Some thoughts on catalysing India's chip design market

Given its massive capital requirements, amounting to several billions of dollars, and highly specialised manufacturing ecosystem, establishing semiconductor chip fabrication facilities in India poses several insurmountable challenges. In the circumstances, and also given its far lower capital requirements and the country’s comparative human capital advantages (it is estimated that 30-40% of global chip design talent is Indian) in software development, it has been suggested that India should focus on fabless chip design.

There is no doubt that there are Indian startups with the requisite expertise and talent to design chips and products. But there are perhaps two binding constraints to the emergence of chip and product design companies in India – its acutely deficient risk funding ecosystem and, more critically, the absence of domestic companies (OEMs, etc.) that can deploy these designs in their products.

I blogged here on industrial policy for semiconductor chips. 

Semiconductor chip design and manufacturing are among the most daunting of industrial activities. This sums up the complexity. 

A typical integrated circuit chip can involve over 500 distinct production stages and cross as many as 70 international boundaries before it reaches the consumer. Across this complicated global supply chain, the scale of interdependencies is vast: China has a monopoly over certain critical minerals, the US and UK have a combined monopoly over chip design tools, and so on. Moreover, there are dozens of hyper-specialised suppliers spread across the world who hold virtual monopolies over critical process technologies needed to manufacture chips. They can act as technological ‘choke points’.

Underlining the complexity, it must be noted that semiconductor chips are perhaps the only major area where China has struggled to make much headway despite spending hundreds of billions of dollars. Apart from the high-end chips fabrication, the biggest challenge is with chip manufacturing equipment, which is dominated by the US and Japan, and where China is a marginal player despite being the largest buyer. 

Tracxn has estimated 117 semiconductor chip design firms in India by the end of 2024. The Design-Linked Incentive (DLI) scheme of the MEITY, introduced in 2021, had an allocation of just Rs 1000 Cr (of the total of Rs 76,000 earmarked for semiconductors) to nurture 100 chip design companies over five years and ensure at least 20 such companies have a turnover of Rs 1,500 Cr or more. The maximum funding available to a firm is Rs 15 Cr. 

This has proved inadequate since it requires at least $10 million (Rs 90 Cr) to build even a basic chip, much less the several tens of millions for a more sophisticated chip. Just licensing the IPs required to design a chip alone will cost a few million. Private sector funding, too, has been scarce.

Similar levels of funding are calculated from other sources (and this) too. In 2024, seven chip design startups raised $28 mn. 

The analysis of funding shows that most of the deals are seed or pre-seed stage, with just one or two in the pre-Series A or Series A stages. 

The Ken has a very useful interview with P Raja Manickam, former head of Tata Electronics’ outsourced services unit, where he describes how China entered the semiconductor market. 

The Chinese government arm-twisted Qualcomm and said, “Look, I’m giving you this huge market in cell phones. You’re selling to Huawei, Oppo, Xiaomi, and others. I have a fab; you build those chips here, at least some of the lower end stuff.” As a result, Qualcomm now has quite a bit of business with SMIC. China didn’t stop with that; they said now that you are building the wafers, also do the packaging in China. Qualcomm is not a manufacturing company, it could have said, “We don’t do packaging. We just give it to somebody else.” But China forced them to bring a supplier, Amkor [Technologies], and invest in them just to fulfil the Chinese demand. So, the thought process is this: if we have a fab in India, we could do the same and go to Qualcomm. And I think it makes sense now because Qualcomm is searching for a market. They’re getting thrown out of China.

He divides the global wafer market into three categories - 30% going to memory, 30% to the 3-4 nm chips (a few products made by very few companies); and the 40% going to mass market electronics (microcontrollers, MOSFETs, DC/AC converters etc.) which largely sit in the 130-180nm range. 

Manickam describes why despite the presence of over 50,000 chip designer engineers working in India, Indian firms and startups struggle to develop products.

