Deep Tech VC On AI, Chips, and US-China Competition
Sep 30, 2023
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Noah Smith and Matt Klein, economists and Substack writers, delve into the intricate dynamics of the Chinese economy and its global ramifications. They discuss Huawei's breakthroughs and the hurdles faced by China's AI companies. The conversation touches on the semiconductor industry's challenges and how they mirror the struggles of AI startups. They even explore unique analogies, like pizza machines, to illuminate AI's impact on the labor market. With insights on investing in deep tech, they highlight the raw talent pool and the multifaceted risks involved.
The difficulty in creating a useful domestic AI chip due to breakthrough implications of Huawei and NVIDIA's CUDA technology.
The underperformance of China's AI companies compared to expectations.
The challenges and opportunities in investing in deep tech, including talent pool, market structure, and distinguishing between R&D and engineering risk.
Deep dives
The Chinese economy's slowdown and pandemic impact
The podcast episode discusses two main perspectives on the Chinese economy: the long-term structural slowdown and the short-term impact of the pandemic. The Chinese economy has been gradually slowing down since 2010, reaching a growth rate of around 6-7%. The pandemic further disrupted the economy, with lockdowns and restrictions initially showing some success in curbing the virus. However, the situation worsened as the virus mutated, leading to more repression and economic challenges. Despite high hopes for a rebound, the economy has not seen the expected growth, raising concerns both domestically and globally.
The importance of service industries and structural challenges
The podcast highlights the importance of service industries for China's economic growth and suggests that the country's heavy focus on manufacturing and real estate has hindered its development. Service industries typically offer more potential for productivity gains and can stimulate economic growth. However, China's government prioritized industries it could control and put less emphasis on consumer-driven sectors. This has resulted in a relatively low share of consumer spending and a heavy reliance on real estate as a means of saving and investment. These structural limitations, combined with ideological and political factors, pose challenges for China's future economic growth.
The role of subsidies and competition in industrial policy
The podcast touches upon the success of Chinese industries such as electric vehicles and semiconductors, raising questions about their impact on global economic growth. The guests discuss that while there may be concerns about China's industry dominance, this should not necessarily create alarm. The car industry's global dynamics tend to favor local production, and the production of semiconductors involves lighter and more easily transported goods. The semiconductor industry, in particular, is seen as an important arena for competition, not only due to economic growth but also because of its military relevance. Overall, the podcast suggests that understanding these industries' nuances and potential long-term impacts requires a nuanced perspective beyond a simple binary setting of alarm or complacency.
China's Real Estate Bubble and Financial Repression
China's real estate bubble and financial repression have led to a situation where people are forced to save their money in real estate. The government has artificially kept interest rates on bonds and bank deposits low, discouraging saving in those areas. As a result, real estate has become the preferred investment option, driving up prices and creating a housing bubble. This approach is similar to what happened in Japan, where people were encouraged to save in bonds due to the government's policy of demolishing homes every 20 years. However, Japan's real estate bubble was more complex and different from China's. China's heavy reliance on real estate for savings and investment poses risks for the economy as the physical depreciation of capital can set in after about 20 years.
Trump's Foreign Policy and China's Influence
There is uncertainty regarding the future of US-China relations in a potential second term of the Trump administration. While Trump's rhetoric was often tough on China, his actions and policies did not match that rhetoric, and he even expressed friendship with Xi Jinping and blamed his predecessors for issues with China. There is a concern that a second term could see a shift in the US approach towards China, with potential desire to appease China and drop attempts to economically or militarily compete with the country. The impact of personnel choices and the influence of foreign powers on Trump's decision-making are important factors to consider. Furthermore, the future of the US relationship with China is intertwined with larger issues, such as the US relationship with Russia and the ability of democracies to coordinate and project power globally.
How semiconductor industry dynamics parallel the challenges facing AI startups
How pizza machines explain AI's future impact on the labor market
Challenges and opportunities in investing in deep tech, including the eager but raw founder talent pool as well as the importance of market structure and distinguishing between R&D and engineering risk
This show was brought to you by Creative Ventures.
