The Lawyerly Society vs. The Engineering State: Who Owns the Future?

I want people to get out of these rigid frameworks—socialist, capitalist, neoliberal, autocratic—to think about the U.S. and China. I want both Americans and Chinese to demand better from their governments.

What works really well in China, and what do we have in the U.S. right now? There is no winner here. There is no loser here. It's not a race. Nobody gets to hit the win button. We should be having some sort of better synthesis.

Dan, the book is Breakneck. It's a New York Times bestseller in just under 2 weeks. Congratulations.

Thank you.

What is the conversation that you hope to create with the book? What do you want people to take from it?

I think that I want people to get out of these rigid frameworks—socialist, capitalist, neoliberal, autocratic—to think about the U.S. and China. I want both Americans and Chinese to demand better from their governments.

We're sitting here now in Silicon Valley. Not far away is the California High-Speed Rail project, meant to connect San Francisco and Los Angeles. It's been more than 15 years since voters approved this referendum to build this train. How many people have taken this train? Precisely zero.

Silicon Valley works really well in all sorts of ways and doesn't work well for most people. I want people in America to demand better from local governments, and I want China—and I want Chinese people—to feel like they can live in a government that respects individual rights and respects their own individual creative flourishing.

Yeah. And one of the framings you add to this book that I think is the meme that's become the most popular from it is the competition between America being a society of lawyers—the political class—and China being more engineering-oriented, and the different cultures there. Stephen, I know you found that sort of breakdown remarkable. Why don't you talk about that?

Well, in a lot of ways, I bring it back to the way that we frame companies. We see companies in Silicon Valley as startups, and we see startups as being founder-led. We quite often—I wouldn't say exclusively, but near exclusively—see them as the product or engineering people, particularly in this AI era.

We then see the big companies as, somewhere along the way, making this transition to being MBA-led, which in a lot of ways is kind of lawyer-led. They're led by the rules of a system and arbitrage of those rules rather than breaking the rules with new bits of technology.

It literally blew my mind that companies would start off, before this technology is diffused and before anybody knows about it, thinking, “Regulate us.”

And yet there we were. So I do see that similarity. I wonder how many a16z companies have been led by lawyers. The number's probably not zero, right?

Well, I'm actually on the board of a software company for lawyers that was co-founded by a lawyer, by coincidence, but not very many. There are people with law degrees, but they often have engineering undergraduate degrees. Okay.

Or they were lawyers and then immediately just made the leap to being operating executives in startups.

Yeah. You mentioned in your opening that you want America and China to both demand better from their governments. Why don't you flesh that out a bit more? Some people point to this convergence or say that we are borrowing from each other—not necessarily always the best things—but why don't you talk about that, too?

So what works really well in China? I think it is the urban living experience and the countryside living experience. Day-to-day life functions really, really well.

I was living in Shanghai, China's most functional city, where everything pretty much works. You go outside, and subway stations are not very far away. There are dense commercial areas. The shops stay open past 8:00 p.m., which is not something you can necessarily say about San Francisco. The train and park systems all work beautifully.

In the Chinese countryside, a lot of the remote villages are still really well connected by bridges, by high-speed rail, and by highways. In the U.S. countryside, there's basically roads and cars and almost nothing else.

Okay, so that's what works really well in China. We have really functional logistical systems. We have really functional urban cities that have good order.

And what do we have in the U.S. right now? Well, again, in Silicon Valley, the infrastructure here is not really wonderful. What Silicon Valley does have is companies worth trillions of dollars, which is not something that any other country is able to claim.

Here, we have really functional wealth creation. We have people who are able to drive a lot of corporate value. What I'm really hoping for is that there could be a little bit of learning between each other. Why shouldn't Caltrain work a lot better than it does? Why shouldn't it be much more possible for workers to take the train to go from Silicon Valley to San Francisco?

I hope that the Chinese government could actually respect its entrepreneurs, respect entrepreneurial drive, and not try to crush anyone who is out of line with government directives. That's where we should be having some sort of better synthesis.

Yeah.

I don't want to say it in such a clichéd way to push back on it, but there is also one of the things that you experience when living in China. You see the workforce, particularly in the factories in Shenzhen. There are rural people, and they're not allowed to just move. They can temporarily relocate for work, and then the state sort of requires them to go back. In a sense, they are forced to repatriate what they earned as a salary in the rural community.

I do think that some of the things that are restrictive also represent a huge benefit. It's an immense benefit. It's what enabled their whole system to work.

Here, the cities are more attractive. If they were all allowed to move to the cities, they would love to move to the cities, but they're not allowed to. So how do you navigate this? Do you take the best of both, or do you learn when you have to look at the fact that even the best part has some parts that would be rejected here?

Yeah. Well, the Chinese state has restricted a lot of rural people from going into the cities for quite a long time. This is known as the hukou system, the household registration system, which stops a lot of rural people from going into schools to access better education or healthcare.

I think a lot of that has been loosened in the last couple of years, especially if you're in a place like Shenzhen, which is much more welcoming toward migrants. One of the other big differences between the U.S. and China is that, in China, the cities generally work pretty well, and people really want to go into the big cities.

In the U.S., people would much rather live in their suburbs, and the cities aren't necessarily very pleasant. What I would love for American cities is for them to be much more pleasant, to allow agglomeration, and for people to be able to afford San Francisco and New York and feel like they can take mass transit there in a safe way and go eat some dumplings past 8:00 p.m., or eat some sandwiches, whatever else.

