Podcast Transcript — The Impact of Smartphones on the U.S.-China Rivalry
On July 8, the Association of Foreign Press Correspondents in the United States (AFPC-USA) hosted a podcast episode produced in partnership with the Hinrich Foundation. The episode focused on the US-China tech rivalry, specifically on how smartphones have influenced the contentious relationship between the two nations amid global trade tensions.
The episode was hosted by Vlad Savov, the Technology Editor for Bloomberg News in Hong Kong. The podcast guest was Michael Enright, the Pierre Choueiri Family Professor in Global Business at Northeastern University, who specializes in international competitiveness and business strategy. He recently published a paper for the Hinrich Foundation that dove into the smartphone issue, sharing key insights that demystify another dimension of the sensitive matters impacting global trade.
This episode was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this podcast episode. The learning takeaways for this podcast can be found HERE.
Vlad Savov: Welcome to the community of foreign correspondents in the US and around the globe to this episode of [the] Foreign Press USA Podcast. Today we’re talking [about] smartphones and the way they’ve become a focal point of the US-China technology rivalry. I’m Vlad Savov, Technology Editor for Bloomberg News in Hong Kong. Our guest is Professor Michael Enright, who teaches Global Business at Northeastern University and is an expert in international competitiveness and business strategy.
This podcast episode is a partnership of the Association of the Foreign Press Correspondents in the US with the Hinrich Foundation. The Association is solely responsible for the development and the content of this podcast episode.
So Michael, you just wrote a piece for the Hinrich Foundation titled, “China Smartphone Producers Take on the World,” and key to that is the way that smartphones have become a focal point of the US-China tech competition. So, maybe you can give us the impetus for writing this in the first place and why you see them as such an important part of the business world.
Michael Enright: Well, part of the impetus is the very importance. I mean, smartphones are by far the largest export category out of China into the US and quite frankly, rest of [the] world. And also smartphones are in many ways at the cutting edge not only of mobile technologies, but also chip technologies and other advanced technologies that both China and the US wish to be the world leader in. And what we're seeing is basically a very interesting set of potential transitions where increasingly the international leaders, historically Apple and Samsung, are in danger of being displaced by indigenous Chinese brands. In fact, indigenous Chinese brands today have about 60% of the world share of unit shipments of smartphones. And the impetus of writing the piece was to explore the dynamic, how that happened, and then the role that smartphones play really almost like the canary in the coal mine when it comes to technology competition between the East and the West.
VS: Right. So before we get to Apple and Samsung, who are the threatened parties today, there was HTC, LG, [and] Sony previously, who were big players in the Android operating system and ecosystem. How did the Chinese brands surpass those other international players?
ME: Well, the Android operating system again, introduced in 2008, is an open system. So once you had an open operating system and you had the underlying semiconductors that were powering the smartphones freely available on the market from companies like NVIDIA, Qualcomm, Intel and Samsung, often manufactured by TSMC, basically, once you had the brains of the smartphone available on the marketplace and you had the operating system available on the marketplace, then, in the Android world, it fundamentally becomes a manufacturing game. And starting in the 1990s, China increasingly became the dominant location for electronics manufacturing. A lot of that was built through the efforts of companies like Samsung and then Apple working with Foxconn.
So, by the time smartphones were introduced and started getting popular - 2007, 2008, the introduction by 2010, 2011, you see the real ramp up. China was already extremely well situated on the manufacturing side. And then you have the supply chains in China, you have indigenous Chinese companies able to leverage the same supply chains and manufacturing capabilities originally built to serve the foreign firms. You take the operating system out of the game in terms of proprietary knowledge, you take the chips out of the game because they're freely available. And what you have in the Android world, with the exception of Samsung, which is still able to differentiate its products on features, et cetera, what you have is a manufacturing game that the Chinese have mastered.
VS: And you also made the point in your piece that government industrial policies have played a big role in making that possible as well.
