Made (entirely) in China: a tech behemoth rises

Hey, Ryan Reynolds here wishing you a very happy half off holiday because right now Mint Mobile is offering you the gift of 50% off unlimited. To be clear, that's half the price, not half the service. Mint is still premium unlimited wireless for a great price. So that means a half day. Yeah, give it a try@mintmobile.com Switch upfront payment of $45 for three month plan.

Equivalent to $15 per month required new customer offer for first three months only. Speed slow 135 gigabytes of network busy.

Taxes and fees extra. See mintmobile.com. Hello, Happy New Year and welcome back to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. The land masses of Alaska and Russia reach out across the Bering Strait at the closest, just 50 or so miles apart. Our editor at large makes an arduous journey to get a measure of the indigenous communities on both sides and of himself. And North Korean defectors have revealed a curious A third of them had received some form of private education that is illegal. Like everything else, the North Korean state wants control over learning. So why does it look the other way? But first, in these early days of the new year, we take a step away from the news to examine a trend that's shifting the balance of power in technology. Three words have shaped human history. Made in China. From gunpowder to paper to porcelain, our world would be unrecognizable without Chinese contributions. The Chinese government wants the country to resume its role as global innovator. It's making huge investments in the tech industry, in fields such as artificial intelligence, electric cars and computer chips. And as Chinese firms want to create new technology instead of just mass producing gizmos designed in America, that's creating a new tension between the world's two largest economies.

The message coming from China is that we are not going to be content to just make all of your stuff according to your designs in a way that is controlled by you. We are going to try and climb that value chain and start creating stuff ourselves. And this will mean that we control its export, we control its design, we control its configuration, and it basically makes us more powerful.

Hal Hudson is the Economist's Asia Technology correspondent.

The message being received by America and its allies, the west, is China's taking over the world.

So as regard to the message that's being sent, China being the creator of things, what is it doing to become that?

This has been a long process for China. It started two or three decades ago and some things it's kind of completed. So these are things like nuclear power plants. China is now pretty much the only country, along with Russia, that can build you a nuclear power plant. That used to be the domain of France. In America, Westinghouse and Areva, these were big companies that built nuclear power plants. Now it's just Chinese companies. The domains that are currently under question are things like electric cars and the chips that go in your phone. And these are the areas where Chinese companies are sprinting to catch up and potentially overtake Western rival companies.

But at this stage, the chips that China is making, how do they compare with the sort of current market leaders?

They're nowhere close. They are about 10 years behind, say Intel's latest chips and it's very, very difficult for them to catch up. People in the industry in China kind of quietly accuse the government of chasing these prestige, cutting edge things. They say you're just to catch up with the west because it looks good, whereas what they should really be doing is picking the areas of the market that would be the best fit for Chinese companies to make chips in and pouring money into those. But there's a little bit of a kind of prestige game going on that is a hindrance.

So is that a fair assessment that the efforts here are to simply catch up with the west or try to get better than the west do? More than bigger than.

Sometimes the government stimuluses are more in the latter camp that they see a strategic opportunity to jump ahead. And to be fair to the government, to the Chinese chips companies, there's no super obvious way that they could leapfrog the cutting edge chips that intel and TSMC make to go in the Apple phones. It's just not. There's no obvious market, but there are more obvious markets in things like electric cars. So China completely failed for decades and decades to build a Chinese made engine and car fully integrated, with no Western help or contributions. And so now they're saying, let's forget that we're just going to go straight to electric cars and pumping huge amounts of money into it. And it really does look like China will be the place where electric cars are made in the same way that China is the place phones are made. And that's because they've seen an opportunity and they've spent loads of money on it and they've kind of leapfrogged.

Is that a common dynamic in the tech industry in China in that there's a sort of a middle step that China never really got to and therefore it can make it easier to get to the Higher end, the more cutting edge.

Leapfrogging is the term. And maybe the other great example is payments. People will have heard of WeChat Pay and Alipay, which is where you pay using a QR code on your screen of your phone. And the reason that took off so fast is that but before, most Chinese people didn't really have payment cards. You had to go to the bank, you had to carry cash. And so when these new technologies were introduced, they made everybody's lives really quite easy. And so there's not really the same incentive for that kind of thing to happen in the west, because we've already got a way of paying that's reasonably convenient. And so are we really going to bother adopting this whole new thing? Probably not.

