The latest in China-related news that caught my eye
I continue to follow developments in China...
As longtime readers know, I'm not looking for investments there. As I've said many times, I view investing in any Chinese company as outside of my circle of competence, especially given the widespread fraud.
Instead, I'm interested in developments in China because of the impact on non-Chinese companies and industries.
That's why in my July 10 e-mail, I shared two articles, "Why Americans Can't Buy the World's Best Electric Car" from the New York Times and "How Xiaomi Succeeded Where Apple Failed" from Bloomberg...
And that's why I recommend watching this Wall Street Journal video, Inside China's Dark Factories Where Robots Run the Show.
I don't want to be overly dramatic, but Chinese manufacturers are making extraordinary advances Chinese manufacturers. It makes me wonder whether their global competitors, especially of automobiles, will be able to compete?
1) Take a look at this Bloomberg chart shared by venture capitalist Chamath Palihapitiya in a post on X earlier this month in regard to what's happening in solar:
2) In part thanks to electric vehicles and solar, China is reducing its dependence on foreign oil – as this WSJ article from earlier this week notes: How China Curbed Its Oil Addiction – and Blunted a U.S. Pressure Point. Excerpt:
China's thirst for oil drove global demand for decades. Now a government campaign to curb that addiction is nearing a milestone, with national consumption expected to peak by 2027, then begin to fall.
Chinese officials have long worried that the U.S. and its allies could hamstring the nation's economy by choking off its supply of foreign oil. So China has poured hundreds of billions of dollars into weaning itself off the imported stuff by reviving domestic production and swiftly building the world's leading electric-vehicle industry.
"The energy rice bowl must be held in our own hands," Chinese leader Xi Jinping has said.
3) And one of my readers, Dr. Michael W., the founder of multiple life-sciences companies, warns about the threat to another important U.S. industry:
You might want to take a dive at the U.S. biotech industry.
We are being hammered by the Chinese. They are producing quality compounds and large pharma companies are now buying them.
And they can now do much faster and cheaper clinical studies. Yes, some of them have to be repeated here, but it gives them a huge advantage.
It's a paradigm shift that will soon – if it hasn't already – killed the domestic drug discovery industry.
I asked two of my friends who are longtime industry veterans – one who runs a fund, the other a banker – to comment on Dr. W.'s e-mail. The former said:
The Chinese industry has become a lot more competitive and even relevant, but we are some ways from being killed. But a "996" [9 a.m. to 9 p.m., six days a week] work ethic is certainly raising the bar in terms of sense of urgency and mindset.
And he's absolutely right about clinical trials. One company I know well didn't have the $100+ million it needed to run a trial in Europe, so it went to China, did it for a fraction of the time and cost, and, after the trial showed the efficacy of their drug, a big pharma company bought them for more than $1 billion.
And as the other friend e-mailed me:
Starting more than 20 years ago, the Chinese government made a strong effort to get emigre scientists to return to China. They have also made concerted efforts to support the development of an internal biopharm industry. Over the past few years, these investments have started to pay off as can be seen from an increasing number of licensing transactions between multinational companies and smaller Chinese biotechs...
Recently there have been some quite substantial transactions such as Pfizer's agreement with 3SBio.
He also referenced this article in BioSpace, China Still Go-To Source for New Drugs Despite Tariff Minefield, with this excerpt:
According to GlobalData, large pharma in-licensed 28% of innovative drugs from Chinese biopharma companies in 2024, hitting a record high. Values for these transactions rose 66% from $16.6 billion in 2023 to $41.5 billion a year later. Looking at just the U.S. licensing deals with Chinese firms, GlobalData found that total deal value rose from $15.7 billion in 2023 to $21.3 billion in 2024.
And as he concluded:
So, yes, the Chinese biopharm sector has evolved into a truly competitive force internationally.
However, scientific insight continues to be a very difficult to achieve and it is not bounded by international borders, so I think that [Dr. W.] is being a bit hyperbolic that Chinese biopharms will "kill the domestic drug industry."