You're right: we're a sort of lawyerly society on the political level, and yet we have, as you mentioned, some of the best companies in the world and the best entrepreneurs in the world. But what is it about our government that even Elon Musk couldn't help solve some of the budget issues? And what is the potential path such that the law society won't sort of crumble or collapse, and we can strengthen the engineering one?

Yeah, I think Elon is a pretty interesting guy. I'm sure you guys have more thoughts and interactions with Elon.

Maybe the tragedy with Elon has been that he has been focused so much on cutting costs, focused on personnel rather than regulatory red tape. Personnel costs are not a giant aspect of America's budget. Arguably, we need a lot more personnel in order to process drug discoveries and make the FDA much more efficient, process high-skilled immigrant visas, and have a much more functional government.

I think it is a little bit tragic, also, that Elon was focused on reducing aspects of the government that he didn't like rather than conceptualizing how to build great projects inside the government.

If I'm thinking of some of the great achievements of America over the past century, I would offer projects like the Manhattan Project and the Apollo missions, which were absolutely an element of the technological sublime and had so much inspiration for so many people. These were engineering-led projects within the government, with a military component as well.

I think it would be much more interesting if Elon actually went in to try to do something like that. But what do you guys think about why Elon couldn't have cut through a lot of the morass with the regulations?

Well, I think, just on your question about the Manhattan Project, what is the incentive? It seems like more and more is being privatized. Why would the best engineers in the country work for an initiative where there isn't that same level of upside—not just upside, but also autonomy? Why would they want to be inside the system? It seems like outside the system is just working better.

Yeah. Well, maybe we need a degree of patriotism and national security consciousness, because I'm pretty sure the Manhattan Project engineers had better things to do than go out in the desert of New Mexico and work on this thing in pretty confined environments, and they weren't making a lot of money.

That's on the upside. But then, could Anduril have built within even just the feasibility or effectiveness of it?

Yeah, I mean, it's definitely the case that the prime contractors through the Department of Defense are not really inspirational places to work. Absolutely, I think there should be efforts outside of it, but outside of just building products, I would like for many more talented engineering types to go into the government to build all of these big engineering projects that we really need: things like mass transit, subway systems, solar, wind, and transmission lines to decarbonize our economy. These are all projects that could have used an Elon to support.

Well, of course, Elon leads the country in solar and in energy in general. I think that's pretty interesting.

It is. First, of course, in Silicon Valley, when people want to point to government success, the first place they land is on the internet itself.

Yeah, but it also shows the incredible strength that is unique to a true public-private partnership to develop something. That involved the universities, private companies, and the government itself, in a unique way of government funding, which was like, “Hey, go build this,” and we didn't really have a goal. I think that's a thing that you don't often see in China: the engineering focus, which is, “We love to build with this very specific goal.” I think that you always love to get those strengths of both, but there are these things where sometimes it just seems like you really can't just take the best of both.

We have a very long history of saddling new initiatives here with too many extraneous things. The CHIPS Act, most recently, is one where, if you actually read the text of the CHIPS Act, the money came with an unsolvable set of requirements. There was no way you could actually spend the money. This much had to go to these geographies; it had to employ these kinds of people; it had to do these kinds of things; it had to spend the money in these cities. That's not really a partnership. Companies really needed money, and they just had to say yes. They really wanted to make a statement by having the money out there.

Yeah.

Which is way different from when China decides, “We want to be really good at security.” The focus of engineers typically is on the result, and the focus of lawyers typically is on the process. I think at least the CHIPS Act was able to allocate a lot of the money to the chip companies before President Trump started threatening to withdraw some of that.

But if we take a look at the other big pieces of legislation—the Bipartisan Infrastructure Law as well as the Inflation Reduction Act—there's been very little infrastructure actually built by the infrastructure act, and there's been very little clean technology built through the Inflation Reduction Act. I think one of these problems is that the US is trying to do industrial policy by putting a lot of lawyers in charge.

The lawyers are still really thinking about their committees. They're still really thinking about their process. In China, at the 20th Party Congress, which concluded about 3 years ago, what Xi Jinping did was elevate a lot of the leaders of China's military-industrial complex: the people who ran China's crewed space missions and the people who ran China's biggest weapons companies. He elevated them to be provincial party secretaries and governors. It's kind of unimaginable that someone who used to run Lockheed Martin would become a governor of a major state in the US.

Instead, we have a lot of people from law schools conducting our industrial policy, and I think it's just not the right strategy to bring a lot of lawyers to a technology fight.

Well, in fact, we had a president who was a general who warned everybody about having generals and defense contractors run the country. So there's a lot of history to that as well. But what is it? One of the things you write about a lot, though, are the challenges that engineers bring to running things. Certainly, as an engineer, I read that carefully, but I actually think my view of it is that much of the excitement in at least half the audience of your book is that it points out that engineers are not good at running things. People gravitated to that aspect. What were some of the things you saw or experienced in China where the engineering mindset really backfires?

Yeah, I think the problem with China is not that they're only physical engineers. If there were only physical engineers, there would be some problems with overbuilding. There would be some problems with environmental destruction and displacing people. But overall, it really helps to have physical dynamism, because you can see your streets, your city, and your home get better year by year.

The problem with China is that they are also fundamentally social engineers. Social engineering can be really dangerous because they treat the population itself as just another building material to be torn down as they wish and remolded as they wish.