ME: Oh, absolutely. In terms of building up that electronics capability, it's not just the investments of the foreign firms, it's also the investments of the domestic firms and really the concerted effort now for decades to build up China's technology competence. If you look at the semiconductor side and chips, even the less important chips since 2010, 2014, there have been massive investments by the Chinese government in building up indigenous capability. The Made in China 2025 program that was introduced in 2015 committed—literally—now hundreds of billions of dollars in terms of building up those capabilities. And through the political industrial process, let's call it, the foreign firms have been pushed to source more and more, not just from China, but from Chinese mainland companies in the mainland.
So, these days, the final assembly of Apple products in the mainland is about 50% or more by PRC companies or PRC companies that have bought out manufacturing facilities from Taiwanese and other companies. So, you see in that process really a concerted effort now for 15 -20 years on the part of the Chinese government to bring in the foreign technology providers to get them to invest heavily in building up local supply chains while also the Chinese government, and this is government at the national level, at the provincial level, and the municipal level, investing quite heavily in building up those capabilities in a really targeted long-term effort.
Michael Enright
VS: And returning to Made in China 2025, that entire program: I'm based in Hong Kong, and I don't really hear it mentioned too often lately, but would you assess it as a success?
ME: Well, when the 2025 program came out, I said, “very interesting idea, let's call it Made in China 2035." But what we've seen, I mean South China Morning Post ran a piece late last year that indicated that in their view about 85% of the goals of the Made in China 2025 program had actually been achieved. One reason why we don't hear the term used is that once that program came out and with the implementation guidelines that called for massive state support to achieve on the part of Chinese companies particular market share targets, first in the domestic market, then in the international market, that combination got massive pushback from the US, from the EU actually, before the US. And that really pushed the US to then move in terms of its own policies and in terms of restrictions.
But the program still exists. It exists on steroids today, it's just not called that because of the international pushback. But if one looks at the ‘14 five-year plan you see Made in China 2025 embedded everywhere, if you look at the provincial and the municipal plans for cities like Shenzhen, it's embedded. If you look in the national technology five-year plans, it's embedded. So we don't hear the Made in China 2025 term, but it is alive, well, and motoring forward. Again, were all the targets achieved by 2025? No, but a substantial portion have been, and the impetus and the massive government funding behind it still exists.
VS: So I just want to pick up on this point you made and ask the question explicitly: The US, let's call it trade hostilities that arose around 2018, 2019, especially with Huawei and so on. Were they prompted most specifically by made in China 2025, were they maybe accelerated or heightened concern?
ME: Oh, absolutely. In fact, if one looks at the 2015 period when it was introduced, the European Chamber of Commerce in China by 2016 had come out with a document saying, "Wait a minute, this is contrary to the normal international trade relations. This is basically government subsidies. This is in violation of both the spirit and the letter of WTO." The US was actually a little bit late to the game, but the whole trade tensions that we hear about and the claim that they started in 2017, 2018 with the Trump administration, that's simply false.
Basically what we saw was the European and US reaction and why the reaction, because China has always supported industry, it's always had targets. But the difference in Made in China 2025 was specific targets for Chinese market share, which implicitly means displacing foreign firms, massive state support, and for the first time the view by both the Europeans and the Americans that China actually has the technological wherewithal to pull it off. So this was really a warning bell to both the EU and the US in terms of China's not only goals in terms of technological competition, but also China's capabilities.
VS: So, as we get into the topic of the trade war, which is this year turning into a bit of more of a tariff discussion than anything else, how do you see this impacting the competitive balance? When we look at China, it can both produce mostly domestically and also to a great extent consume smartphones mostly domestically in a way that US companies like Apple cannot. So do you see, if this bifurcation between the two nations continues, do you see China being able to weather that better than the US, or otherwise?
ME: Well, it's a timing issue because if we look at most of the Chinese players, most of them are still dependent on the Android operating system and on chips provided by foreign players that use US technology. So we saw that when Huawei was sanctioned [in] 2018, 2019, that their position in smartphones evaporated almost completely from actually outselling Apple and Samsung in China. Well, Samsung is virtually gone from China these days to going to virtually zero overnight. Now today, Huawei is probably the only one of the major Chinese players that is self-sufficient in terms of its chips and operating systems. The other players are still largely dependent on the foreigners. So it depends on how this takes place going forward. Yes, China can manufacture the phones. They now have companies that can develop the phones. What they don't have at present is a track record in developing the operating systems and in advancing the state of play in semiconductor technology.
