Dan Wang, an analyst based in China, published his personal annual letter a few weeks ago. I’m a fan of his, and think that his ability to bring a historical perspective, a strong sense of macro trends, and personal observations together is unique and powerful. This year’s letter covers (among other things) a long reflection on Chinese technology efforts, and Dan’s perspective relates directly to process engineering and the ability to translate experience manufacturing someone else’s products to creating homegrown inventions of one’s own.
Excerpts from Dan’s letter here:
Today, Chinese workers produce most of the world’s goods, which means that they engage more than anyone else in the technological learning process. Few Chinese firms are world-leading brands. But workers in China are using the latest tools to manufacture many of the most sophisticated products in the world. They’re capturing the marginal process knowledge, and my hypothesis is that puts them in a better place than anyone else to develop the next technological advancements. To be more concrete, Chinese workers will be able to replicate the mostly-foreign capital equipment they currently use, make more of their own IP, and build globally-competitive final products.
That has roughly been the story in the consumer electronics sector. Every year over the last decade, Apple trained a million workers in Shenzhen and other cities to manufacture the world’s most complex consumer electronics. The smart narrative on the iPhone has been that Chinese workers are engaged in mere assembly, of mostly foreign parts to boot, while Apple keeps all the profits. That story is true, but it misses a great deal. First, even if most of the workforce learns little, a few thousand line engineers become the world’s greatest experts in electronics assembly. Combine that fact with the billions of dollars invested in the smartphone supply chain, and it’s no wonder that Shenzhen is driving the marginal innovation on hardware today, from consumer drones to scooters. Second, Chinese brands were able to tap into the same supply chain and learn how to make pretty good products; collectively they make up around 40% of global smartphone sales (though they earn little profit). Third, the Chinese share of added value per phone has zoomed up, from 4% to 25% over the course of a decade, according to an academic estimate. It’s no longer the case that China is responsible only for assembly; Chinese firms have figured out how to make the more valuable parts of the phone as well.
Now consider that it’s not just the electronics supply chain that is centered in China. Design and production of many goods, from furniture to heavy industry, are concentrated in gigantic Chinese production hubs. These hubs allow for tight connections between R&D and manufacturing, shortening the circulation of knowledge in a production loop.
As the group here is heavily populated with process engineers, I’m curious what the general reaction is to Dan’s perspective - if you have thoughts, please share them below!