I spent a lot of time in my book thinking about the one-child policy as well as zero-COVID. The number is right there in the name. There's no ambiguity about what the one-child policy could possibly mean. In the case of the one-child policy, this ends up being a campaign of rural terror that was really meted out against female bodies, mostly in the countryside. Zero-COVID made a lot of people lose their minds, and it was pretty traumatic, especially for the residents of Shanghai, China's biggest and richest city, in the spring of 2022, when people couldn't leave their apartment compounds for about 8 weeks.

This is where I'm pretty clear-eyed about having a state run by engineers. They feel like they are just making decisions very technocratically. Everything feels super-rational for them, and they have the state capacity to enforce a lot of their big goals.

I prefer not to have anything like one profession running everything. I think a healthier society would have not only lawyers completely overrunning the US Congress right now. I think there's something like 47 US senators who went to law school, and only 1 has had any degree that resembles a STEM degree. Instead of being purely dominated by engineers or lawyers, let's have a few economists, a few entrepreneurs, and even a few dentists in there. That's not so bad.

We have a couple of doctors. We actually do.

Excellent. It is interesting because earlier you mentioned how we have these technology-founder-led companies, but very often—and I actually think there's a preponderance of this—there's a yin and yang of a technical founder and the nontechnical, socially oriented, or business-oriented co-founder. I would agree that our policy directives sort of lack that balance of any kind. It's very interesting how much we're structured around the procedures of the law. So much of our inability to build high-speed rail has just been the law.

Yeah.

The law is used to prevent building, as you know. And the CHIPS Act sort of said, “Well, here's all this money, except use it this particular way,” which is not how engineers would have thought of the problem.

It's definitely a double-edged sword. You can't build companies worth trillions of dollars without having legal protections and intellectual property protections. On the other hand, any fool is able to hire a lawyer to stop a project that he or she doesn't like.

I spent a lot of time looking at quite a lot of these projects that California really tries to build. I spent a lot of time thinking about this particular expansion plan by UC Berkeley to let more people attend and get educated inside its excellent classrooms. It was trying to build a student dormitory on this vacant lot, and homeowners nearby put up their hands and said, “Well, maybe we shouldn't let students move here. Has the state sufficiently studied the idea that students constitute some sort of noise pollution?”

This park—it was a tiny little park.

It was a tiny little park, and I think they had some affordable housing units in there as well, but they were alleging that the state didn't sufficiently study the problem that students are pollution.

We have all these very strange things. Often when I'm in New York, and often when I'm in San Francisco, I live around Van Ness Avenue. Van Ness Avenue has tried to add a bus line onto the avenue for something like 20 years. It took about 20 years, more or less, to add a bus lane. These are the sorts of things that are really crazy, and often it is people hiring environmental lawyers to stop what should be pretty innocuous projects.

You mentioned early in this conversation how you're trying to move past simplistic explanations or terms like “socialist” or “capitalist” to describe the differences between the countries.

How should we interpret “socialism with Chinese characteristics,” especially as we think about the term in the US? Say more about what it means to them.

“Socialism with Chinese characteristics” represents a couple of things to me. First and foremost, it represents a lot of discretion by the state to take control of resources and do with them what it will. Karl Marx did not write that much about redistribution. A lot of it ended up being about public ownership of critical goods.

If we take a look at China’s economy, there is still a giant state sector in which some of the most important industries in China are owned by the state. All of these upstream strategic industries—telecommunications, airlines, energy—are essentially organized by 3 giant state-owned companies that control pretty much the entire sector.

This is partly why, if you go into the countryside in China, they are not giving much in the way of cash handouts to ordinary people. In China, I think they still have this socialist mindset that every act of spending by any household is a capitalist act of consumption, while any big infrastructure project is this noble act in favor of socialism. China provides a pretty threadbare welfare net. It does not provide much by way of distribution.

Xi Jinping often sounds like Ronald Reagan when he denounces people for relying on welfare and for being too lazy. That’s exactly right. First and foremost, “socialism with Chinese characteristics” means that it is the state’s pleasure to decide how to spend most of the country’s resources.

The other part of “socialism with Chinese characteristics” that I offer—this is not at all a standard definition in the political science literature—is that I take a look at some of these highly competitive industries in China. I think a lot about something like the solar industry, in which most of these solar companies are extremely competitive, offering products that are not highly differentiated, and competition is absolutely miserable.

The solar companies’ profit margins are pretty minuscule, so the investors make very little money here. On the other hand, China owns pretty much 90% of this industry, everything from polysilicon processing down to module assembly. That is a national success for the state, and I think Chinese firms have inarguably driven most of the innovation in pushing down the costs of solar as well. “Socialism with Chinese characteristics” also means to me that investors and companies lose. They’re pretty miserable. Consumers win, and the national government wins.

But Stephen, I want to ask you a little bit about some of these competitive dynamics that you saw in China. A lot of it is pretty cutthroat competition. Can you offer some thoughts from your days at Microsoft about what sort of competition you saw?

Well, I think the thing that jumps to mind relative to competition is, of course, one of the things you had alluded to earlier: in the US, you rely on a legal framework for a lot of competition. It works both ways. It protects what you have, but it also gives the government the right to take away what you have if it becomes too big or too successful.

I think China is very good at the taking-away part. By design, as part of the socialist-capitalist view, they don’t really view intellectual property as the most important thing. In particular, for the software industry, that was hugely problematic because the software industry itself is just an intellectual-property business.

And in your book, you write about how China hasn’t really exported the arts and entertainment very much yet.