One, the experience of building a product company did not exist in India. Just because you are a designer in a TI or a similar company doesn’t mean that you know how to build a company… Even if you work for these companies in India, you will never be able to make an entire chip. They certainly don’t expose you to marketing and selling and all such aspects. Secondly, the moment you finish your design and ship it to Taiwan or some other fab, your door closes. You have no idea how to work with TSMC or how to get the product done. And that is why I always say we need a fab in India. You can never build a product company without a fab. Why is Taiwan successful? A small country with very few people. Look at Mediatek (a Taiwanese fabless semicon firm); they gave Qualcomm a run for the money… they can compete with TI sitting in Taiwan because they have access to the fab. They can tweak their process with the fab. A lot of startups in Taiwan come from TSMC, not from design companies… Startups create some IP, run out of cash, and VCs never invest in these guys because they don’t see them becoming a hundred-million or a billion-dollar company. So, they sell their IP to somebody.

The lack of large firms and an ecosystem, and the stranglehold of majors, also mean that Indian chip design firms spend 50-80% more for taping out chips than their counterparts elsewhere, like NXP Semiconductors. 

Skilled manpower is a major constraint. A Ken report states that the $115 bn electronics manufacturing sector in India is expected to touch $500 bn by FY30. It is expected to create about 12 million jobs over the next two years across operational roles like technical troubleshooting, electronics design, running Surface Mount Technology (SMT) lines, and operating CNC (computerised numerical control) machines. The report also points to a Teamlease finding that at least 10 million of these potential hires may lack relevant practical skills. 

Skills necessary to run electronics production lines and semiconductor operations are rarely taught in the current academic curriculums… Not many would know how a printed circuit board works or what a 3D laser inspection is… In mid-2023, Macdermid Alpha set up a production line for components at IIT Madras where students can get hands-on training to develop necessary skills. Bhatkal was inspired by similar models in US universities, like the Georgia Tech Manufacturing Institute in Atlanta. The motive was simple: upskill the talent so their recruiters could cut down on the time and resources spent on training them… The institute runs an 11-day workshop, which is open to students from the Industrial Training Institute (ITI) and even employed engineers who want to upgrade their skills… So far, over 340 students have completed the training and found jobs at various companies—the likes of autocomponent maker Uno Minda, printed-circuit-assembly maker Syrma SGS, and even one of the Tata group companies… Macdermid runs a similar course at the College of Engineering, Pune, in partnership with two-wheeler maker Bajaj Auto and US-based electronics manufacturer Jabil. NMTronics, a Noida-based electronics-solutions provider, also runs one at IIT Kanpur… it cost companies nearly Rs 4–5 crore ($466,000–582,000) to set up each of these centres.

This article about getting Micron to establish a chip ATMP facility at Sanand in Gujarat points to the challenges associated with attracting such investments, even with 70% of the $2.7 billion investment being a public subsidy.

What does all this mean for the development of India’s chip design market?

The US semiconductor chip industry has developed on the back of seed grant financing of hundreds of startups by the government and plentiful VC funding of promising startups. Two critical factors contributed to the success of this strategy: the presence of deep and risk-taking VC investors and OEMs with a massive volume of demand for these chips and designs. Since neither of these two factors is available in India, Indian chip and design startups face a daunting challenge. This is the real valley of death facing even the most promising and technologically advanced Indian startups.

Let’s look at the capital requirement. As the figure below shows, the one-time Non-Recurring Engineering (NRE) cost with a chip design is very high. The prototype must license technologies on controllers, interfaces, communications, etc., and then do multiple tape-outs on silicon to get to a robust enough quality that can meet commercial requirements. It is therefore not surprising that there are several startups even in the US that raised $200-300 million in funding but have failed to commercialise.

