China may be the best modern illustration of Joel Mokyr’s argument that growth and development happen when propositional knowledge is translated into prescriptive knowledge through dense networks. Without explicitly articulating using this framework, the narratives described in Patrick McGee’s Apple in China (see this and this) and Dan Wang’s Breakneck demonstrate the essence of Mokyr’s argument.
The fundamental point is that both Apple (through iPhone) and Western multinational corporations in general helped China by transferring useful knowledge (what Wang calls ‘process knowledge’) and creating rich industrial ecosystems seeped with technical expertise acquired iteratively over several years. It helped that China, like the pre-Industrial Revolution England, had a culture that gave primacy to the acquisition of useful knowledge over theoretical propositional knowledge.
I just completed Dan Wang’s book, Breakneck. The big premise of the book, the reason why the US is lagging behind China in making things is because the former is ruled by lawyers and the latter by engineers, is too simplistic and questionable. Jonathon Sine has an excellent critique.
However, the book has a compelling explanation for how and why China built up its manufacturing prowess. It echoes the description by McGee of how Apple’s intense and long-drawn engagement in the co-creation of Foxconn’s iPhone manufacturing capabilities played a critical role in the development of China’s world-beating manufacturing ecosystem of designers, tooling engineers, component suppliers, managers, and assembly-line workers. This is a good description of the emergence of the ecosystem.
The smartphone components were getting better every year, part of a trend that Chris Anderson, former editor of Wired, called “the peace dividend of the smartphone wars.” The hundreds of billions of dollars invested in the smartphone supply chain have caused the cost of electronic components – cameras, sensors, batteries, modems – to plummet. That’s why we are able to carry around sensors in our pockets that used to be available to only a select few military powers.
Many companies have grown around this peace dividend. Indeed, Shenzhen is the headquarters of many of China’s most dynamic companies, including BYD, the world’s largest EV maker; DJL, the world’s largest consumer drone maker; and Huawei, the beleaguered company that is the world’s largest telecommunications equipment maker. Electric vehicles are full of electronic components borrowed from smartphones; the consumer drone is roughly a reassembly of a smartphone camera and sensor with propellers for flight. The magic of Shenzhen in the combination of the world’s most creative hardware engineers sitting in a sea of components that improve every year amid a labour force of millions who know how to put together electronics. This buzzing ecosystem has produced many other products that follow in Apple’s wake, like hoverboards, electric scooters, virtual reality headsets, and who knows what’s next?
Wang highlights the importance of three aspects of technology in production, specifically the last aspect of process knowledge.
First, technology means tools. These are the pots, pans, knives, and ovens required to prepare a dish. Second, technology means explicit instruction. These are the recipes, the blueprints, the patents that can be written down. Third and most important, technology is process knowledge. That is the proficiency gained from practical experience, which isn’t easily communicated. Ask someone who has never cooked before to do something as simple as fry an egg. Give him a beautiful kitchen and the most exquisitely detailed recipe, and he might still make a mess…
Process knowledge is hard to measure because it exists mostly in people’s heads and the pattern of their relationships to other technical workers. We tend to refer to these intangibles as know-how, institutional memory, or tacit knowledge. They are embodied by an experienced workforce like Shenzhen’s. There, someone might work at an iPhone plant one year, for a rival phone maker the next, and then start a drone company. If an engineer in Shenzhen has an idea for a new product, it’s easy to tap into an eager network of investors. Shenzhen is a community of engineering practice where factory owners, skilled engineers, entrepreneurs, investors, and researchers mix with the world’s most experienced workforce at producing high-end electronics.
Silicon Valley used to be like this too, but now it lacks a critical link in the chain – the manufacturing workforce. The value of these communities of engineering practice is greater than any single company or engineer. Rather, they have to be understood as ecosystems of technology. The American imagination has been too focused on the creation of tooling and blueprints. Andy Grove, the legendary former CEO of Intel, said it best in 2010: that the US needs to focus less on “the mythical moment of creation” and more on the “scaling up” of products. Grove saw Silicon Valley transition from doing both invention and production to specialising only in the former. And he understood quite well that technology ecosystems would rust if the research and development no longer had a learning loop from the production process…
American manufacturers spent the better part of the last three decades unwinding its stock of process knowledge when it opened so many factories in China. Every US factory closure represents a likely permanent loss of production skill and knowledge. Line workers, machinists, and product designers are thrown out of work; then their suppliers and technical advisers struggle as well. Entire American communities of engineering practice have dissolved, leaving behind a region known as the Rust Belt. Some mayors and governors tried to step this receding tide. But they were continuously scorned by economists and executives, who sought low-wage production in the name of globalisation. Still today, many American economists doubt there is anything special about manufacturing and put their faith in the inevitable march to a service economy…
It became part of the elite consensus that the US could lose manufacturing. This consensus portrayed union bosses, as well as the handful of heterodox economists, as sentimentalists for resisting offshoring. Neither the Clinton nor the George W Bush administration restrained American firms from moving manufacturing operations to China. Now, it’s more obvious that the departure of manufacturing has created economic and political ruination for the US. We are still only beginning to understand how much it set the country back technologically…
If we think about technology ecosystems as communities of engineering practice, it makes sense that factory closures accelerated as process knowledge dissolved, prompting production problems and more job losses. And it also makes sense that Chinese workers went from merely assembling iPhones to producing some of their most valuable components as well. As one country lost its process knowledge, the other gained whole industries.