Correct. That’s also because there’s not a lot of intellectual-property protection. If you invented an incredibly cool Marvel comic universe in China, you wouldn’t have any real protection to be able to maintain it. People could just copy it. They could own all your merch, copy all your merch, and the economics of it go away.

I’ve always found that particularly interesting. At a very granular level, when you do business in China, you literally don’t have trade secrets. You’re just in the office, and there are CCP members who work in your office, whom you’re forced to employ, who report back on what’s going on. You have no say in that.

At the level of—they get to walk into your data center, and they get to log on to any system. That’s the cost of doing business. It’s sort of like in the US: you open a restaurant, and the food inspector can show up at any point and walk around the kitchen all they want, except when it’s a data center and the goal is not safety for the consumers but security for the state. It’s a different kind of challenge.

When you were hiring a lot of engineers in China, what were you looking for? How hungry were they? Were they dynamic?

Yeah, that’s a great thing to see. You do see some of this in the US, but in China, the example I always use is the Consumer Electronics Show. You go to one part of the show where all the component makers are, and you want magnets to put your MagSafe adapter on. There are 500 companies selling magnets, and you walk up to any one of them and take the slightest bit of interest. They’re whipping out a deal book.

They’re hungry. I talked to a guy at last CES—CES is on my mind because it was this week—and he made cases for iPhones with chargers and magnets and stuff in them. He was asking, “What do you not like? Have you looked at all the competitors? Have you seen the one from this other company? They suck, right?”

“How many do you need?” And you’re like, “I’m just a guy. I don’t even—my badge doesn’t say I buy lots of cases. It says nothing that would indicate I’m about to write a check for 300,000 units of an iPhone case.” But booth after booth, no matter the size of the component or what you want, they’re hungry.

It’s very different from in the US. You go to a US company at a trade show and show interest. They know if you’re a qualified buyer or not just by how you look and carry yourself, and they’re not going to talk to you. I watched a guy just fall in love with this iPhone case that looked like Darth Vader or something last year, and he just wouldn’t shut up. He thought it was the coolest thing ever, and they were literally about to give him an order of 1.

Right?

Just to do business with the guy and see where it led. That hunger is definitely a novel thing. We saw it when we were building Surface, and we could just watch the component people basically fight over the business.

The PC industry grew up in Shenzhen, and they have these factories where, if you show up and commit to building 100,000 laptops, they will build you a building and keep all your IP in the building. They will not cross employees over, and they will promise you the very best. That’s like Quanta, a company in Taiwan that does that.

I think that hunger is definitely a thing you just don’t see here to that degree.

Why not? What’s the deal? Why aren’t people more hungry? Why won’t they build our factories?

Well, building the factories is probably a different matter. I’m not here to represent all of America and what goes into it, but I do think that the factory thing is a very subtle and interesting point. It’s also one where the parties have completely switched roles over the past 30 years or so.

When China entered the World Trade Organization, this was a milestone for the world. It was a huge, immense deal for China, but the world was like—I don’t remember what the phrase was in the book. I think you called it “consistent with the elite agenda,” or something like this.

Oh, consensus. It was the elite consensus that China entering the World Trade Organization was the right thing, and not 1 person in Western Europe or in the US thought, “Oh, this could be a problem.” In fact, it was like, “This is the greatest thing ever. It’s the true global Star Trek one economy, where everybody just practices art all day and we all just—it’s great.”

It really created what I would think of, in a not-the-most-positive way, as this private-equity phase of American business. All the businesses just said, “How do we get rid of our factories?” Because we couldn’t employ people. They were busing people in from rural China to work for small wages every day and busing them back, and we couldn’t compete with that. They were committed to low price, high volume.

It starts with T-shirts and socks, and then it gets to radios. You see this all over Asia. You see even Japan saying, “Well, we could make Sony TVs in China.” You could see LG saying, “Well, we could do our industrial products in China.” Meanwhile, the US is like, “And we could do cars in Mexico and Canada.”

Everybody took that moment in time to say, “How do we make the leanest profit-making engine in the US?” The first way is you just don’t own manufacturing. I think now everybody is coming to regret this. The question I have for you is, I feel like on that one the book kind of plays both sides of it.

It says, on the one hand, the US has to manufacture stuff, but on the other hand, it will never compete. It can't catch up. So what is the right answer to that? Not the right one. I mean, that's unfair to burden you with the right answer for that, but—

I'm going to burden you with the right answer for that. But let me offer that what matters is direction as well as intent. Right now, last I checked, China's share of its economy dedicated to manufacturing is about 26–27%. For the US, it is about 10–11%.

Fine, the US is a pretty rich country. Its labor force doesn't really want to be bused to factories and work for small wages every single day. But why doesn't the US try to achieve, let's say, Japanese or German levels of manufacturing as a share of GDP, which are closer to 20%? I don't think there's any natural law that says that manufacturing as a share of US GDP should only be about 10%. Let's try to get it a little bit higher. Let's try to get workers quite a lot more excited about building all sorts of products.

Let's try to have the government actually create functional infrastructure, such that our ports work much better than they do, our trains work much better than they do, and our trucking systems work much better than they do. That's something that China does really well. It invests in all sorts of port infrastructure. It invests in all sorts of power production, so they have nuclear power in order to build a lot of stuff.

Infrastructure is where the government absolutely does have a good role to play in terms of creating all of these public goods. Then it's also up to the entrepreneurs to decide that making products is really, really exciting and we should try to build a little bit here. If we treat technology as more of an aesthetic project, as more of a political project, that's really the sort of direction that I want to take things. I don't think there's a level that we can possibly target, but right now it still doesn't seem all that interesting for many people to build.