There are five stages in the chip development. Stage 1 is the drawing-board phase — what should the chip do, what architecture, what licensed IP blocks to buy. Stage 2 is where the actual design is written in code (RTL) and exhaustively simulated — this is the longest and most expensive phase of the entire lifecycle, absorbing 40–60% of all non-recurring engineering cost. Stage 3 is the FPGA sanity-check — running the design on a reprogrammable chip to shake out software and integration bugs before committing to expensive silicon. Stage 4 is tapeout — the design is frozen and handed to a foundry like TSMC, which etches it onto wafers using costly photomasks; any bug found here requires a full respin. Stage 5 is where the chip actually reaches customers — first in small pilot batches for qualification, then at scale, with economics that only work once volume is high enough to spread the NRE costs. The key insight connecting all five: each stage is a gate. A mistake at Stage 2 that slips through costs a hundred times more to fix at Stage 4, and a mistake at Stage 4 costs a year and tens of millions to fix at Stage 5.

India cannot replicate the US VC industry, at least for the foreseeable future. India’s angel funding industry does not invest in high-risk sectors like the chip design industry. Indian VCs are still at a seed stage ($1M-$3M) and cannot fund at the levels needed to succeed. Further, as mentioned earlier, VC funding in India for chip design is tiny compared to the requirement.

Nor does it have global companies that can offer commercialisation platforms for its startups. Further, global OEMs already have long-term partnerships with established and reliable chip design suppliers and will, therefore, be reluctant to experiment with a new chip designer. New chip design companies will also not be able to signal reliability in terms of meeting the massive volumes demanded by OEMs, the exacting standards and upgrade requirements, etc.

Given the aforesaid, it’s therefore not prudent to throw scarce public finance at startups purely in the hope that the demand-side (for these chip/product design startups) will emerge on its own after some time. The best use of scarce public funds in this context is to derisk and expand the envelope of private capital that might be interested in investing in risky chip design startups.

In the circumstances, one strategy would be to emulate parts of the Chinese playbook. There, the government supplemented the funding of startups with active market development interventions. However, there are limits to how much of it can be done in India, given the size of financing required (China is estimated to have spent $250 bn on the semiconductor chip industry) and the market-making efforts.

However, as a strategy, the Government of India could start by targeting 3-4 large-volume electronic products that are being procured by the government or are in demand in the Indian market. It can bring together promising (chip or product) design startups and product OEMs (and their manufacturing partners, EMCs). The OEMs could be supported to either buyout or license technology from the startups and adopt these domestic designs.

Electricity smart meters, surveillance cameras, fixed wireless access (FWA) devices, and automobile and heavy equipment chips are examples with very large domestic demand, where the aforesaid strategy can be pursued to catalyse domestically designed chips and OEMs. Unlike mobile phones or routers, these product markets are large enough and may have slightly lower entry barriers for domestic companies.

But this will require very high-level commitment and tight coordination by the central government, involving multiple departments, to integrate this strategy with public procurements, for market consolidation, mandating of product standards, expediting regulatory enablers and permissions, etc. Besides, the government must also work closely with private manufacturers and OEMs, even supporting them in their business development.

In the case of public procurements, this would involve effectively picking winners and giving them large multi-year contracts. For example, in the case of smart meters, the meter supply and O&M contractors (6-9 year TOTEX contracts) could be mandated to supply domestically designed and manufactured meters. They should be supported to bring together OEM/EMC and chip and product design startups. The support provided by the Ministry of Power for smart meter installations under the Atmanirbhar Bharat Scheme could be leveraged to catalyse domestic chip and meter design.

Surveillance camera manufacturers require regulatory approvals. These approvals could be linked to the use of domestically designed chips. This requirement can be gradually phased in to allow domestic design capabilities to emerge.

In conclusion, the best use of public policy to catalyse semiconductor chip design in India may be on the market-making side to complement the limited public funds to support startups. 

Weekend reading links

1. Good chronicle of Trump at War in the NYT. 

2. List of a few impacts of the Gulf War from across the world. 

3. Foreign national government holdings of US Treasuries drop to their lowest value in years as they sell the Treasuries to prop up their economies and currencies.