It's one thing to try to match what a Qualcomm or an NVIDIA or an Intel or a Samsung can do today. It's another thing to keep the pace every six months, every six months, every six months. So purely in terms of manufacturing, the US isn't, and the US is unlikely to have a huge portion of even phones sold in the US, made in the US. But I think the policymakers in the US and quite frankly in Europe, although they tend to be quiet and they tend to sort of hide behind the US on these things, I think they do understand that the tipping point is relatively soon in terms of once China is completely self-sufficient on operating systems and semiconductors, then they may not need the foreign technology. And then even cutting off foreign technology doesn't really move the needle one way or the other. But in addition, it's really revenue from items like smartphones that has been powering and funding China's technology drive.
So if we were to see a true bifurcation with technology cutoffs as well as product cutoffs, it would be expensive and it would take time to develop the supply chains elsewhere that are in China. But those can be done. At least in terms of assembly, Samsung has no or virtually no smartphone assembly in the Chinese mainland now. They do have a portion assembled by contract manufacturers in the mainland, but the vast majority of that is in places, not just Korea, but Vietnam, India, etc. Assembly can be moved. It's really the entire supply chain and the engineering expertise that China has. Is that impossible to duplicate at the same cost, quality and quantity today? Answer - yes. Is it possible? Answer also yes. I mean companies like Apple and Samsung still have the manufacturing knowledge to do that. They're the ones who helped build that system in China. So really it's a complicated game because in a way, China still needs the foreign technology and the US companies still need China. And I think that's why, even though again the US-China discussions seem to have ratcheted down from the extreme, even when they were at their most extreme, if one looks at which products that both sides exempted, basically China was exempting the semiconductors that it needed and the US was exempting the smartphones and other consumer electronics for which there was no immediate substitute.
VS: One of the things I've also noticed is that in the private sector, when I hear executives from Google, Qualcomm and on the other side, Honor, Oppo and the Chinese brands speak of each other, hey speak in very warm terms. They still talk about being in very close partnership, in collaboration. You can almost struggle to get any quotes from them about any trade war being underway. So it does seem like the companies themselves, Google I mentioned because it's the maker of Android, seem very keen to indeed extend those relationships across China and the US.
ME: Well, number one, that's being politically smart, right? Because you don't want to rock the boat because for all concerned, the US and China are the big markets. So a company is looking at this, and quite frankly, many of the companies are not particularly nationalistic in their outlook. That's the US companies, but it's also the Chinese companies. I mean the private sector, Chinese companies operate under the constraints of being in the mainland with all that entails, both in terms of advantages of state support, but also the limitations in terms of their motives cannot just be profit maximization. But for Google, they get licensing fees for all the add-ons to the Android operating system. And at this point in time, Apple, 20% of the global market, the harmony of Huawei's operating system, about 15% of the China markets, say 7% of the global markets. So we're talking about 75% of the world being on Android operating systems and nearly all of that being other than Samsung being Chinese players.
So Google is going to be very friendly with its largest customer base by far. And Apple of course has to be cognizant of what's going on on both sides because still the vast majority of their manufacturing is in China, their second largest market is in China, so they can't really run afoul of each other. And in terms of companies describing each other, I think there's a lot of respect there. And I think there's a lot of respect for good reasons because again, it's not the situation that it was 20 years ago or even 10 years ago where foreign companies were by far the technology leaders and Chinese were at most serving foreign technology.
You now have in China companies that are very good technically, you have Chinese smartphone companies that are putting out at the high end, and this is companies like Xiaomi and Huawei, Oppo, Vivo, they're putting out phones with features in many cases that match or exceed what a Samsung or an Apple can do. So I think there's competition, clearly there's cooperation that the companies have to be involved with. Again, Apple is dependent on China. The Chinese players, most of them, are dependent on US technology at a minimum. So they have to sort of toe the line politically. But at the same time, I think there's respect in some cases grudging respect for the companies that have emerged as strong competitors, efficient manufacturers, and able to do things today that people wouldn't have dreamed they could have done 10 years ago.
