China, America, and Our Shared Future

Editor’s note: Portions of the conversation were edited for brevity Over the past several years, we’ve watched as the U.S.–Chinese relationship quickly morphed amid tensions over supply chain disruptions, trade policy, tech competition, cybersecurity, and the Russian invasion of Ukraine. After the Biden administration passed policies banning the sales of advanced semiconductors and increased restrictions on exporting technology to China in late October, animosity escalated to a new level. Prior to the first in-person meeting between the two leaders since Biden took office, Eclipse Partner Aidan Madigan-Curtis, who has analyzed China’s economy for the largest hedge fund in the world and shipped millions of devices from China’s shores on behalf of the world’s largest consumer electronics company, sat down with Sand Hill Road’sScott McGrew to look at the Chinese-American relationship and to discuss what Madigan-Curtis described as, “The precipice of what some people may dramatically describe as a new world order.” Below are a few highlights from their conversation. Scott McGrew (SHR): I find it interesting that we are limiting the chips that we are sending to China, but those chips are made from rare earths and other things that we get from China. What are your thoughts?Aidan: So much of the backbone of our economy is made from these parts and pieces that are sourced from these rare earths based in China (consumer electronics, medical devices, automotive parts, etc). And rare earths are not the only materials that are based in China — 85% of the world’s lithium is processed in China. Lithium is sourced in other parts of the world like Australia, Chile, and also China, but the processing step — which is quite hazardous from an environmental and health and human safety perspective, predominantly occurs in China. Similarly, 90% of the world’s graphite is processed in China as well. So, we are incredibly dependent on China when it comes to processing these core materials that our big shift towards renewable energy and electric vehicles are entirely reliant upon. And in terms of interdependency, China is far less dependent on the U.S. than it used to be. China is shifting its economy towards more consumption-driven growth (40% of the Chinese economy now comes from consumer spending) and they’ve ramped down their export-driven growth dependency as the former ‘factory of the world’. Xi has also set expectations that China will grow at a slower pace in coming years, leaving the government wiggle room to trade some international-export and real-estate investment-driven GDP growth for greater domestic self-reliance and more sustainable GDP sources. Xi is targeting a GDP per capita by 2035 that would be on par with the world’s developed economies. Scott McGrew (SHR): Give me a short term and long term outlook that you see. Again, very short term, the two leaders — the American leader and the Chinese leader — will meet at the G20. What’s the six month bet on our relationship with China and what’s maybe the 10 year bet on our relationship with China?Aidan: From a U.S. perspective, it doesn’t seem beneficial to rock the boat further in the next 6 months. The U.S. is facing a crisis of inflation like we’ve never seen before. It was demand-driven inflation after COVID, due to a large fiscal stimulus and 10 years of low interest rates. We see the Fed taking action to clamp down on the demand side pressures causing inflation. However, there’s not much we can do in terms of the supply side of the equation. It isn’t possible for the U.S. to rebuild the supply chains that source, process, and manufacture more than a trillion dollars worth of our goods in the next six months. This is real power politik and given significant global interdependence, it would not be beneficial for the U.S. to escalate further. That said, there remain serious issues between China and the U.S. on the defense front — between perspectives on Taiwan and China’s rapid advances on the AI and quantum computing front (which enable the most complex encryptions to be rapidly cracked.) Things get a lot more interesting on the 10 year front. Between the Chips Act and the Inflation Reduction Act, the U.S. has committed hundreds of billions in capital to restructuring our supply chains and China has committed to reunifying with Taiwan amongst the other kinds of economic shifts that we’ve mentioned. I think that the table is set for some very interesting geopolitical dynamics in the next 10 years. Scott McGrew (SHR): It’s certainly been in both countries’ best interest to have a good economic relationship. As you pointed out, prices are low for all American goods as you walk through one of those big box stores, and it’s lifted so many Chinese into the middle class. However, the push in America, in particular, is to be ready to do a lot of this on our own. At Eclipse, you’re looking for companies to help innovate the way out. This kind of presupposes that nationalism and a drawback of globalism is permanent. Aidan:Eclipse is a multi-billion dollar venture capital firm focused on digital transformation of physical industries. All of the partners at the firm come from robust industrial and technology operating backgrounds, and the desire to innovate in these sectors came from the problems we all faced in our prior roles. Many companies and consumers experienced the historical deflationary benefits of globalization. However, to increase productivity from this point on, we need to leverage new technologies to not build back, but build different — or better — our domestic and near shore capabilities to reduce inflation and continue to grow and advance as a country. Robotics, automation, advanced AI, data, and analytics are all key to help humans move up the value chain and play a smart and safer role in our growing industrial operations in this country in the coming years and decades. Scott McGrew (SHR): You were with Apple for a number of years and were key to help get the Apple Watch manufactured. Do you envision a day in which there’s a factory that big in the United States making Apple Watches?Aidan: I do. I think it’s wonderful to see the government take action to incentivize companies to manufacture more, and manufacture with advanced tools and higher throughput here on shore. Overseas, we’ve seen the Chinese government pour hundreds of billions of dollars into subsidies and credits into semiconductor and overall manufacturing capabilities. So, to say that it seems very fair for the U.S. to take the same action is an understatement. Ultimately, these regulatory moves encourage companies to take on some of the financial burden (capex, opex) involved in moving and diversifying their supply chains now versus later when geopolitical or climate conditions worsen. Companies are incentivized to act immediately, as they have the chance to evaluate the most modern approaches and technologies that can increase throughput, make workplaces safer, and make inventories more modular and less rigid and wasteful. For the full episode, listen here.Follow Eclipse on LinkedIn and Twitter for the latest on the Industrial Evolution.