4. For all its cultural salience and ubiquity, Bollywood box office receipts were $1.45 bn in 2025!

Interesting that video subscription revenues rose 61% in 2025 to $1.56 bn, according to EY.

Bollywood is another example of an Indian private sector/industry struggling in the face of global competition.

One top producer who has worked with many of Bollywood’s top actors says the combination of cultural drift and waning star power is a deadly one. “If you’re bankrupt on creativity, then the only thing you’re banking on is stars,” he says. “Nobody’s coming to the movie theatre to watch a star any more.” This, he adds, is a major reason why several international studios abandoned their attempts to enter the Indian industry...

Bollywood has remained resistant to outsiders. International studios such as Fox Star, Paramount and Sony entered the country more than a decade ago, looking to streamline the world’s largest movie-producing market, which remains parochial and dominated by family-run production houses. But through either mergers or losses, almost none exist in the country any more. Its films have also struggled to find audiences overseas. Unlike K-dramas from South Korea or Turkish soap series, Bollywood is yet to find breakout success globally, beyond the south Asian diaspora.

And this is an important market failure

The decline in Bollywood stars’ pulling power has not been reflected in either their remuneration or their creative influence. Male leads in particular wield immense power over which films get made and command salaries that are far in excess of what female actors can demand. Although Bollywood budgets are much smaller overall than those of the big five studios in the US, male stars often demand half or more of a film’s budget — compared with at most a quarter in Hollywood. The eminent producer says the industry still wants to “helicopter the star, do the least amount of work [possible] and try and do some razzmatazz, and everyone’s followed the herd mentality”. Shailesh Kapoor, chief executive of Ormax, says the multimillion-dollar fees that some top actors demand are driven by the free market. “Stars do not downgrade their fee if their last movie doesn’t work well . . . because somebody is willing to pay.”

5. Gulf war scenarios.

Oxford Economics said this week it estimates a six-month interruption of flows through the Strait of Hormuz would create a 13mn barrels per day gap in global oil supplies, triggering a worldwide recession. “That represents an unprecedented shortage of around 12 per cent of consumption, leading to widespread rationing concentrated in emerging economies, with significant hits to activity and supply chain disruption,” said the advisory group.

The Strait of Hormuz chokehold provides China with enough ideas on how to implement a similar strategy in the Taiwan Straits.

Beijing would declare the right to control who and what comes and goes from the island. China could demonstrate resolve by firing missiles or bullets and declaring “exclusion zones”. Even short of outright conflict, if escalation risk seemed high, private carriers would face pressure to avoid the waters and airspace around Taiwan. The standard “Five Powers Clause” in commercial war-risk insurance terminates coverage in any conflict between the US and China. If it has proved hard to persuade shipping companies to risk sailing amid a few unguided Iranian drones, imagine asking them to take on the People’s Liberation Army.

More on the oil supply squeeze.

Fatih Birol, the head of the International Energy Agency, has called this “the greatest global energy security threat in history” — much worse than the 1970s oil crisis, the Covid pandemic or Russia’s invasion of Ukraine in 2022. This conflict has disrupted a bigger share of the global oil and gas trade, and there is no way to quickly fill the gap.

6. FT series on how Apple became obsessed with quality. The first one is about how it learned the quality focus from Japan. 

7. NYT on Pakistan's remarkable pivot to green energy.

For governments weighing how quickly to pivot to clean energy, Pakistan’s recent history may offer some lessons. The country was hit hard by the energy shock that followed Russia’s invasion of Ukraine in 2022. It was unable to afford suddenly exorbitant gas imports, so many of its scheduled shipments were rerouted to wealthier European buyers. But a deluge of inexpensive solar panels from China has transformed Pakistan’s energy system and helped insulate it from the current scarcity of liquefied natural gas. Solar now generates nearly 30 percent of its electricity, up from just 3 percent in 2020. The Center for Research on Energy and Clean Air has estimated that the solar boom will help Pakistan avoid $7 billion in fossil fuel imports this year. That’s shielding Pakistanis from real pain.

