Noah's latest piece Why China is defeating Tesla, he analyzes Tesla's market struggles, attributing them to fierce competition from Chinese EV manufacturers like BYD and Xiaomi. He describes a "China Cycle" where Chinese firms appropriate foreign technologies to outcompete both locally and internationally, and he advocates for Western companies and governments to adopt more robust industrial policies and international cooperation to protect technological sovereignty and prevent economic “shortsightedness”, highlighting the geopolitical risks of allowing Chinese firms to dominate global markets through foreign technology appropriation.

My critique will come in two directions. First, I will discuss specifically the case of Tesla, which is a really interesting case of the relationship between China and foreign enterprises. Second, I will touch on a core issue that almost all Western commentators always fail to see when discussing China’s industrial development.

Li Qiang, who was party secretary of Shanghai at the time, met Elon Musk at the Shanghai Gigafactory, a star project made possible by Li.

Tesla and China

Let me start with something very personal. I am a Tesla owner, and I am a huge fan of Tesla. In fact, the first and only car I have ever owned is a Tesla Model 3, and I have been happily driving it around for more than 5 years. That makes me one of the few Chinese customers of Tesla who bought an imported, made-in-Fremont Model 3, just before Tesla’s Shanghai factory started production.

I absolutely love my Tesla. It’s perfect for me. Back in 2018 when I just bought it, there were very few Model 3s on the road. So I got tons of pedestrian glances back at my handsome vehicle, the kind of vain thrill I thought I could only get if I paid 10 times more for a Ferrari or something. (Been here, done that, so I lost any interest in buying fancy vanity cars afterward, which could be a huge money-saver for me.)

Immediately after I bought my car, Tesla announced a deal with Shanghai to build that historic factory in Lingang. When construction started in 2019, my company, BigOne Lab also set up to track factory construction activities using various alternative data technologies. However, at the time, you couldn’t really find their location on map apps, but we needed to find the exact location in order to do accurate “geofencing”. So I drove my Tesla for an hour to reach the farmland that was today’s Tesla Shanghai Gigafactory and spent the whole afternoon scoping its future perimeters. Yes, you hear me correctly: my Tesla Model 3 might be one of the only Teslas that have “seen” its Tesla’s Shanghai factory when workers were just digging out dirt for its foundation.

Driving my Model 3 in 2019 around where the future Tesla Shanghai factory would be located

So, although the fresh new China-made Model 3 may cost as little as 60% of my original purchase price right now, I never regretted my choice. Good memories can’t be replaced.

All of these personal anecdotes serve to prove one thing: I am not some nationalist chanting “Buy BYD!” or “Huawei No.1”. My bias, if there is one, is tilted toward Tesla, a revolutionary brand that could be forever etched in the history of mankind.

I do have a big regret though: With my first-hand experience of its amazing product before most other people, I, of all people, should have foreseen its epic stock market run. Instead, I sold my Tesla stocks too early in 2019 and totally missed the chance for a 20-bagger return later (cry, cry).

But honestly, it was not easy to hold on to Tesla stocks back in 2019. At the time, Tesla was in the middle of the production hell and they were quickly running out of cash. To make matters worse, the whole “taking Tesla private” mess made me seriously question the emotional well-being of Elon Musk.

But Tesla survived.

What saved it? If a historian is to write about this episode in the future, I am sure it will be quite easy to pinpoint the biggest reason for it. It was the Shanghai factory. It was the generous subsidies, zero taxes, free land, revolutionarily favorable terms (previously China only allowed foreign automakers to set up joint ventures with domestic ones, but Tesla China was the first to be 100% foreign-owned), and, very, very importantly, the hard work, punctuality and blitzkrieg efficiency of the Chinese workers that allowed Tesla to spend a mere 10 months between ground-breaking and rolling-out of the first car, and saving itself from certain doom.

Yes, China saved Tesla. But people like Noah dare to claim that China is killing Tesla. (This is what “historical nihilism”, a term China loves to use, means in real action.)

Noah loves to say it’s the “corporate short-sightedness” that made American companies agree to work with China. Noah, please get out of your theoretical armchair, travel back in your time machine to go back to 2018, and elaborate for Musk about your “far-sighted” strategy to make Tesla survive when its life was hanging on a thin thread.

After Shanghai, what happened?

To be honest, what China did to Tesla was no charity. There was a clear, well-documented self-interest involved, something the Chinese would call a “non-secret conspiracy阳谋”: Tesla has always been seen as this “catfish” that could stir up the competitiveness of China’s domestic EV industry.

