Supply Chain Expert Answers Chinese Manufacturing Questions | Tech Support | WIRED

Temu's Pricing Strategy and Demand Aggregation [00:11]

• Temu operates not as a traditional marketplace but as a demand aggregation platform, effectively selling excess manufacturing capacity from Chinese factories.
• Factories facing potential losses from idle production lines are willing to sell at lower profit margins (even $1 per widget) to keep operations running.
• The availability of products on Temu fluctuates, reflecting factories offering whatever excess capacity they have, such as car chargers or gloves.
• This model allows Temu to price products competitively, moving inventory that would otherwise be a financial burden to manufacturers.

The key thing is if I was going to lose money anyways by keeping my my factory idle, if I can make a dollar by selling a widget, I'm going to do that all day every day.

The Chinese Manufacturing Ecosystem and Western Brands [00:39]

• Chinese brands like Temu and Shein have capitalized on China's manufacturing capacity, addressing issues of excess supply that Western brands previously relied on China to absorb.
• In the past, Western brands like Nike and Adidas lent an aura of quality and familiarity, even if products were made in China.
• Shein has built an ecosystem where factories constantly compete for demand and volume, operating on razor-thin margins to avoid losses.
• Factories will do "next to anything" to keep running, highlighting the pressure to constantly push product out.

And so when I'm buying a pair of gloves for 90s, the likelihood that that factory had the best labor laws, the best outputs, the best sustainability capabilities is is probably not 100%.

Impact of Chinese Manufacturing on Global Product Availability and Cost [02:15]

• If all products made in China vanished, consumer electronics would be severely impacted due to China's dense and capital-efficient ecosystem, making it impossible to simply replicate factories elsewhere.
• Apparel and footwear, while produced elsewhere like Vietnam and Bangladesh, rely heavily on Chinese sub-components and raw materials, potentially increasing their cost by 80-100% without Chinese support.
• US domestic production capabilities are strong in strategic, highly automated sectors like defense and aerospace, which are less reliant on extensive labor.

The second bucket which would be the biggest bucket. They may not be completely produced in China but they have significant subcomponents and raw materials that come from there.

Evolution of "Made in China" Perception and Quality [03:18]

• The perception of "Made in China" has shifted from being synonymous with low quality to encompassing high-quality products, with many major brands sourcing exclusively from China.
• Branding and psychology play a role, as consumers may inherently associate quality with origins like France or Italy, regardless of actual production standards.
• During trade wars, China deliberately showcased its high-quality manufacturing capabilities, including luxury goods assembly, to counter perceptions and demonstrate its indispensability to the West.

And so I think it was part of the geopolitical tool bag that China had to try to show that the west needed China, but it was also a way that they could show that they had higher quality capabilities than what most people thought.

Geopolitical Chip Controls and China's AI Ambitions [04:43]

• US export controls on advanced chips to China are a geopolitical strategy to slow China's progress in AI and maintain American hegemony.
• By restricting access to top-tier chips, the US aimed to give its companies a few years' head start.
• This restriction, however, is backfiring by incentivizing China to innovate and invest in its own domestic chip development, as its AI companies can no longer rely on Nvidia.
• Selling slightly older chip models might have been a more effective strategy to maintain dependence on US technology.

And so the best thing that the US could have done actually is to continue to sell Nvidia or Intel chips but maybe keep them a model or two below the cutting edge these to keep the lock in so that these companies would still build and be dependent on these US designed chips.

China's Interconnected Manufacturing Ecosystems [05:48]

• China's ability to manufacture "damn near everything" is due to specialized cities and nurtured industrial ecosystems, exemplified by Shenzhen's growth in consumer electronics.
• The presence of anchor companies like Apple and their need for a vast network of suppliers created a self-reinforcing loop of interconnectedness.
• This supermarket-like model, where all necessary suppliers and components are readily available, makes China uniquely positioned for diverse manufacturing.

China's able to make everything because they have a very tight interconnected ecosystems. It's kind of like if you were going shopping and let's suppose you're having a dinner party and you want to serve pizza.

US Industrial Policy and Competition with China [07:17]

• The US is focusing investment on defense, semiconductors, and other strategic industries, not aiming to be the largest exporter of low-cost goods like cell phone cables.
• Competing with China requires clear national intent and robust industrial policy, including guaranteed buyer commitments and streamlined regulations.
• China endured 20-25 years of low-margin investment before reaching its current manufacturing strength, a level of pain any competing nation must be willing to endure.
• Taiwan's dominance in semiconductor manufacturing, particularly TSMC's capability in cutting-edge AI chips, is a critical geopolitical asset that both the US and China are vying for.

