Who’s Disrupting Whom at the Global Level?
European Straits | Friday Reads
Hi, it’s Nicolas from The Family. Here’s a new Friday Reads edition. The goal here is to direct your attention to various things you should care about.
Today’s Agenda 👇
Is China the new Japan? And if so, who’s the new China?
Following up on topics I covered over the recent weeks
A comprehensive reading list on what’s happening in India
Yesterday Byrne Hobart of The Diff wrote an excellent article about Japan and why it went from being America’s dreaded competitor in the 1980s to an alleged laggard with an economy seemingly unable to ever start growing again. You’d need to subscribe to Byrne’s (excellent) newsletter if you want the whole thing, but here are extracts that I particularly like:
Toyota looked unstoppable because its suppliers took the hit when things went badly. That kind of system is tenable when a country is building national champions, but it’s not nearly as popular when they’re trying to maintain their position.
Aggressive protectionism, financial repression, and technology transfer are an established way for poor countries to catch up to richer ones. And while the rise of Japan cost the US manufacturing jobs, the rise of other Asian economies cost Japan plenty of factory jobs, too.
It reminded me of the late Clay Christensen’s thesis about why Japan stopped growing in the 1990s. Watch this video (it’s just a few minutes), but here’s the transcript:
A former student returned to Japan and took a position in their Ministry of International Trade and Industry (MITI). This poor man was sentenced to develop a plan for the resurrection of Japan’s economy. And this is a big puzzle, because through the 60s, 70s and much of the 80s, Japan’s economy was growing. But then, starting in 1990, it just flatlined.
He worked on the problem for about two years, and he called me one day, and he said “Clay, there’s no hope for Japan”. I’m a very optimistic guy. I said “I’m certain there’s something that Japan can do. Why don’t you just come back to Harvard? We’ll spend a day, and we’ll solve Japan’s problems”.
But after an hour, he convinced me that there indeed was no hope for Japan. He [simply] pointed out that...Japan disrupted America.
Those [Japanese] companies started at the bottom [of their] industry, and by 1990 they were making the best products in their categories in the world. The problem for them was hitting the high end of the market, [because from there] there’s no place to go. The margins are beautiful, but the volume there is limited.
So, again, Japan disrupted America. They started at the bottom of the market during the 1960s and then grew from there, all the way up to the high end. But then Japan stopped investing in disruption (they weren’t hungry enough anymore), and South Korea and Taiwan disrupted Japan, until they ended up reaching the high end, too. Then China joined the party, but it might be starting to feel a bit exhausted as well. India, according to Christensen, is next in line—but in today’s environment, it may be too early to tell how that will work out, as explained in Wednesday’s edition.
Note what Christensen says about Europe in his conference (at Oxford): that in Europe, unlike America, we didn’t let the Japanese in. I think the situation was more complicated than that, as Europe was still busy catching up, meaning European firms were a tougher match for the Japanese than sleepy, high-margin American firms. But it says a lot about what makes it possible for one country to disrupt another while in the process of developing their economy: you need access to the other’s market, which means that you need free trade at the global level.
That certainly existed back when Japan disrupted America. But it’s not the case anymore, as abundantly explained in previous editions (notably here and here), as well as in Peter Zeihan’s excellent Disunited Nations. And there are consequences of this reversal in the progress of free trade.
One outcome is that America doesn’t have much to fear from outside disruptors anymore. And so what we’re about to witness is more of Battle Royale between domestic incumbents and domestic disruptors. I must say I don’t think the latter have a particularly high probability of winning that battle:
Today’s America is victim to Thomas Philippon’s The Great Reversal and to a phenomenon Brink Lindsey and Steven M. Teles call The Captured Economy: the older and bigger you are, the easier it is to ask the government to tweak the market to your advantage.
In the past, disruption from the outside, lifted up by free trade, contributed to weakening domestic incumbents and paving the way for domestic disruptors, notably those founded in Silicon Valley. It took foreign competition in the personal computing industry, notably from Japan, for Apple to be able to rise and take on IBM.
On the other hand, now that free trade is a thing of the past, US incumbents can focus on consolidating their positions, including by lobbying in Washington, DC. As a result, tech-driven disruptors might find that they have a much harder time growing in the face of their resistance. No wonder why Marc Andreessen stays awake at night writing IT’S TIME TO BUILD.
By the way, this idea that the US is not particularly positioned to race ahead from a technological perspective was all confirmed by Peter Zeihan in a tweet dated October 2019:
With the exception of the 1950s-1980s, when the world was recovering from the world wars, the US has always been a tech laggard. Cheap land, capital, food and power means there's less pressure for moving up the value-added scale. It isn't a bug, it's a feature.
The situation is made even worse by the widening inequality gap in the US. I was particularly interested in this thread by Michael Pettis, a professor of finance at Peking University, which corroborates Zeihan’s idea: the more the American workforce is forced to work for miserable wages (all while paying a very high price for everything, starting with healthcare, housing, and higher education), the less industrialists will invest in increasing labor productivity by fostering technological progress:
As long as wages grow more slowly than GDP, why would businesses invest in productivity-enhancing technology? With wages so low there is little pressure to do so (unlike in the 19th and early 20th centuries, when US wages were the highest in the world and rising rapidly). In fact it is more profitable for companies individually to force down wages, and with wages continuing to grow slowly, businesses collectively don’t face the demand for their products that justifies large increases in productivity-enhancing investment.
This is a self-reinforcing process, and it is probably not a coincidence at all that the slowdown in American productivity growth overlaps with the rise in American income inequality. This by the way is also what happened in Germany after the 2003-04 labor reforms.