VS: So we've addressed the corporate side of things. I'm also curious about your view on how the consumer, the private individual in Europe and the US perceives Chinese technology and Chinese products, because we see the headlines, we hear the proclamations from the US government, etc., that Chinese technology is not necessarily trustworthy. So how do you see the consumer on the ground level making the decision between a Samsung and Apple or a Xiaomi product?
ME: Well, so far in the US, the Chinese companies don't have much of an inroad. It's less than 10% market share, but in Europe it's about 25% market share. If you look at Asia outside of China, it's about 50% market share. And what I think [is] the consumers still look at brands and they look at the ecosystem involved. And so Apple of course does much better in the US than they do in most other places. Samsung does quite well in the US. Samsung dominates the Android sales in the US, and that's in part the ecosystem and in part the name.
But I think increasingly what's going to happen is people will recognize just as they recognized a number of years ago that be it microwave ovens, TV sets, CD players, etc., that before long they're going to realize that whatever the name on the box or on the phone, it's basically using similar components, similar operating system, manufactured often in exactly the same facilities. And it's only a matter of time before the marketing, customer service, et cetera reaches the same level. We saw this in industry after industry, and it's just that the smartphone represents really sort of the cutting edge technologically where TV sets don't anymore. People these days, whether they're buying a TV set that says Samsung or LG or one of the Chinese brands, it's all made in the same places - in China basically.
VS: Again, returning to your piece for the Hinrich Foundation, you made the point that the smartphone industry has many of the characteristics of China's development over the past couple of decades. Would you like to expand on that and just give us more of a sense of what those are?
ME: Sure. It's an industry really that got its start with the foreign companies, the Samsungs and the Apples in particular, bringing the manufacturing into China, which had already established itself as a place to do consumer electronics. It was companies like that, plus the Taiwanese contract manufacturers that built up the manufacturing system capabilities built the supply chains. The Chinese government saw this as a long-term play to build up China's economy and to build up its technological capabilities. Once you can assemble the products and assemble the products at a location, then it makes sense to bring in the suppliers, the suppliers relocate. You build up the ecosystem, you start localizing that ecosystem as the locals understand, learn. A lot of the Chinese companies - they employ people that used to work at Foxconn, Apple, Samsung, etc.. That learning becomes localized, gets supercharged by massive government investments. And you have a really interesting and competitive system built by a combination of foreign ideas and intellectual property to start local capabilities and economics combined with massive state support.
And that becomes a bit of a juggernaut. And you don't need the foreign players forever. It's a life cycle. I've written a similar set of pieces on China's auto sector that shows how, again, it may have taken longer in autos, but China has played the long game imposing foreign investment restrictions, imposing market restrictions to force companies to make in China, to build up local capabilities, and now indigenous companies have not only learned from that, but in the EV space have leapfrogged that and have become world leaders. And it's a similar pattern that we are seeing in industry after industry. The same thing happened in large telecom infrastructure equipment where foreign companies brought the technology into China, they were forced to manufacture and joint ventures in China, and then eventually through the learning through that process, plus massive state support, companies like Huawei and ZTE now supply about 90% of China's own demand for large scale telecom infrastructure equipment and about 40/50% worldwide.
So it's a pattern that we've seen in industry after industry. And what's quite striking is you have basically four different players involved. From a Chinese government standpoint, the strategy is absolutely straightforward. It's [to] bring in foreign players, use the attractiveness of China as a manufacturing location, hold out the carrot of access to the China market to bring those players in. For the foreign players, it's if you start doing this on a net present value basis where you're discounting future earnings, you know, moving into China in terms of overall manufacturing in particular for smartphones, that's what allowed Apple to become the world's most valuable company, right? So for them, that was a decision that was made 2004 through 2010, and it already has paid off for them even if it creates the competitors for the future. The consumer wants the best product at the lowest possible price. So they're perfectly aligned in many ways with the company dynamics of wanting the best quality product at the lowest possible price. Where it gets tricky is for policymakers in places like the EU or the United States, where the policies traditionally have been built around favoring the consumer rather than the producer.