He describes how Tesla contributed to the development of China’s emerging dominance of EV car manufacturing.
Beijing did something unprecedented for Tesla in 2018: it allowed the company to fully own its plant in Shanghai. Previously, any automaker that wanted to produce in China had to partner with a domestic company. So Japanese, German, and American companies dutifully partnered with state-owned enterprises in order to access the enormous market. The state had hoped that these domestic companies would learn from the likes of Toyota and Mercedes-Benz and match their quality. In reality, Chinese automakers were sluggish from their research dependence on their foreign friends.
Tesla’s presence jolted China’s EV market. China’s business community began using the term “catfishing” for what Tesla was doing in China. The idea was that introducing a powerful new creature into the domestic environment would make Chinese firms swim faster. That’s exactly what they did to raise their game. When Tesla vehicles started rolling out of the Shanghai Gigafactory in 2019, BYD saw its sales decline by 11%, while profits fell by 42%. But Tesla would eventually do the whole market a favour. As in the US, the company’s audacious branding stimulated consumers to think of EVs as more than high-powered golf carts. And Tesla made investments in China’s tooling ecosystem that other automakers exploited to produce better cars. BYD benefited as well, reporting record profits in 2023 and becoming the world’s largest EV maker. And even the Communist Party’s main newspaper praised how Tesla produced the “catfish effect” for Chinese firms.
As Grace Wang, founder of Shenzhen-based Luxshare poetically expressed, “Flying with phoenixes will nurture outstanding birds.” It is another lesson that capitalist Shenzhen has taught the Communist Party: Market competition tends to lower prices and raise quality.
Apple and Tesla have made a huge effort to train its Chinese workers to manufacture their products – and earned fabulous sums of money by doing so. These stories are replicated in varying degrees across China’s other communities of engineering practice, production hubs for shoes and garments in the eastern city of Wenzhou, medical equipment in Wuxi and Suzhou, and, most wonderfully of all, guitars in the mountains of Guizhou’s Zheng’an County. Overall, China’s manufacturing workforce employs more than a hundred million people, around eight times that of the US (13 million in 2025)…
American companies have spent two decades building communities of engineering practice in China, made up of people who roll up their sleeves to figure out how to overcome their daily bottlenecks.
At the heart of this narrative about economic growth is the importance of persistent and boring implementation, over the Aha! moment of inspiration presented by ideas and inventions. This is a good summary:
Americans expect innovations from scientists working at NASA, in universities, or in research labs. They celebrate the moment of invention: the first solar cell, the first personal computer, first in flight. In China, on the other hand, tech innovation emerges from the factory floor, when a new product is scaled up into mass production. At the heart of China’s ascendancy in advanced technology is its spectacular capacity for learning by doing and consistently improving things… The US likes to celebrate the light-bulb moment of genius innovators. But there is, I submit, more glory in having big firms making a product rather than a science lab claiming its invention… Every day, millions of workers in factories to build up technological process knowledge. That is the basis of China’s tech power. China has become a tech superpower by exalting process knowledge and the communities of engineering practice that keep it alive.
There are a few observations that are of relevance for India as it charts its journey of building a globally competitive manufacturing base.
1. Mokyr points out that the Industrial Revolution happened in England and not continental Europe, and attributes this to its culture of tinkering and refining, and interest in material progress. This required useful knowledge that the fabricants could use, as against the more theoretical and esoteric knowledge that savants created.
Similarly, China had a culture of pursuing process knowledge. When faced with competition from Apple and Tesla, instead of folding up and retreating, these companies leveraged the ecosystems of process knowledge and engineering practice created by Apple and Tesla. They fought back to build their own products and compete (and outcompete) the foreigners. Huawei, Oppo, Xiaomi, Vivo, BYD, Geely, SAIC, Nio, Xpeng, and so on are the outcomes of this.
Do Indian manufacturers and startups have the culture to embrace process knowledge, iterate diligently, build ecosystems of engineering practice, and move up the value chain? What are examples from India of such technology or industrial ecosystems that stand at the cutting-edge of their sectors?