In other words, if Japan hadn’t kicked America’s ass in the 1980s, maybe America wouldn’t have raced so quickly into opening the Internet to all, which is what triggered the technological revolution that led us to today’s Entrepreneurial Age! Instead, domestic incumbents would have lobbied the government to bring wages down and keep would-be domestic disruptors at bay, thus slowing economic development and preventing the Internet from even becoming a thing.
One amusing note on changing times. Back in the 1980s, Donald Trump was using exactly the same sentences he’s using these days to criticize China (“Let’s Not be Laughed at Anymore”), but it was to criticize Japan: Donald Trump and Japan from the 1980s to the Present (by Jennifer N. Miller).
India. Wednesday’s edition drew traffic and interest! My friend Thomas Jestin pointed out the work of Shashi Taroor, a Member of the Indian Parliament and author of Inglorious Empire: What the British Did to India (have a look at this video). I really enjoyed having lots of Indian readers contribute with opinions and insights—particularly given the context of mounting hostilities between India and China.
The ‘Great Fragmentation’. My wife Laetitia Vitaud has worked a lot on what individuals can do to thrive in a more fragmented world. Put simply, it takes a lot of learning and practice to be able to navigate across cultures (and languages). Read her article Navigating across cultures and getting ready for the future of work as well as this must-read that she wrote about Erin Meyer’s Culture Map.
The COVID-19 economy (1). This is a topic I’ve been covering a bit, notably here and here when it comes to governments supporting startups, and here regarding support for individuals. Software eating the world seems to bring about polarization: big business is even bigger, while small business is even smaller (down to the one creator in the passion economy or the self-employed person in the gig economy).
The COVID-19 economy (2). I’m quite harsh when it comes to measures implemented by governments to help businesses stay afloat; in particular, see this recent piece in Sifted. Here are interesting additional readings: what’s been happening in Germany; Noah Smith ringing the alarm about “zombie firms” in the US that should have died a long time ago but are still (somewhat) alive due to the bailout. Also, this.
Value investing is a recurring topic of interest for me (see this long 11 Notes on Berkshire Hathaway as well as the more recent The New Strategic Deal in Value Investing). Recently I stumbled upon the best article I’ve read recently about why value investing as a framework is relevant in the Entrepreneurial Age. Check it out: The Unified Theory of Enterprise Value & Tech Investing. Also, there’s this one.
China. A lot is going on on that front. Have a look at this incredible, in-depth essay recommended to me by my friend (and subscriber) Dan Colceriu: The Death of Engagement. I also discovered an incredibly interesting series of essays about why Apple, unlike other US tech giants, has been so successful in China. It’s available here, and the consolidated version is in my Evernote here: Apple’s Success in China.
Manufacturing, which I discussed last December, is a hot topic these days, notably when it comes to reshoring. Have a look at these three sources: Dan Wang; Noah Smith; and this in-depth paper that explains why leaving China is easier said than done for Western manufacturers: Five Suggestions for China’s Engagement in the Restructuring of Global Supply Chain amid the COVID-19 Pandemic Shock.
The US. Well, it’s not good (see my Adieu to Old America). Have a look at this graph revealing that the US hasn’t been making the same progress as Europe in curbing the pandemic (remember what I wrote about Europe doing better on some fronts?). The US needs to get its house in order, fast, if it wants to stay in the race—and embrace geoeconomic strategy rather than geopolitics. Also, have a look at this.
As always, please don’t hesitate to reach out if you want to pursue the discussion or if you’d like me to dig deeper into one of the questions above 🤗
This Wednesday, the free edition of European Straits was dedicated to What’s Happening in India? Here’s the related comprehensive reading list:
What does India think? (François Godement, European Council on Foreign Relations, November 2015)
India Stack: The Bedrock of a Digital India (Sasi Desai, Nipun Jasuja, Wharton FinTech, October 2016)
India: The Other Asian Giant (me, European Straits, June 2018)
China, India and the rise of the ‘civilisation state’ (Gideon Rachman, The Financial Times, May 2019)
India and China push a new age of Asian nationalism (James Crabtree, Nikkei Asian Review, October 2019)
U.S. Tech Giants Bet Big on India. Now It’s Changing the Rules. (Newley Purnell, The Wall Street Journal, December 2019)
Watch Out, China: Why Investors May Flock to India Next (Julie Segal, Institutional Investor, December 2019)
India’s payments revolution (Claire Jones, FT Alphaville, December 2019)
What Happened to India? (Shashi Tharoor, Project Syndicate, January 2020)
The pandemic is a portal (Arundhati Roy, The Financial Times, April 2020)
Health Can Be a Way Out of the Middle-Income Trap (Andy Mukherjee, Bloomberg, April 2020)
Reliance Industries Limited and Facebook (Ramneek Kundra, Twitter, April 2020)
Reliance's Facebook deal highlights India's troubled tech sector (James Crabtree, Nikkei Asian Reviw, May 2020)
A Tech Billionaire May Find Use in a Cold War (Andy Mukherjee, Bloomberg, May 2020)
India's richest man built a telecom operator everyone wants a piece of (Manish Singh, TechCrunch, June 2020)
Mukesh Ambani Won the World’s Most Expensive Sibling Rivalry (Ari Altstedter and P R Sanjai, Bloomberg, June 2020)
The Attack Of The Civilization-State (Bruno Maçães, NOEMA, June 2020)
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From Normandy, France 🇫🇷
Nicolas