And, as a result, we've seen what may be a late reaction to this combination of bringing in foreign tech, leveraging local market and local labor and massive state support. So what we see in the US or EU is that the governments are in a sense hamstrung by their own history and by their own policy of philosophy.
VS: So I'm curious about this particular strategy. Is it only applicable to [a] country of the size and scale of China, or would it be possible for somebody of a smaller scale to do likewise?
ME: Others have tried it and it hasn't necessarily worked. I mean, a number of countries have tried being relatively [unintelligible] forcing import substitution. And in places like Brazil, places like India, historically, that just wound up with local rent seeking and stifling innovation and stifling progress. In China, we have not only the size of the economy, we also have the labor force and the cost base, but we also have in China a situation where the competitive dynamic is extreme, that instead of one or two players in smartphones, for example, in China getting fat and happy, they do have to compete against Apple. And most importantly, they have to compete against each other. So we have not seen, to my way of thinking, we have not seen the same combination of market size, labor, arbitrage possibilities, government commitment to high tech advantage and the willingness to put resources behind it and a sizable enough market to make it all attractive as a carrot to hold out.
And we haven't seen countries that have been able and willing to do that with the single-mindedness that China has been able to exhibit over a period of decades, because basically this strategy, be it smartphones, be it telecom equipment, be it autos, this is exactly the same strategy that's been employed since China first started to open to foreign investment in the early to mid eighties. That actually, to do a shameless plug, is outlined in a book I wrote in conjunction with the Hinrich Foundation on inward foreign investment developing China - the critical importance of foreign direct investment.
VS: No, it's a hugely important topic and I'm delighted that you've written a whole book about it. I mean, you could write a series, I'm sure. Another fascinating topic is also you mentioned earlier China's auto sector, in which China made EVs a priority more than five years ago, and it's been able to execute extremely well to the point where BYD has now risen ahead of Tesla. But I find that there is a similarity here where again, you have a highly competitive internal market. BYD has had to compete with at least a half dozen other EV startups. So, I also saw you've written on that subject, so I was curious if you have any thoughts in how much of an analogy there is with the smartphone market.
ME: I think there's a quite good analogy, because again, one of the things about the Chinese system is that in some industries they've simply selected national champions, and that's clear. And even in something like smartphones, the backing that Huawei has had for its development probably dwarfs that of many other firms. But at the same time, China has promoted, encouraged - in some cases, forced there to be very active local competition. And in a number of industries, the competition in China is fiercer than anywhere else in the world. And this is something that most outsiders simply don't understand. Most places in the world you have a rough duopoly in smartphones still. Well actually, it's not the case—in the US, let's say you have a duopoly in smartphones, Apple and Samsung, that gives them both a certain amount of pricing flexibility, but at the same time, if you're in China, you have absolutely cutthroat competition.
Another element to this is that the Chinese companies in part because of their relationships with the financial sector are accepting virtually zero margins, right? I think [in] the piece I indicate that if you put Apple and Samsung together, they're making over 90%, 95% roughly of global profits in smartphones. So that means in terms of unit shipments worldwide, 60% of all the smartphones shipped in the world are basically shipped at zero profit. Now, this is another thing about the Chinese system: is that because of the ability to get bank financing and state support, that companies are willing to compete at basically positive cashflow, virtually zero profits, which would not be acceptable in the West to modern capital markets [and] would not be acceptable in Korea. So that's another piece of the puzzle. But it gets back to as well, one of the misperceptions that foreigners tend to have about China is they put their own prejudices into the statements that Chinese leaders make.