It worked in two ways.

First, just like what Apple did to China’s supply chains, Tesla became the heart of a new supply chain system, helping various suppliers attain the highest standards. There was no need for “forced technology transfer”, all it took was for Mr. Musk and his team to set some target specifications, and all the best suppliers in China would scramble to meet those requirements, upgrade their technology, and gain technical know-how in the process. Later on, Tesla’s China competitors can tap into this same supply chain ecosystem.

Noah Smith said that China dominated the supply chains through “subsidies and environmental degradation”, but never mentioned this core role companies like Tesla and Apple willingly and voluntarily played. Unless you source all parts from foreign markets, you will help build a supply chain locally in one way or another. If I were an American, I would not criticize American businesses for this. There is nothing complicated or wrong about this, nothing “short-sighted” about it, just pure business logic. Otherwise, why do you build a factory in China in the first place? And the part about “environmental degradation” is a joke. I said before, through the story of a friend, that environmental protection may be the biggest achievement of the Xi government, at a heavy cost shouldered by small- and medium-sized enterprises.

There is a second component of this “catfish effect”, which is even more crucial: When Tesla first entered China, it built the best electric vehicle in the whole world at a very affordable price. I remember vividly that at the time there was a huge debate in China about whether the onslaught of cheap and good Tesla cars would kill the young EV industry in China.

I’d say, killing at least part of our own industry was at least part of the plan. It’s only by culling the weak, that the others would be jolted into action to become stronger. Survival of the fittest. So, the really important lesson that everyone should pay attention to, was not that China supported the EV industry through subsidies, but that it was actually a complex, masterfully executed total policy package that also contained a cruel, man-made “hunger game”.

All those Chinese EV names you have heard of, be it BYD, Nio, or Xpeng, survived that great game. Around the podium where those winners stood, you would find the dead corpses of Byton, WM Motor, HiPhi, Singulator, Leitin, Hengchi, Baoneng, and a whole bunch of names you have never even heard of.

Hengchi, the failed EV gambit by Evergrande, the spectacularly bankrupt real estate company, and one of the many Chinese EV attempts that failed

Noah Smith claimed that the key to the China book is that “China appropriates the multinational company’s technology, through some combination of joint ventures, acquisitions, reverse engineering, and espionage.” But I never hear him talking about these self-inflicted pains in the great, terrible hell of fire that Chinese EVs have all gone through.

Technology doesn’t exist in a vacuum. No amount of “technology” will be useful if uncompetitive businesses wield it.

[And up to this point, I haven’t even talked about the proprietary technology that Chinese businesses have pioneered in the EV space. You can check it out in the footnote here¹]

Is policy really the key reason behind the rise of China’s industries?

I do not deny China has a lot of subsidies, direct or indirect subsidies to support its industrial development. China does have a clear bias towards supporting production at the expense of domestic consumption.

I also believe there are definitely cases of economic espionage and commercial theft involved in various industries, just like any ambitious developing country would do to get rich fast. As much as I am morally against this, I also know that it was exactly what the US was also engaged in back in the 1800s, being another young and ambitious developing country back then, hungry for early success.

I do have some doubts about the idea of “forced technology transfer”, because, A, Western companies aren’t really “forced” to transfer technology. Deals, once struck, are generally fair. You can’t have your cake and eat it too. Likewise, you can’t make obscene profits from China without giving back something in return. And B, as I explained above, I believe most of the so-called “technology transfer” happens inevitably when a foreign company wishes to set up a local supply chain. Some technical know-how would be inevitably “transferred” along the process.

But all of these are not the key points I am trying to make here.

Whenever I hear Western commentators talking about China’s industry policy, state subsidies, and forced transfer blah blah blah, I have this feeling that all of them miss something, something really important.

One of the biggest cognitive errors that outsiders make when looking at China is to project their own fear of a totalitarian system onto China. Because of this error, they tend to believe everything in China is because the Chinese government does this, or the communist party does that, and the discussions only stay at that level.

But still, it is a cognitive error, and by committing this error, one thing they fail to realize is that they deprive the agency of the people in China. Where do Chinese people come in for all of these discussions? No one bothers to ask. It seems some autocrats give out some subsidies here, appropriating some technology there, and a fantastic, globally competitive industry just miraculously comes into being.

