The Bottom-Up Roots of China’s Hi-Tech Manufacturing Power

As the economic rivalry between the United States and China intensifies, it’s tempting for U.S. policymakers to focus on the things they most object to: subsidies, predatory pricing, over-production, dumping, technology theft, forced labor, lax environmental standards, an undervalued yuan, low wages, protected markets, the powers of the Communist state, and more. It’s comforting to stress that these tactics aren’t fair, and that China isn’t playing by the rules.

But while all of these criticisms are both necessary and justified, they are less than half the story. The spectacular growth of Taiwan—with less than 2 percent of China’s population—has been largely achieved without any such tricks. This suggests that a “normal” China might be an even tougher competitor. China’s global brand would be greatly improved, making it much easier to attract international students, professionals, investors, and customers, among other benefits. Perhaps we should be careful what we wish for.

Many in the West don’t want to accept the fact that many of the essential ingredients in China’s manufacturing domination are neither new nor nefarious. The country has closely followed the proven economic model of the Asian Tigers, only this time with an order of magnitude increase in population and scale. Acknowledging and addressing this simple business model reality is the key to developing an effective American response.

Over the decades, Japan, Singapore, South Korea, Taiwan, and China all adopted the same economic development formula: excellent mass education, elite technical training, a compliant and low-cost workforce, substantial subsidies, government R&D support, a manufacturing export focus, initially protected domestic markets, access to foreign investment and intellectual property, modern infrastructure, high savings, low crime, an effectively engaged state, and especially bottom-up industry strategies initially focused on low-end commodity products.

This approach was particularly well-suited to electronics-related markets, where there was a growing need for inexpensive keyboards, mice, printers, cables, modems, monitors, speakers, and similar commodities. The Tigers then leveraged this diverse base of business to steadily move up the value chain into semiconductors, network equipment, storage devices, flat-panel displays, fully assembled smartphones, tablets, and personal computers, and other forms of advanced, high-volume, higher-margin, production.

Asia, especially China and Taiwan, now dominates most of these markets, with deep expertise in the complex minutia of advanced, large-scale manufacturing. This unmatched foundation of production capability is now transforming other strategic industries, as electronic components become the building blocks of EVs, solar energy, robotics, drones, telecom, defense and other sectors. This is the essence of China’s hi-tech leadership challenge.

In contrast to Asia’s bottom-up model, U.S. technology firms have focused on the upper ends of the value chain—system design, software, customer experience, etc. Although this top-down approach has been extraordinarily successful in leveraging Asian manufacturing and dominating the most profitable market segments, it is inherently vulnerable to supply chain dependencies, ecosystem bottlenecks, manufacturing skill shortages, and/or intentionally imposed embargoes, weaknesses now obvious to all.

Unfortunately for the West, history shows that it’s much easier for companies and nations to move up the value chain than down it. Asia’s bottom-up approach was initially a humble one, with small profit margins and little market influence. But as businesses move up the value chain, they gain confidence, ambition, skills, scale, and profitability. Moving down the value chain tends to generate the opposite dynamics. It’s mostly done out of a sense of necessity, with lower levels of enthusiasm, confidence, know-how, and profitability. Students of disruptive innovation will recognize that the ease in which bottom-up strategies move upward vs the difficulty in moving downward is a classic Innovator’s Dilemma, as famously articulated by Clayton Christensen back in 1997. What’s the solution?

The first step is to realize that reducing manufacturing dependencies in strategic industries should be America’s single most important China policy priority, more than supporting advanced R&D, restricting exports, or trying to change China’s business practices. If there are multiple nations that make hi-tech materials, components, and equipment, commodity-like competition will re-emerge, helping America’s top-down model retain its vitality.

While it would be nice if this non-China manufacturing occurred within the United States, this isn’t a requirement. All that’s necessary is to stop China from amassing monopoly-like power in strategic sectors. Given America’s lack of domestic capabilities, the belief that the United States can become self-sufficient in electronics manufacturing will remain a fantasy for the foreseeable future. This means that global partnerships are the only real option. Targeted tariffs and subsidies can facilitate such partnerships, but today’s across-the-board levies do not. The Trump administration needs a much more cohesive approach.

The bottom line is that the best way to change China’s behavior is to reduce its market power. As long as China believes its influence is growing, there’s only so much that Western jawboning can do. But to shrink China’s power, the West needs to end its manufacturing dependencies on China through by developing strong and sustainable alternatives. Only then will it have the leverage to avoid being under Beijing’s thumb.

Fortunately, across Asia, India, Europe, and elsewhere, there are many nations that hope to find and/or become such an alternative, but this very diversity risks making it difficult for any single effort to achieve critical mass. More pointedly, it’s now very late in the game, and both policymakers and the U.S. tech giants themselves often remain complacent and divided. It’s embarrassing how long the West’s rare earth vulnerabilities have been obvious to anyone paying attention, and yet so little has been done. It’s well past time for America to realize that the most effective way to change China’s behavior is to develop global manufacturing competitiveness strategies that can actually work.