The other part that China does right, I think, is that it hasn't been so focused on this idea that's kind of attributed to Tim Cook: inventory is evil. We just have to get products out the door. We shouldn't keep them all in stock. Have lean manufacturing.

When China had a crisis, as it did in 2020 with the COVID pandemic, and it had a production issue, there were a lot of pretty inefficient state-owned enterprises, as well as entrepreneurial firms that had a giant workforce and a lot of slack in the system. They were quickly able to retool to build masks and cotton swabs. American companies were unable to do that because they had let a lot of their skills atrophy.

They keep a pretty lean workforce. This workforce is hyper-well-adapted and optimized for one particular task, and they can't easily retool and reskill quickly to confront an emergency. This is where I want to encourage US firms to build in a little bit more buffer, both in terms of inventory as well as labor, because you never really know when there might be a crisis that might strike. You don't want to be hyper-optimized for one thing.

Yeah, I think that's a fantastic point, and it sort of feeds into the evolution that happened at the start of the WTO. What arose from that was this whole lean manufacturing, which actually came out of Japan, and the idea of how you minimize not just the length of the assembly line, but the stockpile of inputs at the beginning of the assembly line.

But one thing I do think that, as you mentioned Tim Cook, I would say something that Apple does uniquely—which, in this environment, they aren't getting enough credit for—is almost like, how do you even count the engineers versus the manufacturing people? Because even at Apple, the number of people who really are manufacturing people, who just happen to work in Cupertino and fly to Asian locations a lot, is very, very high—thousands and thousands of people as part of the company.

I think the reason Apple products are what they are is because they don't see this line that people saw in the '80s or the '90s with the WTO, where manufacturing is rural people on a bus doing the same operation 12 hours a shift, and then smart people figuring everything out at headquarters. Apple sees much more of a continuum.

I think where American industry really didn't do so great was that it very quickly snapped to a small number of people in headquarters who are the brains, and there's just too much of a distance to what's made. That's what happened with the PC industry. All PC laptops basically became the same because not just the manufacturing, but the design, the innovation, and the origination all came from the factory. So, to use your point, they came from the engineers, not the designers or the MBAs or the lawyers, right?

And the engineers making a laptop are going to make it for efficiency. They were, in fact, responding to that, and the same happened with American cars. American cars—you know, your brain says an SUV and a tiny little compact car should share as many parts as possible. But an engineering-outsourcing brain says, well, for efficiency's sake, we should use the same turn signals and all.

So I had this tiny car with this giant turn signal because it was the same one they used throughout the whole Chrysler line, which made no sense at all. But that's efficiency, and that's what an engineer says.

Right?

I want to ask if there are lessons that we can take, or analogies from further back in history. So let's look at Japan and how they built a manufacturing economy. What are things that you think are resonant with how China has done it, or what are things that maybe not so much?

Yeah, I think that the biggest difference between Japan and China is that, first of all, I think the Japanese are much more meticulous, and they have done, on average, just a much higher quality of production starting out. The Chinese started out really poor, and then they got a lot better, and the Japanese tend to be much better throughout this process. But maybe that's just a matter of opinion; maybe that's just a qualitative measure that is a little bit difficult to quantify.

I think the crucial, crucial difference between Japan and China is that Japanese companies were making mostly Japanese products for export, and there wasn't that much foreign involvement in Japan. Making something like Nintendo products or Mitsubishi products, that was almost all Japanese value-add. China took a pretty different approach, in part because of WTO accession, which Stephen is right about and which was tremendously important.

China realized that it was so far behind the technological frontier, it couldn't possibly produce anything like game consoles or memory chips that Japan had already been really good at. So China was really welcoming of foreign companies—companies like Microsoft, Apple, and Tesla—to build factories in China, and then have Apple engineers come over, train a lot of people, bring their managerial talents, bring their design talents, and then mostly assemble, at the start, components that were coming from the US, Japan, Germany, and Korea, and only provide the labor involved in producing these products.

That was not the case with Japan. Japan was already producing really high-quality products at the start, and China was much more excited about welcoming foreign investors. Even today, there are still a lot of products from Apple as well as Tesla that are being produced in places like Shenzhen and Shanghai for export.

I think the Chinese approach is going to avoid a lot of the problems of Japan in the past, because Japan really had been locked into its own model. It suffered what we call Galápagos syndrome, in which it wasn't really adapted well for other markets, and Japan was much less integrated than China is today.

Stephen, you have a prop that you want to show us about something with Japan.

Well, I think it's super—I love this point that you make in the book about quality and what you just reiterated here. I also think one thing that we tend to underestimate in the West, so to speak, is the degree to which the East Asian countries are incredibly focused on each other.

Everybody in Beijing knows what's going on in Tokyo, knows what's going on in Seoul, is paying attention to Singapore, and they really are keyed in. When I was living in China, that was the biggest thing I saw: China was very proud that Sony was coming to open factories in China for foreign investment and build TVs.

Sony didn't quite realize it, but what was happening to them already was that Korea had already seen how Japan was successful with TVs and had already decided—LG and Samsung—that they were going to win in TVs. Not in a government-mandated way, but in a capitalist market way. So today, the share of TVs that are LG and Samsung is super high for export around the world. That was very deliberate.