So there was a famous, over a decade ago, there was the famous third plenum of the 18th Party Congress, where foreign analysts picked on the line, "The market will be decisive in China." And the foreigners thought, "Ah, this means China's going to open up everything, open to foreign competitors, etc, etc. And they forgot to read everything that came out before the market being decisive - as in the party setting the direction, the state being the implementing arm of the party, state-owned enterprises controlling the commanding heights of the economy, Chinese private sector enterprises being supported by the party state and the state-owned enterprises 4, 5, 6, 7 - all else being equal, the market will be decisive. And even there foreigners misinterpreted what the market meant, because in the West we tend to think of the market as driving efficiency through competition with decentralized resource allocation and decision-making. In China, they think of the market as driving efficiency through competition with centralized decision-making over where the resources should be directed.
So that's what we see play out. We saw it play out in consumer electronics, we're seeing it play out in smartphones where the Chinese companies are competing like hell against each other mostly. And basically it's not that they targeted Samsung in China, Samsung now has virtually zero market share in China. It was that Samsung made a number of missteps and the Chinese companies with Android operating systems competing on price against each other basically helped drive Samsung out of the market. So again, that's a dynamic that most outsiders don't understand about how China's economy is working and how these industries are developing, which, if you put it together, creates a real quandary for the rest of the world. Because, in the US we want companies to make profits. We don't expect companies to be expanding at zero profits. We want the consumer to have lots of choice.
We don't want to, in general, restrict their choice and raise their prices. And that's why be it the current administration, or in fact the last administration in the US, which had kept the original Trump tariffs that had added technology restrictions on China, when in the US or in the EU, governments try to make decisions that they think will promote more economic development than manufacturing in their home countries and will offset or rebalance what they see as the state support coming out of China. They run up against opposition from their own companies and they run up against opposition from their own consumers. So the people who really get put in a quandary are the people who think long-term about what this means for the EU economy, the US economy.
VS: So, you mentioned that the big quandary now is for policy makers and one of the recent pieces of reporting that we did at Bloomberg News was the fact that Foxconn sent its Chinese workers back from India back home to China. And our information is that that was effectively under the orders from the Chinese government, which may be the strongest measure from the government against the moving out of Apple and iPhone manufacturing out of China, toward India. Do you see any of that action intensifying? Do you see a more confrontational approach from China perhaps?
ME: Well, we already saw starting last year and even the year before, China putting restrictions on exporting some of the equipment because the fastest way to shift production out of China is to actually move the equipment even. And so China I think has been showing what it can do because not only does it have the ability to shut down anybody operating in China, it also has the ability to lock in the equipment and other things. And so certainly I think it's at the very minimum a shot across the bow and at a maximum a signal that says, okay, if you want to do this, then your operations in China are under threat - your choice. And that makes moving things out of China much more difficult because the way that one would move things out of China is the expertise is now inside companies and it's inside companies like Foxconn, inside companies like Apple that are dependent still on China, and even a Samsung which does no assembly of its own in China and has only a small portion of its outsourced assembly in China, even Samsung is dependent on Chinese supply chains. That's one reason why they put big operations into Vietnam.
So China has enormous power to try to disrupt that flow. And so the companies are going to have to be very careful. And for an Apple who has worked with Foxconn now for 20 plus years, 25 years on its manufacturing, has engineers that basically live in Foxconn facilities. Trying to duplicate that with other companies is very difficult. I mean, Foxconn got the lion's share of Apple business because they were simply better at doing what Apple needed than other companies, including other Taiwanese contract manufacturers. So it's not as simple to start up in another location. And it's not just the workforce, the availability, the work ethic, the efficiency - it's the training, it's the entire production system that allows for rapid ramp up. It's the suppliers that all go with that and the very tight inter-relationships. So yes, China can make it very difficult for, in particular, Apple and Foxconn, because they're still so dependent on China. And the question there is whether the US government or other governments are willing to put equal and opposite pressure to use access to the US market to force the issue.
VS: Again, I could probably guess your answer to this, but I want to ask the question explicitly. What would your advice be when you have President Donald Trump suggesting that he wants to see the iPhone brought back to the US and manufacturing the US? How feasible is that?