8. Sekhar Gupta makes an important point about India's fertilizer import dependency and advocates the use of coal gassification to domestically manufacture them. 

Coal, we know, is an unpopular fuel... And while coal-to-chemicals is also a polluting activity, it is much less so than burning it in power plants... while burning coal for electricity may be evil, turning it into gas is much less so... Fertiliser shortages are an even bigger threat because this affects our food security... China produces more than 90 per cent of its ammonia from coal gasification. Ammonia is essential for DAP. India imports much of it and so severe are the shortages that to prevent rioting or looting by desperate farmers, many states store the supplies in their police stations, allocating to farmers on the basis of land holdings and Aadhaar-based registrations. Now hold your breath. China uses syngas (synthetic gas) derived from coal to produce 40 per cent of the entire world’s urea. It also produces 54 per cent of all of the world’s methanol, around 70 per cent of it from coal... Among the large agricultural producers, we’re the most import-dependent for our fertilisers... Our crippling dependence on fertiliser imports is also ship-to-mouth existence by another name. This war in the Gulf has driven home these vulnerabilities.

9. The GPU race

Graphic processing units (GPU) are the “oil” on which AI runs... India aims to increase its current stock of 38,000 GPUs to 100,000 by the end of the year, with a target of 1 to 2 million by 2030. The state is providing GPU “time” as a service at a subsidised rate of only ₹65 per hour to foster application development by startups... The US has a current inventory of 5 to 7 million GPUs, and China has 1.5 to 2.5 million. The target for the US is 25 to 30 million by 2035 and China plans to achieve 10 to 15 million by the same date.

Observations on China's 15th Five Year Plan

The formal adoption of China’s 15th Five-Year Plan has generated much scrutiny and analysis. 

The central theme is the development of a modernised industrial system, elevating it above the regular headline of technological innovation. The sequencing reflects a practical focus: turning laboratory breakthroughs into scalable, high-value production capacity. Frontier sectors such as advanced manufacturing, semiconductors, next-generation information technology and aerospace are prioritised. The plan aims to achieve breakthroughs in critical areas, including semiconductors, industrial machinery, advanced materials, biotechnology, and foundational software, and to deepen integration between scientific and industrial innovation. 

Importantly, it does start to acknowledge the role of the structural imbalances in the economy. For example, under the overarching banner of “common prosperity”, it links household-centred policies to growth resilience: employment, childcare, education and social safety nets are no longer simply "livelihood" issues — they are productivity and confidence issues. But this focus on structural empowerment appears, as I discuss later, to be done in a more roundabout manner. 

The Plan has some clear departures from earlier versions, prompted by internal and external challenges. As mentioned, the elevation of the industrial system before innovation indicates a shift from the lab to the factory floor. Related is the focus from making breakthroughs to applying them at scale. It offers an opening up of high-technology sectors and deepening cooperation in specific regions and industries. 

In short, the 15th Five-Year Plan appears to mark a subtle shift from scaling up to sharpening China's edge — a strategy designed for a world of intensifying great-power competition, supply chain fragmentation, and technological rivalry. Its effects will be felt well beyond China's borders, influencing global trade flows, technology standards, and the competitive landscape across nearly every advanced industry.

Kyle Chan has an excellent analysis of the technology and innovation focus of the Plan. It focuses on strategic emerging industries and future industries as “new quality productive forces” to achieve the income level of a moderately developed country by 2035 (or socialist modernisation). 

A less discussed feature of China’s economic success is the long-term planning and persistent pursuit of the plan objectives. 

What makes China’s tech-industrial policy remarkable is not some hundred-year master plan for technological supremacy or meticulously engineered blueprint for success. It’s China’s sustained focus on a set of obviously critical technologies over years and even decades. While the strategies and tactics—and even the technologies themselves—may change, China’s overarching persistence has yielded steady gains that have allowed it to catch up and even achieve global leadership in key technologies. China’s new 15th Five-Year Plan is but the latest chapter in a much longer technology story.