In my opinion, the much greater risk to the biopharm sector is the current anti-intellectual/science attitude in the U.S. and the self-inflicted damage to scientific discovery at U.S. universities and the National Institutes for Health, though the impact probably won't be felt for a few years. A more near-term concern is the potential disruption at the Food and Drug Administration. The agency claims that the firings have not negatively impacted the drug approval process, but other reports sound much more concerning.
4) This recent New York Times op-ed by two professors at the Massachusetts Institute of Technology and Harvard University summarizes the rise of Chinese "apex predators": We Warned About the First China Shock. The Next One Will Be Worse. Excerpt:
China Shock 2.0, the one that's fast approaching, is where China goes from underdog to favorite. Today, it is aggressively contesting the innovative sectors where the United States has long been the unquestioned leader: aviation, A.I., telecommunications, microprocessors, robotics, nuclear and fusion power, quantum computing, biotech and pharma, solar, batteries. Owning these sectors yields dividends: economic spoils from high profits and high-wage jobs; geopolitical heft from shaping the technological frontier; and military prowess from controlling the battlefield. General Motors, Boeing and Intel are American national champions, but they've all seen better days and we're going to miss them if they're gone. China's technological vision is already reordering governments and markets in Africa, Latin America, Southeast Asia and increasingly Eastern Europe.
And as the article continues:
The world's largest and most innovative producers of EVs (BYD), EV batteries (CATL), drones (DJI) and solar wafers (LONGi) are all Chinese start-ups, none more than 30 years old. They attained commanding technological and price leadership not because President Xi Jinping decreed it, but because they emerged triumphant from the economic Darwinism that is Chinese industrial policy. The rest of the world is ill prepared to compete with these apex predators. When U.S. policymakers deride China's industrial policy, they are imagining something akin to the lumbering takeoff of Airbus or the lights going out on Solyndra. They should instead be gazing up at the nimble swarms of DJI drones buzzing over Ukraine...
The article also notes how China has leapfrogged us in just the past six years:
And if you doubt China's capability or determination, the evidence is not on your side. According to the Australian Strategic Policy Institute, an independent think tank funded partly by the Australian Department of Defense, the United States led China in 60 of 64 frontier technologies, such as A.I. and cryptography, from 2003 to 2007, while China led the United States in just three. In the most recent report, covering 2019 through 2023, the rankings were flipped on their head. China led in 57 of 64 key technologies, and the United States held the lead in only seven.
In the article, the professors say that America's "mismanagement of China Shock 1.0" means that we need a better trade policy. And they offer four key ideas for this. Here are excerpts from the article on the first two:
First, policymakers must recognize that most of our difficulties with China are shared by our commercial allies. We should be acting in unison with the European Union, Japan and the many countries with which we have free trade agreements, such as Canada, Mexico and Korea...
Second, America should take a page from China by aggressively promoting experimentation in new fields. Choose sectors that are strategically vital (drones, advanced chips, fusion, quantum, biotech) and invest in them.
And here are excerpts on the other two:
Third, choose the battles that we can win (semiconductors) or those we simply cannot afford to lose (rare earths), and make the long-term investments to reach the right outcome...
Fourth, prevent the devastating impacts of job loss from the next major shock, be it from China or somewhere else (you've heard of A.I., right?). The scarring effects of manufacturing-job loss have caused America a heap of economic and political trouble over the past two decades. In the interim, we've learned that extended unemployment insurance, wage insurance through the federal Trade Adjustment Assistance program and the right kinds of career and technical education from community colleges can help displaced workers get back on their feet.
I remember when there were similar headlines about the rise of Japan in the late 1980s – the book Japan as Number One: Lessons for America was a bestseller – but I think the threat from China today is much different and greater.
Tariffs can buy us time... but we can only win this war by out-innovating and out-competing China.
So as a country, we're going to have to significantly step up our game – our people, educational system, business sector, and government.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.