China, Capitalism and Competition
How have Chinese companies done so well?
In three years, China has leapfrogged the competition to become the leading EV exporter, mirroring their dominance in battery and solar tech.
The traditional view has been that State led ‘top-down’ policies such as subsidies and loans, combined with industrial espionage, have allowed the Chinese to create world leading products. Others believe that, sometimes, you can improve and get smarter without cheating. The truth is somewhere in the middle. However, it is easy to overlook the overall education of the workforce in China. The country produced 3.5 million STEM (Science, Technology, Engineering and Maths) graduates in 2020 and forecast to have double the number of US STEM PhD graduates by next year.
Take Tesla as an example. From the mid-2010s to date China has been helping resolve significant financial and production challenges for the American EV manufacturer. In 2018, it even changed its rules to allow Tesla full ownership of its factories, without the need for a local joint venture. Shanghai’s leadership enable the Tesla Gigafactory to be built there in less than six months, and state-run banks extended over US$1bn in low-interest loans. China wanted local talent to learn but also improve Tesla’s tech, in a more synergistic way than most would imagine, and in return Tesla was enabled to produce its EVs in a cost-effective way. Tesla aimed to use mostly Chinese suppliers, and now c.95% of components are locally sourced. This has had an impact globally. In America, Tesla had a partnership to use Panasonic batteries, but it started to use the Chinese battery manufacturer CATL in its Shanghai factory. It is a stock we own and is now the world’s largest EV battery maker!
In recent years, the number of Chinese EV companies surged to around 50. Many have since gone bankrupt, and more are predicted to do so. After the ‘culling of the herd’ the remaining players have sharpened processes and improved products. Elon Musk laughed, in a 2011 Bloomberg interview, at a suggestion that BYD could ever be a rival for Tesla, and yet they are now neck and neck.
Apple had a similar impact when it started producing the iPhone in China, improving local supply chains and processes. It helped spawn a market of many firms in the Chinese smartphone space. Not all have survived, but those that did have thrived, carving their own niches that are more than just ‘Chinese iPhone copies’ and are garnering global success. Huawei, OnePlus, Xiaomi and others could be regarded as good or better now.
In these instances, China has accepted failure and allowed capitalism to work as it should do. As the late and great Charlie Munger said, “Capitalism is a pretty brutal place." Coincidentally (or maybe not?) he also persuaded Warren Buffet to buy c.10% of BYD in 2008 when it was a major rechargeable battery manufacturer with smaller subsidiaries including an automotive manufacturing arm.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.