Kyle Chan on China's industrial power and entrepreneurship | Subtext by Zerodha

ELI5/TLDR

Kyle Chan, a Brookings China fellow, walks through why Chinese industrial policy keeps producing strange-looking winners. The hero story for a Chinese entrepreneur is not disruption — it is grinding, scaling, and staying inside the lines of national priorities. The country bet on EVs over a decade ago not because they were obviously profitable, but as an energy-security hedge and a way to leapfrog combustion-engine incumbents. The current debate inside China is whether to keep hold of low-end manufacturing or shed it, and the answer so far is “both, awkwardly.” Every day the Strait of Hormuz stays disrupted, Chan thinks, is a month of free marketing for Chinese clean tech.

The Full Story

The hero story is different

In Silicon Valley, the cult is around disruption — move fast, break things, route around the system. In China, that template doesn’t translate. Founders who got too loud — Jack Ma, the head of ByteDance — got more than a slap. The cultural lesson stuck. What gets celebrated instead is grinding through hard problems and scaling fast, ideally in industries the state has flagged as priorities. Underdog stories work, but the underdog is positioned against Alibaba or American big tech, not against Beijing.

Huawei and BYD started on the outside

It is tempting to read Huawei today — Ren Zhengfei in photo-ops with Chinese leaders, gear sold abroad as part of state diplomacy — and assume it was always at the centre. It wasn’t. Huawei started by chipping away at small markets and local governments, the places nobody else wanted. BYD started by selling cars cheap enough to be laughed at. The same pattern repeats globally: Chinese firms don’t go straight for the United States. They start in Southeast Asia, Latin America, Africa — markets that look more like home — then work toward Europe, with the US as a distant trophy. Being stuck at “everywhere except the US” turns out to be a fine outcome, because the world is large.

The “made in China” tax

Selling abroad, Chinese firms still pay a brand tax. In India and the US, “Chinese” is shorthand for either low quality or a security risk, sometimes both. Some firms route around the stigma — MG Motor is technically owned by SAIC, a Chinese state automaker, but reads as British to the average buyer. Others have to genuinely adapt. Chinese EVs are loaded with software features because the domestic buyer is a young, smartphone-native first-time car owner. Export the same car to Europe and customers want a car that works, not a phone with wheels. Sometimes Chinese firms read emerging markets better than Western incumbents do. Sometimes they have to relearn what a “car” means.

Industrial maximalism vs. moving up the chain

There is a live debate among Chinese economists. Lu Feng’s camp argues for industrial maximalism — hold on to every link of the chain, including the unglamorous low-end stuff, because it feeds everything else and it gives you geopolitical leverage. The other camp says let it go, the wages are rising, the pollution is real, follow the developmental ladder. In practice China is doing both, badly. Steel and aluminium it still dominates. Parts of the solar supply chain and consumer electronics are quietly relocating to Vietnam, Thailand and India.

The Trump-era tariff round, Chan says, vindicated the maximalists. Push tariffs above 100 percent on Chinese goods and you discover that Americans need those goods — pharmaceuticals, industrial inputs, consumer everything — and can’t source them quickly elsewhere. The question stops being “is the US punishing China” and becomes “is the US embargoing itself.”

The new five-year plan and the interlocking-ecosystem bet

The latest plan tilts hard toward “high-quality development” — semiconductors, clean energy, EVs and the transport supply chain, AI. The bet is not just to win one sector. It is to push across all of them simultaneously so they reinforce each other. Smartphone manufacturing feeds EV components. EV components feed drones and robotics. AI sits as a layer on top. Huawei is the archetype — telecom, chips, cars, AI — and newer names like Xpeng do the same across EVs, foundation models, autonomous driving and robotics.

Involution: piling in until margins die

“Overcapacity” became a politicised term once the EU and US started using it, so China rebranded the same problem as “involution.” Chinese firms often optimise for volume rather than profit. Some of this is rational — early-stage EV market, you build capacity now to own the future. Some of it is structural: local officials are graded on KPIs that include attracting factories. Bring in an EV plant, get promoted. Stack enough local officials behaving this way and you get a country with more battery plants than buyers.

Beijing’s response, Chan says, is to keep its foot on the gas and the brake at the same time. Top-down it warns against overinvestment; in the same breath it names these sectors as priorities. The companies hear a confusing mix. Right now the bias is still toward boosting capacity. Firms like BYD are taking the pain at home and trying to find margin abroad — not just exporting but building plants overseas.