It turns out, in the early 2000s, China was already seeing what Korea was doing. I would meet with the CEOs of the electronics companies like TCL and Haier, and I would think, God, these TVs are awful. They would make these 6-inch-thick LCD TVs, and they didn't have the screen technology, and they're like, "We're going to win in this." They were also going to beat Intel, and they were going to beat HP or whatever in making computers.

But the thing that's interesting in today's view of things is that there are a lot of people who aren't as worried about China.

Part of what they think about is, well, we went through—and your book does a great job of this—all the reasons, if you wanted to believe that China couldn't be successful: the demographic problem, the financing problem, the R&D problems. These are real things that they have to overcome.

Part of it was that I was thinking back to the '80s and Japan. This was a Time magazine cover about how to cope with Japan's business innovation.

You should hold that up: “Made in Japan.”

You should hold that up: “Made in Japan.”

It's super interesting because, to me, I feel like I'm on a talk show.

Can you get that in frame? Is that working? Yeah. Okay.

Amazing.

And I think it's just so interesting. We spent 20 years in the US freaking out about Japan.

Yeah.

And it never really won. There was a brief time when it won. So I worry that that's exactly the kind of incumbent complacency that can happen with China: We've been here, we've seen this, and we're not worried. Actually, all the things you just cited—Galápagos syndrome, making things only for the Japan market, and not being welcoming to foreign direct investment—were probably the reasons why Japan is not the leader in electronics today.

Yeah, I think that's a really great point about American complacency, because America can cite this triumphalist victory narrative: In the '40s, we defeated Germany; later on, we defeated the Soviet Union; and later on, Japan was never quite the economic threat that people thought it would be. The emperor was going to sell his land and then buy all of the land in California, because that was how much the palace was worth.

I fear that China is a much more formidable competitor, in part because it is just so much bigger. It has 4 times the population and, by some measures, an economy roughly on par with the US. It has a much stronger manufacturing base. It has some advantages and some disadvantages, but one other advantage is that the Chinese Communist Party is a very good student of history.

It saw what went wrong with Japan throughout most of the 1980s, with all of its economic problems. It intensively studies the Soviet Union and its political failures. It is intent on not repeating these mistakes. When you combine that with all of China's other advantages, what I want to say is that the competition between the US and China will last for decades.

It will not be solved or resolved through any single technology, not even a technology as crucial as artificial intelligence. One country will become stronger—let's say that China is much stronger than the US. China will feel overconfident, it's going to make mistakes, and that's going to prompt the US to try to race faster as well, and vice versa. I think it is really unlikely that either country will simply implode and fail to get back up. Rather, we should be preparing for and thinking about a pretty formidable competitor.

Yeah, I definitely agree with that, and I think that, like I said, my biggest worry is complacency from our own country. Detroit is the classic example of complacency in the US. Japan made cars, and they actually used their lawyers and went to the government and basically solved their car problems by having the government either bail them out or, through a combination of measures, make it harder for Japan to do business in the US and sell its cars.

Germany is another example. One of the things that always surprised Americans throughout the '70s and '80s was why there were so many German cars all over Europe when they visited Europe. Then they would drive them, and it became this big thing: Wow, these cars are really, really good. We did everything we could to make them expensive. Now they're the most expensive cars and they have the luxury market, but they don't have trucks.

I think those lessons apply in the world of software as well. We spent a long time thinking, “Japan doesn't seem to have its act together on software,” and then, sure enough, here comes China marching through: “We're going to make Red Flag Linux, and we're going to make our own CPUs.” Those have all failed. Then one day you're like, “Wow, Huawei looks pretty good.”

I was in Japan last week playing with the Chinese phones, which you can't really do here, and they're all fine. If they were able to sell them here—which is a challenge—those phones would all be share leaders. It wouldn't just be Samsung in the AT&T store, for example.

Yeah. And here's what I wonder: Do you agree with this proposition? Over the last, let's call it, 15 years, China has gotten a lot better at software. It is already really good at hardware, too. Over the last 15 years, the US has had a lead in software, no question about that, but its manufacturing and hardware have not gotten that much better. The Chinese are learning at a much faster rate and patching up their deficiencies faster than the Americans are.

Yeah, we have really only 2 companies doing a good job on hardware, which are the constellation of Elon companies and Apple. After that, we run out, so all of our bets are there.

I do think it will be interesting to see over time. There is a cultural difference, and some of it comes from the scale, the wages, and the need to appeal to a much broader economy. There is a quantitative difference in quality that you can really measure in Chinese products.

I think the phones are good. They're what I would say is good enough.

Yeah.

The software is good enough. Actually, I think you alluded to this: The buildings are kind of good enough, and the bridges aren't going to last as long as the Brooklyn Bridge. They're not built for that. They're not designed for that.

Certainly, our apartment was falling apart, and it was brand new. We used to laugh about this constantly. I think our challenge is that we don't have quantity. I thought it would be good for people to understand the scale of China. I know that sounds like a cliché, but I don't think people really understand it.

Let me put out my scale, and then you update it. When we were first opening all the Microsoft offices in China, the person we hired to be the head of China said, “You have to have an office in every city that's more than 2 million people.” In the US, that would mean maybe broad metropolitan areas, but not cities. We asked, “How many is that?” They said, “30.”

We thought, “There's no country where we have 30. We don't have 30 offices in the US.” We asked, “How about 10 million?” They said, “There are just 2 of those.” So here we are today, and I think there are 18 cities with more than 10 million people. I mean, that's incredible. You couldn't count how many cities have 2 million people. 2 million is like a town, right?

