Good artists copy, great artists steal. – Pablo Picasso
This sentiment rings true as Doomberg1 examines the escalating trade conflict between the U.S. and China. In early July, in response to U.S. restrictions on semiconductor chip sales to China, the latter announced restrictions on gallium and germanium exports – key elements for semiconductors, missile systems, and significant military supply chains. Following this, the U.S. considered limiting China's access to advanced AI-chip based cloud computing services.
The predicament raises an intriguing question: who holds more economic power, the party that dominates the early stages of a complex supply chain or the one controlling the final few production steps? According to Doomberg, the answer is contingent on the time frame.
China holds a near monopoly on the production of the two aforementioned minerals. However, with economic incentives and governmental support, creating new supply chains outside China's control is feasible. Contrastingly, the U.S. and its allies control the more value-intensive steps of producing advanced chips, pushing China to invest heavily in forward integration.
Doomberg points out that China's approach to the semiconductor industry follows a well-known pattern exhibited by Chinese state-owned enterprises (SOEs). Initially, China handles the ecologically detrimental steps of the process, such as mining and processing. It then undercuts international competitors until near-monopoly status is achieved in as many foundational steps as possible. China uses its vast consumer market as a bargaining chip to coerce multinational corporations into relinquishing their intellectual property, either through joint ventures (JVs) or outright theft.
China's automotive industry is a testament to this strategy's success. In the name of climate change, China has seized opportunities to replace internal combustion engine (ICE) cars with electric vehicles (EVs). BYD Auto, once an obscure player, has now become the top-selling EV maker globally.
Doomberg recalls when BYD first caught its attention for producing knockoffs of foreign cars in the domestic market. Despite concerns about intellectual property theft, free-market capitalist Warren Buffett saw potential in BYD and invested $230 million in the company. This investment, in turn, boosted BYD's reputation as an electric vehicle manufacturer.
Fast forward to now, and BYD's vehicle deliveries have grown exponentially, outpacing even Tesla. In fact, BYD recently launched an affordable BEV priced at $11,400, which garnered 10,000 pre-orders in the first 24 hours. Doomberg states, "The numbers are truly mind-boggling, begging the question of how foreign automakers will be able to compete with BYD in the years ahead."
Notably, the market has considerably underestimated BYD's valuation compared to Tesla. Despite Tesla's impressive $870 billion market cap, BYD stands at a mere $100 billion. However, if BYD manages to outsell Tesla two to threefold, it could lead to a significant shift in market dynamics, particularly considering China's potential favoritism toward BYD in an escalated trade war scenario.
In conclusion, Doomberg indicates that the road ahead is rife with uncertainties, making for a captivating journey. It underscores, however, that no member of its team holds or intends to open positions in any companies mentioned in the article, emphasizing the importance of individual research and consulting with a financial advisor before making any investment decisions.
Footnote:
1 Adapted from source: Doomberg. "Build Your Dreams." Doomberg, 8 July 2023, doomberg.substack.com/p/build-your-dreams.
2 Hero image: Photo by Mohammad Fathollahi on Unsplash