The Five-Year Plans have shifted from top-down guidance to a broader strategic guidance framework.

The aim of the earlier Plans was rapid industrialisation and catch-up with a focus on heavy industry… Today’s Five-Year Plans serve as strategic roadmaps for China’s development and include a mix of qualitative goals and hard quantitative targets. Each part of the Five-Year Plan is broken down by sector and annually. Central government bodies and local governments then break down the Five-Year Plan and develop their own implementation plans. Local government officials are evaluated in part on their performance in meeting the national plan’s goals and targets. In general, China’s Five-Year Plans are best understood today not as rigid, top-down “plans,” but as high-level signaling mechanisms that guide local governments and the private sector to align their efforts with national priorities.

In this context, in an earlier post, Kyle Chan had pointed to China’s industrial policy strategy of creating interlocking industrial ecosystems that allow it to play across the manufacturing spectrum.

China doesn’t just have a smartphone industry or a battery industry or an electric vehicle industry. It has all of these industries and more. China’s strength across multiple overlapping industries creates a compounding effect for its industrial policy efforts… If you’re trying to develop a target industry, it helps to have the technology and manufacturing capacity in surrounding industrial domains… industrial policy is like a jigsaw puzzle. The more pieces you already have in terms of technology and domestic manufacturing capacity, the closer you are to filling in the remaining gaps. And if you’re already strong in multiple overlapping industries, then this creates a mutually reinforcing feedback loop that further strengthens your position in all of these connected industries… As China becomes stronger in some industries, this tightens its grip on others…

Having existing domestic suppliers in upstream industries can make it easier to source parts and work directly with suppliers to modify specifications to suit industry needs… Having an existing set of domestic buyers in downstream industries can provide a ready source of market demand and industry revenue… Technical knowledge and manufacturing know-how can be useful across industries. Investments in R&D and manufacturing techniques in one industry can have returns across other related industries… If you have a product that’s an input for multiple industries, then having all of those industries domestically allows for greater economies of scale for that product. 

Another notable insight from the Plan is its focus on higher-quality cultural and consumer goods as a national priority. Innovation extends as a cross-cutting policy mandate, underpinning everything from public welfare and soft power to trade and defence. The Plan talks about boosting “cultural confidence”, whereby Chinese citizens (and the world) feel pride in, and aspiration toward, Chinese-made goods and cultural products, not just Western ones. It refers to building a “cute, respectable image of China” through overseas Chinese film festivals, museum upgrades, high-quality art and literature, video games, animation, exhibitions, cultural tourism, and new public cultural spaces. It also includes the phrase “enable the people to enjoy a higher quality cultural life.” 

The Plan’s emphasis on stimulating domestic demand offers longer-term opportunities in sectors tied to lifestyle upgrades- dine-in consumption, fitness, outdoor sports, live entertainment, cultural activities, gaming, and digital content, and high-end dining, boutique travel, wellness services, and premium lifestyle experiences. This is a definitive signal that China has now openly embraced the lifestyle of capitalism. 

Carolyn Marie Yim has a good post that draws attention to the idea of Cool China as one where the country is increasingly producing things people want to buy, emulate, and follow, much as Japan made a similar transition from "cheap copy" to global design leader in the 1970s–80s. She writes,

This does not mean every Chinese consumer product will win, or that the world will wake up one morning and consciously decide to prefer Chinese made goods. Historical transitions are less theatrical than that. More likely, Chinese-made and designed goods will become globally normal the way post-war Japanese and German products normalized from cheap into high quality signifiers of quality and manufacturing. Moreover, consumers will not necessarily experience this as geopolitical preference. They will experience it as the increasingly common sensation that the nice plate, the good lamp, the respectable glasses, the favorite sweater, the pleasant cafe, the fun Chengdu trip, all seem to come from the same logistical and economic base.