And so if you have a mass of people using these kinds of payment apps and the like, I mean, what we always hear about is the sort of the data exhaust of these things and how high utility they can be. Is that, is that going to be sort of more help to tech companies as these things develop?

It is a help to tech companies, but one of the things that you figure out when you look at the Chinese AI industry is that there's this low level, basically labor force doing this work called labeling, which is kind of what turns that exhaust into something that is useful for the AI companies. I spent some time with the founder of one of these companies. His name is Charles Liu, and he has a company called MBH. And he employs 300,000 people in all of the poorest places in China to sit in a room and sit in front of a computer, and they get images or text pushed at them and they just label. They don't get to choose what they're labeling. They're just sitting there clicking. So like, is this a face? Is this a tumor? Is this a cityscape? The entire system is optimized to get context on this data as fast as possible. It's kind of a little hidden step in the supply chain. These people are paid like 3,000 yuan a month, which is a pretty good salary in the poorest provinces of China, but would be a terrible salary in Shenzhen. And that arbitrage that he's able to do over the Internet is kind of what's making Chinese AI go. It's not necessarily just clever algorithms. It's also hundreds and hundreds of thousands, millions of people just sitting around clicking images.

I mean, you say that the received message from China then is that China is taking over, at least in the tech space. How is all of this going down? With Silicon Valley. Is Silicon Valley trying to take some lessons from any of this?

I don't think they're at the stage of taking lessons yet. I would say the main impact at the moment is fear about loss of access to the Chinese market. Just taking Apple China is one of, if not their most important market. Just in the last year, since all the Huawei trade war stuff has blown up with the United States, for whatever reason, whether it's patriotism or some other kind of machination of the Chinese government, Huawei's phones have started selling way more than Apple's phones in China. And that's a problem for them. It's just going to hit their revenues. Another thing that is happening is that as China and America kind of lose trust in each other, all of these Valley companies who employ loads of Chinese nationals working on stuff that the American government doesn't want going to China, they're going to face this problem where potentially they have to start thinking about firing all their Chinese employees. If the US Government comes up with new rules to try and restrict the flow of advanced technology to China because they're worried about what's going on in China and that China is taking more control or whatever, it's going to become a real problem for the valet companies that they employ all of these Chinese nationals on these sensitive things.

So even if Silicon Valley isn't taking lessons from China, it sounds as if the American government, other governments, may at least take some policy direction from all this.

They're definitely starting to think about it. It's a pretty hotly debated topic. Should America start to get involved in industrial policy, which sort of means starting to try and steer what its companies invest in or don't invest in? I think overall most money on the moment is no. But there is good reason to cast the mind back to the foundations of the Valley, which are things like Bell Labs, which was a government monopoly laboratory for AT&T, and to things like the ARPANET, which is the military invented precursor of the Internet. A large proportion of the tech which became the foundations for Silicon Valley is the result of state directed investment and R and D. And so the idea that it's just unthinkable for the state to have a role in the development of technology, A is proved wrong by America's history and B is proved questionable by China's current progress.

And so you say that's a problem. Is there a fear that China will leapfrog America and the west, not just in a particular sector, but in technology.

More broadly, regardless of how China behaves or what China does. There's an overarching sort of fear of being overtaken coming from America and the American government, that America will no longer be the country that runs the world as it kind of has been since World War II. And a China that makes all the high tech exports, all the high tech building infrastructure in every Central Asian and African country. That's a China to be reckoned with and one that is going to force America to kind of think through its position in the world and its importance in the world. I think the fear is going to increase before we reach any kind of conclusion.

Thanks for your time, Hal.

Thanks, Jason.

In an age of easy travel and super fast connections, the world can feel rather small. But some places are still gloriously remote, such as the easternmost tip of Russia.

Cape Deshniats is a picturesque place.

It's a rocky area.

It looks like a very mystic place. It looks like castles, you know. My name is Alexander Wykvarak Tergon. It's a rather long name, but that's the way it is.

He's a tour guide from the indigenous Chukchi community in the rocky bays and tundra where Russia reaches out to America.

In good weather, you can take binoculars.

And look in the binoculars and you.

Can see, see the Alaskan land.