So, ironically, in all of these discussions made by commentators from supposedly democratic systems, it’s the people that they always fail to mention.

Yes, it’s the people. And it’s not being “cheap” that I want to talk about here. (Chinese people aren’t “cheap” anymore). It’s that, China has some of the world’s most competitive, hard-working, disciplined and ambitious people, which should be the single most important factor in whatever discussion about US-China industrial competition. No amount of “technology” would work if this kind of people didn’t exist. Likewise, with this type of people, it’s only a matter of time before “technology” becomes mature, because all those methods of “appropriating” technology, just or unjust, legal or illegal, are only tools to make things faster. ²

The people are the main driving force behind the rise of China’s industries. The policies are only the spices.

A very good example is the award-winning 2019 Netflix documentary American Factory, which I recommend to anyone who has a stake in China. Because it is about an American auto glass factory, based in the US and operated by a Chinese company, the effect of China’s state policies is nulled. Still, when it puts Chinese workers and American workers, Chinese business owners and American business owners, side by side, you will start to appreciate the real scale of the problem that the US is facing right now. ³

So how exactly can the US counter China?

A wrong prognosis leads to a wrong prescription. Noah Smith said the real solution to defeat China is

to break the China Cycle. American, European, Japanese and Korean companies have to stop giving their technological crown jewels to China in exchange for short-term financial gain and illusions of market access. Governments in developed countries have to keep an eye on their most technologically advanced companies. When one of the companies looks like it’s about to enter the China Cycle, the government should intervene.

If you believe my version of the story, and if you believe the central role that the people play in all of this, you would understand this Noah’s prescription is plain stupid.

Will this so-called “breaking the China Cycle” make Chinese people less diligent, less ambitious, less hard-working, and less hungry for success? I don’t see it’s likely. Will this policy make the American people more disciplined, living a more austere life, and hungrier for success? I don’t see it’s likely, either. But unless you can change this equation, every step you take to prevent China’s rise is futile.

It is my belief that the great power competition is ultimately the competition between the people. The only possible (but not likely) way for the West to respond to the China challenge is for the West to accept a more austere and more hardworking lifestyle. Work more and have less fun. Invest more in yourselves, your education, your infrastructure, your future.

Just this week, I saw this fascinating LinkedIn post written by Mr.

james crabtree

, a renowned author about a meeting with Mr. Shaun Rein and Shaun’s son. Many people remember Shaun Rein as a die-hard pro-China American businessman (he can even be much more pro-China than me). According to James, Shaun’s son, Tom Rein, born and raised in China, actually plans to go back to the US and start his own drone company, in order to take on and compete with the Chinese drone makers.

For me, this encounter is very touching. It just shows what a healthy great power competition between the US and China should look like: healthy, integrated, intense, leveraging each side’s strengths and weaknesses, and remembering that in the end, we are still part of a family, and our competition could hopefully bring enduring benefits for the future generations.

May all of us enjoy this great game.

---

An advertisement about myself:

I will be hosting a live “Ask Me Anything” for all paid subscribers of Baiguan. I will make myself available to be grilled by whatever questions you throw at me for at least an hour. For details please check here.

1. Some China EV companies do not owe their success to Tesla. A good example is BYD, which made batteries long before Tesla did. BYD also started to produce vehicles a few months before Tesla did. (Please check out this fascinating story of BYD’s founder, Wang Chuanfu by

Kevin Xu

.) Besides, Noah also mentioned that China “appropriated” foreign technology when LK Group acquired Idra, an Italian casting machine maker that eventually manufactured the Gigaress for Tesla. But Noah didn’t mention that LK acquired Idra in 2008, at the depth of the Great Financial Crisis, a decade before Tesla came up with the Gigapress idea, so I clearly don’t think why this case is relevant. Is this “technology appropriation” or plain and simple business shrewdness? Does Noah mean to suggest Chinese companies can’t acquire foreign companies or what?

2. Part of this hunger for success is because life is short, and Chinese people generally don’t believe in an afterlife, so better to accomplish your goals in one lifetime.

3. In fact, China’s problem is that we are usually too hardworking and too competitive. This over-competitiveness leads to “over-capacity”, and more precisely, an “involution内卷”. Baiguan published an article this week exactly about this topic. Over-competition and over-capacity are not good things. Over-reliance on production at the expense of consumption is unbalanced. These are the situations that the Chinese want to break out of because, in the current world, you could argue it’s whoever controls the demand, not the supply, that really matters.