Right, right, yes, yes. China's scale is real. The broad statistics that I like to highlight are that China is responsible for about a third of manufacturing value added globally. If we take a look at almost any particular industry, whether that's structural steel or solar photovoltaics, China can represent as much as 90%.

There are a couple of really crucial industries that China has almost a total chokehold over. We saw this most prominently with rare-earth magnets this year, after Trump imposed sky-high tariffs of about 150%. China retaliated not only by raising tariffs really high as well, but also by suspending exports of rare-earth magnets. A lot of automakers across the West started to panic because they couldn't manufacture their cars anymore.

That's not China's only card. China is also really dominant in a lot of things that include antibiotics, segments of pharmaceutical production—namely ibuprofen—and other active pharmaceutical ingredients. China could totally constrain the world's ability to make and deploy solar for a while.

Yeah, I'm particularly worried about pharma the most. I think that one's particularly interesting because we have all this pressure in the US to loosen the regulatory climate for pharma. But China's regulatory climate is very loose.

I worry about what we see all the time: People test products, go to CVS, and get the same antibiotic in 3 different generics, and they're actually not what they say they are, or they're not nearly the level of quality or purity that they should be.

I think pharma is the most strategic and important area that we need to build up, because it's also the one where we had the highest safety standards in the world. My hope is that we focus on it. It's such a straightforward one. We used to make them all in Delaware, and that just seems to have gone away. In New Jersey, that seems to have gone away.

A lot of our approach to catching up on manufacturing seems to be around industrial policy and picking winners, sort of following the approach that China and Japan have taken to some degree.

Do you think that's the right approach, or what would you say about that?

Yeah, well, I think industrial policy could be defined as broadly as we like, Eric. So let's just define it really broadly. This could involve the creation and deployment of better sources of infrastructure. Again, I come back to not only traditional infrastructure like ports and railroads that move around a lot of goods, but also data connectivity.

China has a lot of data connectivity. They build enormous fleets of nuclear power stations. There are something like 40 nuclear plants under construction in the world, and 35 of them are in China right now. The U.S. is barely building out enough nuclear plants. President Trump is now pretty unfriendly toward wind turbines. He keeps tweeting about this sort of stuff.

Industrial policy could also be defined in terms of education, in terms of giving more money to some of our most functioning university labs or national laboratories to get them to deploy technologies quite a lot better. Maybe it could also involve workforce training. It doesn't all have to involve giving money to Intel. Are we even picking winners here when we give a lot of money to Intel? Intel hasn't been doing very well.

So I say that let's have a broader definition of industrial policy. We don't have to call it industrial policy. Let's call it national competitiveness. But right now, I would say that the trend for the U.S. has just not been doing very well. So let's try something else.

Yeah. I think—and I think to build on what you were saying earlier—the lawyer side of us needs to focus. It's just as important to broadly define it as: We want these things to happen, and we're not going to saddle them with ancillary requirements. So much of the challenge has been, "Oh, yeah, we want you to do this, but we also like rare earths."

Rare earths are a real challenge. It's a kind of a weird name: It's not that there are super-rare elements; it's that they're just called that in chemistry, but they're really, really difficult to get out of the ground and process and turn into useful products. Part of the reason we don't like doing it here is because of those environmental downsides. But the flip side is, we have to be able to do them.

And the same with pharma: People don't like chemical plants near where they live, and we have a lot of history that says that gets to be problematic over time. So we need to be able to figure out how to get things done not just by encouraging, but by also putting barriers around the barriers. Otherwise, people can't invest.

You can't—everything turns into commercial real estate, where you have to be this very special breed of person that has like a 60-year time horizon to build one building.

And that's really the challenge. I mean, with something like rare earths, we absolutely need them, and they're absolutely super-polluting. If we take a look at some of the rare earth processing facilities around China, the cancer rates are off the charts. In California, this is a totally NIMBY state. I can't imagine that any homeowner will say, "Yes, let's have a rare earth processor in my backyard."

Even in places like Nevada, which is mostly desert—hot desert—there were a lot of protests about putting some nuclear waste at Yucca Mountain, and that was a pretty remote place, right? So I don't see how we get from here to there. A lot of these rare earth discussions that I saw from the Biden administration were, "Let's make the Canadians do it." This was not a really ambitious project to say, "Okay, well, we've got to figure out some remote part of California, some part of the West where there's a ton of federal land."

The one thing we have is remote. We have a lot of remote that's also fairly accessible, and it's federal land, so why don't we just build there? And yet we can't. And yet we can't. So that's the challenge.

Dan, I want you to compare and contrast America's and China's approaches to foreign policy and how that impacts the competition as we think about it.

Yeah. Well, America has been a global power for a very long time. There are, let's say, 100 countries—or maybe 50 countries—where there are American military bases. There's a lot of people who would really like the United States to have their back, and China has not built this network of alliances. It doesn't have that much trust, even among its near neighbors, all of whom have something to fear from Chinese power.

There have been a few wars.

There's been quite a few wars. And I think, for me, the way that I would characterize China's foreign policy is that it's very engineer-driven. The way that they conduct a lot of diplomacy in Africa and Southeast Asia, as well as Latin America, is just to go up to these countries and build some roads, build some light rail, build some ports.

And I think, for the most part, that's pretty positive. A lot of these countries really do need a lot of functional infrastructure. China is really good at building these at home, but it's found that it hasn't been super good at building these more locally. It hasn't been able to build effectively and cleanly, and in a way that satisfies a lot of political elites over there.