For the few tourists, there's lots to see.

Gray whales, humpback whales, walrus, orcas. It is unique.

But life is hard in this distant province called Chukotka, especially for the indigenous community. An association trying to assert indigenous rights has been suppressed by President Vladimir Putin. Unemployment and alcoholism are high, and because the area is so hard to reach, its story is rarely told.

I think it was probably the most difficult trip I've ever had to organize, and most people said I probably wouldn't manage to get there.

Zan Smiley is the Economist's editor at large. This summer he reported on how different life is for the indigenous communities on the Russian and American sides of the Bering Strait, just a hair south of the Arctic Circle.

I wanted to get as far as I could close to where the two continents almost touch each other. And I wanted to get to one of the little towns on the Russian side from which one could almost look across the strait. And so eventually I first got to an old naval base called Pravidenia, which I flew to. Very, very unreliable Russian state airline. And then from Pravidenia or nearby, I took a little skiff, a little metal aluminium boat. Boat. And we then drove another hundred miles or so up to a whaling village. Called Lorino. Then once I got there, it was just a matter of getting all the way back.

And what drove you to go to these ends of the earth? Why did you put yourself to all this trouble?

Well, I must admit, when I was sitting in one of these skiffs, as the fog came down and we couldn't see where we were going and the engine broke down, I did say to myself, what the hell am I doing here? I think it was partly because I've lived in Russia, and I've always been fascinated by reaching the sort of uttermost end of the earth. And it has been a closed area on the Russian side until very recently, even Russian citizens. And I suppose I must admit, partly I wanted to see age 70, whether I could still handle these sort of trips. And finally, and quite importantly, I've always been interested in the rights of indigenous.

People since you were in Alaska. First tell me about the Alaskan side. What's life like there?

I think one of the things that struck me most strongly was that in the last 30 or 40 years or so, the indigenous people, who I think make up about a tenth of the population, have begun to assert their rights quite volubly and quite strongly. And in 1971, there was a big act that gave them considerable compensation, nearly a billion dollars and also considerable rights. And although they're still underrepresented in the state legislature and so forth, I felt that they were very much on their way.

I'm only one generation away from the history of colonization in our region, in our state, which included the forced relocation of my community, King island, you know, loss of our languages and regulation of our way of life, our hunting and fishing way of life.

Megan Alvana Stimfel is an activist in Alaska. When her mother was young, the idea of native rights was in its infancy. But by the time she was growing up, things were improving.

My siblings and I, my cousins, were really fortunate to be raised, proud of who we are and informed and based in our cultural values, knowing who we are.

After the end of the cold war, they were able to travel in small boats to the Russian side and visit extended family. But they were horrified by the way indigenous people were living over there.

We came back to the United States States just so thankful to be citizens of where we're from. And we just feel so much compassion and are always hoping that our neighbors and relatives on the other side are okay. And it's unclear what the state of their rights are. Are they able to live their way of life on their lands and enjoy who they Are freely.

And so zan it's more challenging then for the indigenous people on the Russian side.

What really happened was that as the Soviet Union collapsed, all the subsidies dried up and the administration basically simply left. And people were left to fend for themselves. And it's one of the harshest climates in the world. And even without the collapse of communism, there were many terrible social blights, the most obvious one being alcoholism, which is extremely prevalent across the whole of the Arctic Circle. But on the Russian side it was particularly harsh. And after 1991, when the Soviet Union collapsed, they had to fall back on their old way of living. And that mainly amounts to hunting whales and walruses. And although whales are banned under the International Whaling Commission, there is an exception for people who can live on them in their old ways. And so they have a quota. And that's what I was able to see them doing. So we went out and hunted for a whale and a walrus.

Did you? What was that like?

You wait around until you see a whale breathing, you see it spurting its water upwards and then all the boats shot towards where the whale had come up. And it'll come up quite nearby. And then on the prow of all the boats is a man standing with an old fashioned harpoon with a hand uplifted. And eventually one of them hits and then more harpoons are thrown at it. And then eventually a kind of old fashioned blunderbuss gives the whale a sort of coup de grace. And then everybody surrounds it and ties it up. And then as a sort of convoy, you drag the whale ashore and then the villagers will come down and celebrate. In a flash they cut it into small ribbons. And that's that.