2. The conventional wisdom on industrial progress, especially in technology-intensive sectors, is that of academia and industry working together to co-create products by transferring research into development at an industrial scale. While this is the approach that the US and other Western economies followed, China appears to have taken a different direction. Instead of spending time on the generation of propositional knowledge in its research institutions, it borrowed (or copied) this knowledge from wherever available and focused on the prescriptive knowledge required to scale up manufacturing. This is the classic industrial tinkering model.
Chinese firms rely on academia more in terms of getting skilled manpower to work in their factories. With the government’s guidance, Chinese colleges and universities have been running courses on niche areas like battery chemistry and rare earth processing for several years. They have kept flowing a continuous supply of high quality skilled workforce.
This is of particular relevance for India, where academia-industry collaboration is limited, but also where industrial R&D is abysmally low (0.7% of GDP compared to China’s above 2.5% of GDP). Indian firms must necessarily multiply their R&D expenses manifold if they are to create the vibrant and high-productivity industrial ecosystems like those in China. They must invest in nurturing a culture of engineering excellence that seeks to constantly innovate and aspire to the global frontier of quality and technology.
3. Another feature of Mokyr’s arguments and China’s success is the importance of clusters in producing things. A manufacturing base does not emerge in isolation from the production of individual firms. It requires the creation of ecosystems of engineering practice, where skills and expertise are transferred through learning by doing, and knowledge and technology spillovers. Clusters enable the diffusion and spread of process knowledge among businesses and their suppliers, and among competing firms.
Massive industrial clusters have been central to the development of China’s manufacturing prowess. China has more than 500 towns that specialise in specific products for the global market, with some being responsible for 63% of world’s shoes, 70% of its spectacles, and 90% of its energy-saving lamps. Sample this from Wang,
Every year, as new models emerge, Apple needs new components or processes that a new design requires, like a certain type of adhesive or a screw of a slightly different size. Therefore, Apple constantly had to scramble to find suppliers on short notice. “Almost always, “the engineer continued, “we found someone in Shenzhen by asking a guy who knows a guy whose cousin might be able to produce a few hundred thousand new screws.” Virtually everything one needs to produce any electronic product can be found in a short drive around Shenzhen. Proximity creates efficiency. When it’s time to do stuff, a company can collapse coordination that usually takes weeks into a business meeting lasting hours by convening all the relevant suppliers in one room the next morning. And if something goes wrong, there are a lot of friendly neighbouring factories to call.
Unfortunately, India’s efforts in this direction, primarily in the form of SEZs, have been constrained by the size of these clusters. I blogged here on how the lack of clusters has been a constraint to the emergence of scale manufacturing in India.
4. The creation of globally competitive ecosystems of engineering practice that value process knowledge for continuous improvement invariably sets in motion something like the Red Queen Effect. Companies must adapt and evolve continuously to even maintain the relative status quo in the highly competitive and dynamic global marketplace.
Only firms exposed to global competition have the incentive to pursue this strategy. The incentives of firms in a closed market, or those happy with serving a large segment of their domestic market, will be only to minimise costs. They are likely to discount quality and technology. In simple terms, Indian firms must necessarily Make in India for the World.
There’s the real risk that Indian firms will remain entrapped in the bad equilibrium of making less than competitive products for India’s large price-sensitive consumer base.
5. The example of how Chinese companies responded to the competition from Tesla is a testament to the aspirations of Chinese companies. In a short period of time, BYD and Co. were able to turn the tables on Tesla and emerge as undisputed global leaders in EVs. They first copied the engineering excellence of Tesla and continuously improved on it to then gradually surpass it. Underpinning this was the communities of engineering practice created by Tesla.
In contrast, as I have blogged on numerous occasions, Indian companies, across sectors, have struggled to innovate and become globally competitive.
The Ken has an article about how the garment makers of Tirrupur, who contribute over half of all India’s knitwear exports, failed to innovate and are now fighting to survive the loss of the US market. They remained stuck with the commoditised and lower value-added bulk supplies of cotton garments to the large US retail clients, with their low margins and large volumes, but stable and assured demand. They missed the opportunity to shift to man-made fabrics earlier and to blended fabrics in recent years, and did not venture into the higher value-added and higher margin mid-sized European who are much more demanding on fashion trends and quality.
It will be extremely challenging for Indian companies to match the resolve and ambition shown by the Chinese EV manufacturers, nurture communities of engineering excellence, and become globally competitive.
In conclusion, stripped of all the jargon and in simple terms, Mokyr’s work and the success of China is a big shout-out to the strategy of progress through continuous problem-solving and iterative adaptation, one which has relevance far beyond mere building of manufacturing capabilities to many things in life in general.
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