Otherwise, I think China's foreign policy has been not terribly ambitious. A couple of months ago, there was this minor border skirmish between Cambodia and Thailand. There were some troops that died in this fatal conflict. Was it China—the regional power—that really stepped up to mediate that conflict? Actually, it was mostly mediated by, I believe, Malaysia. So it wasn't the U.S. or Beijing that did something about this. This was Malaysia.

China has pissed off a lot of Europeans who are not very happy about Trump by engaging in wolf-warrior diplomacy, as if insulting these countries is the way to make friends. That's also been very, very strange. And in any sort of global conflict, Beijing will issue these statements to say, "Well, maybe things between Israel and Palestine should calm down, and maybe Russia and Ukraine should be friends," but they also don't really do anything to have a stake here.

And so I think that the engineering state's foreign policy is still mostly to build stuff rather than get really deeply involved in a way that America has actually achieved: make friends and build alliances in a way that America seems to be mostly walking away from now.

Yeah, it's super interesting. I love your characterization of their foreign policy as engineering. If you go to Africa, take Madagascar, which is arguably the poorest country in the world. To land in the capital city and go see chocolate and lemurs, it's this 100-mile, 100-kilometer drive. There's all this aluminum and metals in the same place, and China came in and just said, "Hey, we'll build you a railroad."

The French had built one, and then it deteriorated. But the French were colonizing the area, whereas China came in and said, "Oh, we'll build you a railroad, and we're going to just build a village where we live, and we won't even bother you." Literally, you could go—if you wanted Chinese food, you just turned left and went to the Chinese part of town, and they never bothered anybody.

And if you wanted Malagasy food, they just said, "Hey, come here and we'll give you chocolate and cool spices and stuff." They never bothered us. And so, in a way, they got the engineering. The transaction is, I think, what the State Department says: It's very transaction-oriented. Here's the train, and now we're going to extract and leave you alone.

But then, once the extraction is done, or once it's normalized, that infrastructure isn't super well-maintained. It's not expansive. And yet the flip side is, countries in Latin America saw what happens when the U.S. came in. So, in a sense, what I'm hearing—and also what I believe—is that the world needs a different kind of foreign policy that is much more, to use a Chinese phrase, much more of a win-win than either country currently sets it up to be.

Sure. Well, the State Department also says that when China talks about win-win diplomacy, it's about China winning twice.

Yeah. Yeah. Yeah. And that's exactly—I mean, Madagascar is still the poorest country, and now they have sort of half a railroad and less aluminum, right?

Speaking about foreign policy, thinking about the short- to medium-term here, one of the biggest questions, of course, is Taiwan in 2027. What are the things you're watching to get a better read on what could possibly happen, and what's your base case on how it plays out?

Yeah. Well, I want to quote the great analyst Ben Thompson here, who recently moved back to the U.S. from Taiwan. His assessment is that there's always a lot of risks out there, but in his view, the conflict between Beijing and Taipei is not imminent and not inevitable. That's kind of my view.

I feel like there is no deadline that Beijing has issued to say, "We will seize Taiwan by 2027." Maybe they want to be ready to do it. But I think so long as Beijing feels that the long-term trends favor China—and that is their publicly stated position: China is growing wealthier, it's growing more powerful, and it's getting more confident at the same time, while the U.S. appears to be falling—Beijing likes to say, "The East is rising and the West is falling."

Perhaps they take some solace from the messiness of American society right now in 2025. They feel that time is on their side. If they have some sort of hope that the Taiwanese could themselves really vote themselves to be part of the mainland again, that looks pretty unlikely now, but maybe they get a KMT government that's more friendly toward Beijing.

So long as they believe in all of that, I think they have no urgency really to move. And I think that the status quo has been pretty robust for the last 75 years now, and maybe that could hold for quite a few years longer.

And so you're not worried, as some people say, that because of the demographic situation or China's economic slowdown, they're going to be forced to make a move while they have the chance? You think it's unlikely?

Yeah, I think that China's demographic situation is a problem more in the next 50 years than the next 5 years. The slope, the curve of their demographic decline, is pretty modest. They still have 1.4 billion people, or just shy of that now. It's not that many people that they're losing every single year.

And their economy—you can debate what exactly the number is—but they publicly say something like 5% growth. There is still growth there, and there is still all sorts of new business creation and fantastic new technological advancements. I don't think they view themselves as fundamentally weak, or that there's a window they must act in before it closes.

What I appreciate about the book is that, right now, in the intellectual conversation around China, I feel like there are these two extremes. You have this sort of extreme bearishness, like the Zeihan view: because of demographics and limitations around food and energy, China is going to implode in the next decade.

And then there's the sort of bullish view, along with many others, who are like, “Hey, they have many more people, they're smarter, and they're just winning on so many things, and it's only going to compound.”

I feel like you have a more sober view, to some degree, which is: America has unique strengths and weaknesses, and China has unique strengths and weaknesses. There is no implosion. When one side is ahead, the other side will overstep, and then they'll need to catch up. I want to say that there is no winner here, and there is no loser here. It's not a race. Nobody gets to hit the win button.

I think we should just take this as a slow, steady grind that will require all of us to get better in all sorts of ways.

I think it's a great place to wrap.

The book is Breakneck. Dan, thanks so much for coming on the podcast.

Thank you, Eric. Thank you, Stephen.

Thanks so much.