The Hormuz dividend

Asked whether Middle East disruption is an inflection point for Chinese EVs, Chan doesn’t hedge. “Every day the Strait of Hormuz is closed and the Iran war continues is like a month’s worth of free marketing for Chinese EVs and batteries and solar and clean tech.” His historical anchor is the 1970s oil shocks. Prices eventually came back down, but the psychological residue stayed — countries piled into alternative energy, consumers fell in love with fuel-efficient cars, and Japan rode the wave to global dominance with priced-right, gas-sipping vehicles. The Chinese EV equivalent could be playing out now.

He is careful, though. In an earlier piece he argued Chinese EVs will be strong but won’t dominate. The auto market is not a commodity market. Brand loyalty is real, country loyalty is real. Germans buy Volkswagens. Americans buy Ford F-150s they don’t really need. And the future will be messier than “Chinese vs. non-Chinese” — CATL works with German automakers, Stellantis partners with Leapmotor. The supply chains mix.

Why EVs worked when combustion engines didn’t

For decades, China’s auto industrial policy looked like a half-failure. The joint-venture model produced volume but no globally competitive Chinese brand. The chokepoint was always engine technology. The pivot was to “overtake on the curve” — a Chinese business idiom for catching up by changing the road. If you can’t beat them on the straightaway, change the track. EVs were that change. China started investing in batteries, charging infrastructure, electric public buses years before the market looked viable. Energy security was the deeper logic — the country has always worried about Strait of Malacca disruptions cutting off its oil. The bet looks visionary in hindsight. At the time it was just a bet that they kept funding.

Chan’s pattern across all these stories: Chinese industrial policy works when it stays consistent for a decade or more. Most countries lose patience.

FDI, leverage, and India’s opening

China extracted know-how from foreign firms by being aggressive at the negotiating table — localise production, work with Chinese partners, upgrade Chinese suppliers, or lose access to the market. Foreign companies went in eyes-open and still made a lot of money. They never gave away the crown jewels (combustion engines, signalling software for high-speed rail), but they gave enough.

Two things made it work: leverage in negotiations and a serious domestic scientific base to absorb what was transferred.

Chan thinks India is the country best positioned to repeat this. Large market, real technical talent, an existing diversified industrial base. The wildcard is whether policy can generate negotiating leverage. India has one advantage China lacked — it is a democracy the West actively wants to back, which makes China-plus-one strategies politically easy.

On Chinese FDI into India specifically, the economics suggest huge mutual gain — India needs the know-how, Chinese firms need new markets. The geopolitics complicate everything. India and China are two countries that historically haven’t fought many deadly military clashes with others, which makes the fact that they fought each other unusually loaded. Chan’s prescription is a more nuanced framework — pick the industries where the risk-reward is right, ring-fence critical infrastructure, manage data-sharing — rather than blanket allow or blanket block.

Key Takeaways

Chinese founder myth: grind, scale, stay aligned with national priorities. Disrupting the government is a no-go after Jack Ma.
Global rollout pattern: start in markets that look like home (Asia, Africa, Latin America), work outward, treat the US as last.
“Made in China” still carries a brand penalty. Some firms route around it (MG/SAIC), others adapt the product.
Industrial maximalism debate is unresolved. China holds steel and aluminium tightly; lets some solar and electronics drift to Southeast Asia and India.
Trump-era tariffs vindicated the maximalists — push tariffs too high and the US ends up embargoing itself.
New five-year plan: cross-sector reinforcement (chips, EVs, AI, clean energy) rather than betting on any single industry.
Involution = volume-maximising over profit-maximising, fuelled by local-official KPIs. Centre tries to brake and accelerate at once.
Strait of Hormuz disruption is “free marketing” for Chinese clean tech — 1970s oil shocks left structural changes even after prices fell.
EVs were a 15-year-old bet driven by energy security, not foresight. Consistency over time is the actual moat.
India has the ingredients to repeat the China FDI playbook — market, talent, industrial base — if it can generate negotiating leverage.

Claude’s Take

Chan is good for the same reason most under-rated China analysts are good — he refuses the two dominant cartoons. China is not an omniscient chessmaster running a hundred-year plan, and it is not a brittle Potemkin economy about to collapse. It is a country that places long, expensive bets, stays at them past the point where everyone else has lost interest, and occasionally gets the timing right enough to look prescient. The EV story is the cleanest version of that — fifteen years of patient capital, framed as energy security, paying off just as oil markets get shaky again.

The most useful framing in the conversation is “overtake on the curve.” It explains the Chinese pattern across battery tech, solar, drones — wait for a paradigm shift, then sprint past incumbents who are still optimising the old game. It also explains why incumbents keep getting surprised. The interviewer pushed reasonably hard, and Chan was honest about what he doesn’t know — whether involution self-corrects, whether the central government can credibly throttle local-government capex, whether Chinese auto will dominate or just be strong. Score 8 — high signal, no jargon-as-disguise, and the Hormuz line is the kind of compressed insight you can carry around for months.