ME: Well, the answer is I don't know enough of the detailed economics to give you a hard and fast answer. Having said that, Apple's making enormous amounts of money on iPhones, right? Their margins are very, very high. Could they move production, sell at the same price point and still make a profit? Answer? Yes. Could they do so and make the same profit? No way. So it is a matter of probably doing a deal or looking at Apple and doing a deal that focuses on what can Apple do in the US, what can it ramp up in the US that will provide significant economic value to the US economy? I mean the US economy, we have a completely other issue. The fact that we have very little manufacturing left in the US has virtually cut off the path for the less advantaged to move into the middle class and beyond economically.
And the US had 18 - 20 million manufacturing workers for a couple of decades until China joined the WTO. And then within seven - eight years, that virtually dropped in half and it stayed at that level roughly ever since. So it was clearly China's entry into the WTO and outsourcing was a substantial, not the only, but a substantial reason for production to shift. However, having said all that, a lot of the work now in a factory producing for Apple is automated, even in China. And as automation increases the ability to move back to places like the US, Europe reshoring, the ability to do that actually increases. And when you get the manufacturing job back, it may be a small number of people physically making products, but you get the software, you get the maintenance, you get the equipment, you get HR, you get finance. For every person actually assembling an iPhone, you bring back a multiple of that in terms of jobs.
And there is a point in many industries where that balance, be it a tariff or whatever, where that balance starts shifting back to the US at least for some, a portion, certainly not a hundred percent of the jobs. And the question really is, is the US willing and is the US consumer willing, and are US companies willing to have what in essence would be a new social contract where American consumers do pay a bit more to ensure that more of the jobs are back in the US? Will a hundred percent come back? Never. Will a portion of it come back? Depends on each industry. And that to me is the dynamic that's going to play out over the next couple of years. It's going to be what's acceptable for the US consumer, what is financially viable for the companies, and then what is the political pressure that is put on by both China and the US. Because quite frankly, China's been playing this game for a very long time, and in many ways, one can take President Trump or what President Biden did as saying at long last, the US is taking a page out of China's playbook.
And the question is whether the political, economic, social environment in the US and Europe is facing the same challenges? Are [they] willing to create the single-minded approach that would be necessary to shift that balance going forward, and if it doesn't, then are we going to see China's technology leadership, if not domination in the technologies of the future?
VS: Well, I think you set out the challenge, especially for Western policymakers extremely well. But I do want to wrap up with an unfair question, which is how do you see things panning out and how do you see China? Will it just continue the trajectory that it is on today or will something change in its policy? And then likewise with the US.
ME: I don't see necessarily China changing its policy, but China will do what it has to do. If the threat of being cut off from the US market is high enough, then China will react. And in particular, we've seen that China has come to the table and at least so far seems willing to accept asymmetric tariffs between the two countries in return for the US allowing things like semiconductor design and other features to be shared with China. So right now, I think it's a sign of the interdependence, and that's the way it's going to continue to play out. Again, when negotiating with China, most foreigners don't recognize that China negotiates not on principles, but on interests. And if the interests change, their position will change and their willingness to accept and follow a previous agreement will change. And it's not good or bad, it's just that's the way their system works.
And what that means is that from a US say negotiating standpoint, the US can only be convinced that China will follow an agreement where the US has the unilateral means to enforce that agreement. And so what I see happening over time, hopefully, is a modus vivendi where there's more or less of an imbalance in trade where companies looking at new generations of products and technologies are going to cover their bases, are going to, even though it costs more, are going to develop more resilient if not bifurcated supply chains. We will see, at least for probably the next 5 10 years, the US tech companies being on the cutting edge, able to continue to develop the new technologies, the advanced technologies at the cutting edge that keeps them in the marketplace. And I think what we could see is a situation where we wind up with two technology leaders with manufacturing more dispersed because China's not as low wage a place as it once was. And that basically both sides will do what's necessary in order to exert their position in order to have a position in the medium and long term, which admits the existence of the other without trying to basically prevent the other from developing.
But it's going to be an interesting tightrope. It's a tightrope for the companies, and in many ways it's going to be a tightrope for the governments as well.
VS: Brilliant. This was educational for me as well. I loved it. Thanks so much.