China endured 20 to 25 years of pain in terms of low margin, lots of investment before they got to a point where they are now.

China's EV Market Dominance and Ecosystem Development [09:48]

• China's rapid proliferation of EV brands is driven by its established ecosystem for batteries, steel, and energy, developed over 20-30 years.
• Western automakers like Tesla found China to be a crucial market, necessitating the development of a local supplier network for components like chassis and batteries.
• This process of training and qualifying multiple vendors created a skilled base that can now support numerous car companies, with companies like BYD emerging as major players.

And so as as you have this proliferation of vendors who know how to make things for Tesla, well, it becomes very easy to make something for insert car company here.

Working Conditions and Labor in China [11:22]

• While China has faced criticism for working conditions, there's an ongoing improvement as labor becomes scarcer, shifting from a situation where nets were added to prevent suicides to active recruitment.
• The large-scale migration from rural to urban areas in the past made it easier to fill demanding jobs, but this dynamic is changing.
• The "996" work culture (9 AM to 9 PM, 6 days a week) highlights the intense work ethic driving competition, even influencing Silicon Valley startups.

As there have become less people available for this work, they've actually had to go out and recruit people.

Pharmaceutical Manufacturing and Global Supply Chains [12:03]

• China manufactures a significant portion of Active Pharmaceutical Ingredients (APIs), the raw chemical components for medications, due to environmental regulations in the US making production there more expensive and difficult.
• The global focus on generic drugs has created pressure for lower input costs, driving the demand for cheaper API production, largely met by China.
• China's long-term manufacturing strategy, involving building massive factories with guaranteed capacity and then finding customers, created a structural advantage in API production.

And so as you look at this and say okay can we externalize some of these environmental costs people started to look elsewhere.

Shifting Perceptions of Chinese vs. Western Products [13:43]

• Historically, Western brands signified quality, but Chinese brands like Huawei and Xiaomi are now dominant domestically, partly due to soured geopolitical relations.
• Consumers are increasingly choosing to support local brands, challenging the long-held notion that Western brands are inherently superior.
• The perception of "Made in USA" as synonymous with quality is being re-evaluated as China's manufacturing capabilities advance.

And so the way that China has managed their companies is they basically put a bunch of demand out there and say, "We're going to buy a lot of solar panels. We're gonna buy a lot of cars."

China's Industrial Policy and Geopolitical Influence [16:47]

• The "Made in China 2025" plan aimed to make China's economy more resilient and less dependent on foreign technology, particularly chips designed in the US and produced with Dutch machinery.
• China is investing heavily in domestic chip manufacturing, solar, batteries, and rare earths, leveraging its refining capacity for geopolitical influence.
• The Belt and Road Initiative expands China's infrastructure and trade relationships globally, securing raw materials for its manufacturing and creating geopolitical leverage, such as influencing countries to recognize China over Taiwan.

And so what China 25 has been is an effort to identify these bottlenecks and to get through them.

Dark Factories and Automation [20:09]

• "Dark factories," operating with minimal human involvement and run by machines and AI, are becoming a reality worldwide, enabling 24/7 production.
• This automation reduces labor costs and operational expenses like heating and cooling, further lowering manufacturing costs.
• The widespread investment in robotics and AI allows for the production of everything from simple electronics to modular homes.

By taking people out of the equation, these factories are able to lower the cost further, not only in labor, but they don't have to pay for heating or cooling, there's also a lot where they've already paid for the robotics.

US Manufacturing Independence from China [22:08]

• Achieving manufacturing independence from China for simple assembly could take 2-3 years, while moving more complex operations requiring ecosystem support could take about 10 years.
• Complete independence, including raw materials, sub-assemblies, and expertise, is a 20-30 year endeavor.
• China's growth is attributed to Deng Xiaoping's economic reforms, special economic zones, and its WTO accession in 2001, which attracted substantial Western investment and manufacturing relocation, including Apple's move from Taiwan to mainland China.

If we want to be completely independent, meaning that we don't take any raw materials, any ingredients, any sub assemblies, any expertise from China, you're looking at probably 20 to 30 years.

China's Demographic Shift and Automation Strategy [28:02]

• China faces a demographic challenge with an aging population and a shrinking younger workforce, partly due to the former one-child policy, projected to result in 100 million fewer people in 20 years.
• Historically, China has not been open to mass immigration, leading it to focus heavily on automation as a solution to its labor shortage and demographic issues.

China has a well documented demographic shift that's happening. The one child policy has basically resulted in a lot of aging people and not enough young people to do a oneforone substitution.