The new Cold War has meant that the globalisation trend over the past five decades since China opened up is unwinding. And it is only apt we feature a piece on the current context by someone who wrote a book about globalisation and how it was changing the world two decades ago – Thomas Friedman’s ‘The World is Flat’. Incidentally, Friedman credits arguably two of the greatest CEOs of Indian IT – Infosys’ Nandan Nilekani and Wipro’s Vivek Paul, for the idea for the book with the former even credited for the title of the book. In this piece, Friedman reports from on the ground in China on what exactly are America and China fighting about?
“The recent visit by Taiwan’s president, Tsai Ing-wen, to the United States — which prompted Beijing to hold live-fire drills off Taiwan’s coast and to warn anew that peace and stability in the Taiwan Strait are incompatible with any move by Taiwan toward formal independence — was just the latest reminder of how overheated this atmosphere is. The smallest misstep by either side could ignite a U.S.-China war that would make Ukraine look like a neighborhood dust-up.”
He starts with how much progress China has made as a nation over the past few decades to measure up to the world’s most powerful nation, US – economically as well as militarily:
“The Communist Party’s hold is also a product of all the hard work and savings of the Chinese people, which have enabled the party and the state to build world-class infrastructure and public goods that make life for China’s middle and lower classes steadily better.
Beijing and Shanghai, in particular, have become very livable cities, with the air pollution largely erased and lots of new, walkable green spaces. As my Times colleague Keith Bradsher reported in 2021, Shanghai had recently built 55 new parks, bringing its total to 406, and had plans for nearly 600 more.
Bradsher, one of the handful of American reporters who lived in mainland China through nearly three years of stringent “zero Covid” policies, also pointed out to me that some 900 cities and towns in China are now served by high-speed rail, which makes travel to even remote communities incredibly cheap, easy and comfortable. In the last 23 years America has built exactly one sort-of-high-speed rail line, the Acela, serving 15 stops between Washington, D.C., and Boston. Think about that: 900 to 15.
I say this not to argue that high-speed trains are better than freedom. I say this to explain that being in Beijing reminds you that China’s stability is a product of both an increasingly pervasive police state and a government that has steadily raised standards of living. It’s a regime that takes both absolute control and relentless nation-building seriously.”
Whilst China has made significant gains on technology, its need for absolute control seems to be holding it back in what is being talked about as most game changing technology of our generation – Artificial Intelligence:
“Indeed, a story making the rounds in Beijing is that many Chinese have begun using ChatGPT to do their ideology homework for the local Communist Party cell, so they don’t have to waste time on it.
…It’s funny, though — just when you start to worry about the state of J.F.K. Airport, and all the stories in recent years that China was going to bury us in the race to A.I., an American team, OpenAI, comes up with the world’s leading natural language processing tool, which enables any user to have humanlike conversations, ask any question and get deep insights in every major language, including Mandarin.
China got an early jump on A.I. in two realms — facial recognition technology and health records — because there are virtually no privacy restrictions on the government’s ability to build huge data sets for machine learning algorithms to find patterns.
But generative A.I., like ChatGPT, gives anyone, from a poor farmer to a college professor, the power to ask any question on any subject in his or her own language. This could be a real problem for China, because it will have to build many guardrails into its own generative A.I. systems to limit what Chinese citizens can ask and what the computer can answer. If you can’t ask whatever you want, including what happened in Tiananmen Square on June 4, 1989, and if your A.I. system is always trying to figure out what to censor, where to censor and whom to censor, it will be less productive.”
He then pins down the issue to the rapid erosion of trust between the two powers:
“The erosion in U.S.-China relations is a result of something old and obvious — a traditional great-power rivalry between an incumbent power (us) and a rising power (China) — but with lots of new twists that are not always visible to the naked eye.
… One of the twists, though, is that this standard-issue great-power rivalry is occurring between nations that have become as economically intertwined as the strands of a DNA molecule. As a result, neither China nor America has ever had a rival quite like the other.
America knew how to deal with Nazi Germany, an economic and military peer, but a country with which we were not deeply economically intertwined. America knew how to deal with the Soviet Union, a military peer but nowhere near our economic peer, and a country with which we were not economically intertwined at all.”
How intertwined are America and China?
“…Americans’ favorite device is an iPhone assembled mostly in China, and until recently the favored foreign destination of Chinese college students — some 300,000 of them today — is America. That makes for some weird scenes, like watching one country shoot down another country’s intelligence balloon just after the two countries in 2022 set a record in annual bilateral trade.”
Another twist he talks about is the increasingly digital connect between the two raising issues such as those faced by Huawei and TikTok in America and complete bans on Youtube and Facebook in China.
This lack of trust seems to play into the strengths of a business that we own in our Global Compounders Portfolio – TSMC, the Taiwanese chip maker:
“… When you ask them what is the secret that enables TSMC to make 90 percent of the world’s most advanced logic chips — while China, which speaks the same language and shares the same recent cultural history, makes zero — their answer is simple: “trust.”
TSMC is a semiconductor foundry, meaning it takes the designs of the most advanced computer companies in the world — Apple, Qualcomm, Nvidia, AMD and others — and turns the designs into chips that perform different processing functions. In doing so, TSMC makes two solemn oaths to its customers: TSMC will never compete against them by designing its own chips and it will never share the designs of one of its customers with another.
“Our business is to serve multiple competitive clients,” Kevin Zhang, senior vice president for business development at TSMC, explained to me. “We are committed not to compete with any of them, and internally our people who serve customer A will never leak their information to customer C.”
But by working with so many trusted partners, TSMC leverages the partners’ steadily more complex designs to make itself better — and the better it gets, the more advanced designs it can master for its customers. This not only requires incredibly tight collaboration between TSMC and its customers, but also between TSMC and its roughly 1,000 critical local and global suppliers.”
It is unlikely that SMIC or any such Chinese semiconductor company will threaten TSMC’s dominance barring the event of a military conflict.
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
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