With the recent US-China tech war and sanctions on Chinese companies such as Huawei, vertical integration is now all the rage in China. Everyone is talking about how "China must develop X technology and Y technology" that is further up the supply chain. I have also participated in these discussions as well. Huawei comes under criticism for not anticipating problems earlier and relying so much on US tech.
However, there is something missing from all this. Its absurdity can be seen in the case of Huawei. Its specializations and advantages are 5G and handset design. It only makes sense to do what it does best: Just as, a bus driver should drive the bus, because that is what he is good at. He should not build the bus, nor engineer the bus, nor sell the bus. If you ask the bus driver to build the bus he will naturally waste a lot of time because that is not what he is good at. Sure, after a very amount of great effort, you might be able to teach some bus drivers to make buses, but the end product will still be inferior to what some other company that specializes in making buses from the start can do.
In reality, asking bus drivers to learn to make buses is just an exercise in wasteful duplication. It is a matter of spending a great deal of effort to figure out how to do what someone else has already learned to do better.
In the case of Huawei, it would have not only had to be Huawei, but to be TSMC, ASML, KLA-Tencor, Applied Materials, Tokyo Electron, Lam Labs, Synopsys, Cadence, and not only those companies but their suppliers such as Carl Zeiss, Cymer, 3M, DuPont, Corning, and also Google (with its Play Store) and god knows what else. It is ridiculous to expect one company to do all that, to become an entire industry. It is impossible. Therefore no, Huawei did not make a mistake in not integrating vertically years ago.
That is why the trend away from vertical integration has been the norm in the business world for decades. Vertical integration tends to promote closed, proprietary systems that stifle innovation. A misguided reliance on vertical integration is a big part of the decline of Japan, Inc.
Therefore, the entire effort to make China vertically integrated economy also makes no sense from a purely business perspective. China is about to invest billions, and perhaps even trillions in the long term, investing in trying to duplicate a bunch of technologies that other people have already learned to do better. This is called waste.
The trend, as Xi Jinping has said, is towards globalization and integration in the world economy. That means that Country X can do A,B,C,D, and E whereas Country Y can do F,G, and the two countries together can trade to integrate A,B,C,D,E,F,G together to create a final product. China is a big country so it will be the best at many things, but inevitably it cannot be the best at everything. No country in the world is the best at everything, not even the US.
Thus why is China in a rush to vertically integrate?
Purely for politics, no other reason. It is solely because the US has put Chinese companies on the entity list for political reasons. It is not because Huawei or any Chinese private companies did the wrong thing or made a mistake by not vertically integrating. It is because the relation between the US and China broke down.
Now the question is, why did it break down? Was it for a justified reason? It can simply be put to the following factors: A) China's refusal to liberalize, B) China's Senkaku dispute, C) China's SCS dispute, D) China's Hong Kong dispute, E) China's Xinjiang dispute, F) China's India border dispute. Every single one of these solely involves the oppression of Chinese people, or China's oppression of its smaller Asian nations. Not a single one of them is necessary or justified. That is my opinion.
In short, the trend towards integration in the global economy will continue, but China is being cut out of it. It is going to waste billions of dollars on vertical integration (a.k.a. duplication) while the rest of the world moves on. This will be damaging to China and for no good reason at all. Unfortunately, this is the reality we have to live with today.
However, there is something missing from all this. Its absurdity can be seen in the case of Huawei. Its specializations and advantages are 5G and handset design. It only makes sense to do what it does best: Just as, a bus driver should drive the bus, because that is what he is good at. He should not build the bus, nor engineer the bus, nor sell the bus. If you ask the bus driver to build the bus he will naturally waste a lot of time because that is not what he is good at. Sure, after a very amount of great effort, you might be able to teach some bus drivers to make buses, but the end product will still be inferior to what some other company that specializes in making buses from the start can do.
In reality, asking bus drivers to learn to make buses is just an exercise in wasteful duplication. It is a matter of spending a great deal of effort to figure out how to do what someone else has already learned to do better.
In the case of Huawei, it would have not only had to be Huawei, but to be TSMC, ASML, KLA-Tencor, Applied Materials, Tokyo Electron, Lam Labs, Synopsys, Cadence, and not only those companies but their suppliers such as Carl Zeiss, Cymer, 3M, DuPont, Corning, and also Google (with its Play Store) and god knows what else. It is ridiculous to expect one company to do all that, to become an entire industry. It is impossible. Therefore no, Huawei did not make a mistake in not integrating vertically years ago.
That is why the trend away from vertical integration has been the norm in the business world for decades. Vertical integration tends to promote closed, proprietary systems that stifle innovation. A misguided reliance on vertical integration is a big part of the decline of Japan, Inc.
Therefore, the entire effort to make China vertically integrated economy also makes no sense from a purely business perspective. China is about to invest billions, and perhaps even trillions in the long term, investing in trying to duplicate a bunch of technologies that other people have already learned to do better. This is called waste.
The trend, as Xi Jinping has said, is towards globalization and integration in the world economy. That means that Country X can do A,B,C,D, and E whereas Country Y can do F,G, and the two countries together can trade to integrate A,B,C,D,E,F,G together to create a final product. China is a big country so it will be the best at many things, but inevitably it cannot be the best at everything. No country in the world is the best at everything, not even the US.
Thus why is China in a rush to vertically integrate?
Purely for politics, no other reason. It is solely because the US has put Chinese companies on the entity list for political reasons. It is not because Huawei or any Chinese private companies did the wrong thing or made a mistake by not vertically integrating. It is because the relation between the US and China broke down.
Now the question is, why did it break down? Was it for a justified reason? It can simply be put to the following factors: A) China's refusal to liberalize, B) China's Senkaku dispute, C) China's SCS dispute, D) China's Hong Kong dispute, E) China's Xinjiang dispute, F) China's India border dispute. Every single one of these solely involves the oppression of Chinese people, or China's oppression of its smaller Asian nations. Not a single one of them is necessary or justified. That is my opinion.
In short, the trend towards integration in the global economy will continue, but China is being cut out of it. It is going to waste billions of dollars on vertical integration (a.k.a. duplication) while the rest of the world moves on. This will be damaging to China and for no good reason at all. Unfortunately, this is the reality we have to live with today.
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