06 July 2020

Dan Wang: “2019 Letter”

I spend most of my time thinking about China’s technology trajectory. The main ideas can be summed up in two broad strokes. First, China’s technology foundations are fragile, which the trade war has made evident. Second, over the longer term, I expect that China will stiffen those foundations and develop firms capable of pushing forward the technological frontier.

In my view, there’s not yet much terribly impressive about China’s technology achievements. It’s true that the country leads on mobile payments and the consumer internet, as well as the buildout of infrastructure projects like a high-speed rail network. These however have more to do with differences in the social environment and regulatory regime. More importantly, much of China’s technology stack is built on American components, especially semiconductors. Failure to develop more foundational technologies has meant that the US has had an at-will ability to kneecap major firms, and to be able to impose at least significant operational hassles on Huawei. Over the medium term, US controls will disrupt the ability of Chinese firms to acquire leading technologies. And so long as substantial US tariffs stay in place, Chinese firms will have worse access to the world’s largest and best consumer market, meaning that they’ll be exposed to less export discipline.

Dan Wang

Interesting perspective, and quite different from the majority of opinions coming from US media, which tend to view Chinese tech companies as a rising and significant threat to Silicon Valley’s dominance. My guess is that, since China is relatively opaque for outside observers, both because of different culture and their more recent authoritarian structures, it makes the perfect canvas for many to project their fears and perceived shortcomings, to imagine China as a constant threat, always on the verge of surpassing the West.

I tend to agree with many points from the essay, for example this one about consumer-oriented technology:

These are not trivial achievements. But neither are they earth-shattering successes. Consider first the internet companies. I find it bizarre that the world has decided that consumer internet is the highest form of technology. It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP. (That’s why, I think, that the companies in Beijing work so hard. Since no one has any real, defensible IP, the only path to success is to brutally outwork the competition.) I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.

Another excellent observation below. I noticed a similar lack of process knowledge in outsourcing, who relies too much, in my opinion, on automation tools and instructions (the infamous Standard Operating Procedures) for its services. Without solid process knowledge the first two fail whenever there are exceptions, new cases not covered by the automation or the detailed instructions, leading to delays or errors in processing, to missed SLAs and loss of business.

My essay How Technology Grows argues that technological capabilities ought to be represented in the form of an experienced workforce. We should distinguish technology in three forms: tools, direct instructions (like blueprints and IP), and process knowledge. The third is most important: Process knowledge is hard to write down as an instruction: you can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but absent cooking experience, it’s hard to make a great dish.

We should think of technology as a living product, which has to be practiced for knowledge even to be maintained at its current level. I offered the example of the Ise Grand Shrine, which Japanese caretakers tear down and rebuild anew every generation so that they don’t lose its production knowledge. Here’s an example I came across more recently: Mother Jones reported in 2009 that the US government forgot how to produce “Fogbank”, a classified material essential to the production of the hydrogen bomb, because relevant experts had retired. The government then had to spend millions of dollars to recover that production knowledge.

To close up this quote-fest, a nice parallel between the worlds imagined by Philip K. Dick and the atmosphere of stagnation in Hong Kong:

An afternoon of walking around Hong Kong is the best argument against the idea that growth is some sort of automatic process, which we can count on as a matter of course. Between its economic stagnation and general air of nostalgia, it’s difficult to identify anything in the streets of Hong Kong that didn’t already exist in the ‘90s. Instead of arguing that case here, I’ll refer readers to Simon Cartledge’s essay on the city’s lack of dynamism. Stagnation might be fine if Hong Kong were the only place afflicted. I worry that the rest of the developed world (namely the US, Europe, and Japan) is turning into larger Hong Kongs.

That’s when PKD becomes most relevant. His novels feature smart—and often even brilliant—elites, who feel hemmed in by forces they cannot understand. PKD’s novels are good at depicting the frustrations of elites, whose only satisfaction comes from toying with the fates of smaller characters. They have good reactive instincts and can manage problems that flare up, but lack the confidence that they can affect larger outcomes, and thus have no real sense of initiative beyond petty matters. That’s the story of an elite in Hong Kong, and I worry that US elites are giving in to the same tendencies. They are well-meaning and well-educated, but also risk-averse and pessimistic: retail sanity and wholesale madness.

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