You've talked about the relationships between people on the two sides. I mean, how close are they able to be? And do you see those relationship developing?

Well, after the collapse of the Soviet Union, there was a huge sort of flurry of excitement and hope. And particularly from the Alaskan side, the people in government, in Alaska and in business all reached out proffering the hand of friendship. And it was very much grasped. And so for the first 10 years or so after the fall of communism, there were high hopes that on both sides of the Bering Strait people would cooperate. Become much closer then on the indigenous side because quite a lot of the people were actually related. Visa free travel was reinstated and in fact does still apply. But as relations have deteriorated again, the sort of hassle factor has got much bigger and it's become much more difficult. And so very sadly, the so called ice curtain has fallen down again across the strait and all those high hopes have really gone into sort of hibernation. And so there's what you might call a freeze has come down again.

Zan, thanks very much for your time.

You're very welcome.

South Korea's hard working children are well known for finishing the school day and heading straight to Hagwons or cram schools, studying for hours every night, hoping to become musical virtuosos or science prodigies. In the north, on the other hand, school is normally followed by compulsory labor in the fields. But now it looks like some North Korean parents are following their southern counterparts, albeit illegally.

Education in North Korea is normally state provided because there's all these things to do with indoctrination and making people believe in the great personality cult of the Kims.

Lena Shipper is our sole bureau chief.

But recently parents have started organizing their own education for their children, very illegally because it's not allowed. You're not supposed to do that.

So what has it been like to be a North Korean school kid?

We have to go back in time a bit to the period sort of before the 1990s, which was a big catastrophic change in North Korean society because the famine happened and the state provided anything essentially collapsed. So the food distribution system collapsed so people couldn't eat anymore. Up until that point, there was pretty reliable universal education, and that hasn't really been the case since then. So children who went to school started having to pay teachers to even turn up to work. There are reports of children having to bring firewood to class in the winter because otherwise the classroom would be too cold for anyone to learn anything. So the state education system's been pretty rickety for a while. And what happened was that teachers who couldn't make a living as state school teachers anymore started informally offering lessons to people outside of school for money.

So if parents are seeking education outside the state system, is that because the state system is simply insufficient rather than just insufficiently ambitious?

Both of these things are true, that parents are seeking education outside of the state system, both because the state system is not providing what they were wanted to provide, but also because they have maybe further ambitions for their children. So there are schools in North Korea that are kind of elite and prepare people to get into big universities in Pyongyang and allow you to study things like foreign languages so you can maybe become a diplomat or music, so you can become a music prodigy. And these things sort of give you an option to leave the country. So that seems very valued. If you get into these elite schools, one of the big perks is that you exempt from compulsory labor, which is still a big feature of state education in North Korea for most children.

But you say this private education is actually illegal. Why is that?

Yes, it's completely illegal because one of the main purposes of education in North Korea is indoctrination. Essentially, you have this regime that wants people to believe that it's godlike and the only game in town. And in order for people to believe that, you have to tell them from quite early on. So you wouldn't want anything being taught to people that's outside of your control.

So why doesn't the regime clamp down on it in the way that it clamps down on seemingly everything else?

So it seems as though a. The private tutors are very careful about what they teach children. So there's no question that anything subversive is being taught in these classes, like, it's literally just maths and science and music. There's not going to be any subversive political opinions being shared in those classes, which local officials know. So they don't really go near it. The other reason is that the main beneficiaries of this education are children of the elite, who often are officials in the party, have some power. They obviously don't want to be seen to be cracking down on something that they themselves. So it seems a kind of don't ask, don't tell thing. As long as you're not too ostentatious about it, as long as you're not flaunting it, they're basically happy to overlook it.

But, I mean, we know actually very little about what goes on inside North Korea. How do we know that this trend is popping up?

So the basis of all the things that I've just told you basically, is testimony from defectors. About a third of these people said that they'd received private education. Some even said that they taught other people in that way and acted as private tutors themselves. So that's the basis we have for this information, which obviously may not be representative because defectors are quite specific people. They've made it out of North Korea. They had a reason to get out of North Korea. They're a very different group.

Lena, thanks very much for coming in.

Thanks, Jason.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and you can subscribe to the economist@exterator.com radio. Offer 12 issues for $12 or 12 pounds.

See you back here tomorrow.