This focus on cultural capital is, I suspect, coming from an interest in the promotion of soft power and is less about addressing the structural imbalances. The resultant policies, for sure, will have some impact on the consumption side and might even be interpreted as a focus on addressing the structural imbalances. I’m not sure. 

The 15th Plan comes at a time when the economy is slowing, and the limits to the input-based model are becoming evident. Credit-fuelled investment has been the primary driver of economic growth. 

Remarkably, all through the quarter century, even as the private sector has emerged as a major partner in economic growth, public spending has remained elevated at more than half of the output, and has hardly budged from 53.4% of the total GFCF to 52.5%.

Raising questions about the quality of public spending, since 2010, the Incremental Capital Output Ratio (ICOR), a measure of investment quality, has steadily risen and nearly doubled since 2010 to 7.6 in 2024. It appears that, economy-wide, the efficiency of China’s investment quality has declined alarmingly. 

This backdrop is important insofar as it offers valuable lessons. The central failing of China’s economic growth model has been its perpetuation of a structural imbalance between consumption and investment. In the first phase, it was about loading investments into physical infrastructure, including housing and the development of greenfield townships. The excess capacity built up on the infrastructure supply-side was sought to be exported globally through the Belt and Road Initiative (BRI). 

Since 2015, the 13th Plan period has seen an increase in industrial focus and investments. This got amplified following the 2021 bursting of the housing bubble, with the government going into overdrive on manufacturing capacity expansion, with a focus on frontier technology areas. It also spawned massive increases in investments in R&D and innovation in areas like green technologies, electro-tech, semiconductor chips, and AI. Again, borrowing the playbook from BRI, the excess capacity was exported globally, resulting in the country’s trade surplus hitting $1.2 trillion in 2025. 

In both these phases, the domestic structural imbalances were sought to be papered over by focusing on building capacity and exporting the production globally. It was like China decided to make infrastructure and industrial capacity at home for the world. Never mind whether the world wanted it that way or not. 

Now, as growth flags and as structural imbalances continue to persist, the 15th Plan has proposed that the “new quality productive forces” emerging from strategic emerging industries and future industries can be the driver of growth to realise an income level of a moderately developed country by 2035. An important political (and economic) signal is that the Plan aims to maintain growth between 4.5-5% for 2026, a compulsion that is an important factor driving the growth strategies pursued. In simple terms, it is about shifting focus to the development of advanced industrial ecosystems in frontier technology areas. It has the added imperative and justification of the new Cold War with the US and the West. 

If we go by the track record, the assumption among Beijing’s policy makers is that it would lead to another Plan period of more or less similar inputs-based industrial growth (albeit in frontier technology areas), fuelled both by domestic demand and global markets. 

I’m not sure whether these assumptions will hold. This time may well be different. As I blogged here, there are now emerging hard limits to the inputs-driven growth model. Further, as geopolitical tensions rise and the Cold War deepens, China’s access to advanced technologies and equipment will become scarce, forcing Beijing to pour more resources into developing the same internally. Given the technologies involved, the nature of the resource allocation challenge, especially to do so efficiently and effectively, is much bigger and more complex than throwing resources into developing infrastructure and industrial capabilities. I’m not sure that pouring resources into large public and private companies, even with the most militantly patriotic and idealistic motives, can help create the conditions to deepen links between innovation and the manufacturing industry and foster the deployment of frontier technologies. 

This would be like one country trying to mobilise all the resources to compete with the world at large in developing its own proprietary frontier technologies. The Soviet example, which did not end too well, notwithstanding very important differences, is not to be ignored. 

The external market access, even in developing countries, is facing strong pushback or is rapidly closing. No large middle-income developing country, those with the markets to meaningfully absorb the Chinese excess capacities, will countenance a flood of cheap imports that will not only make them acutely dependent on another country in strategically important sectors, but also weaken and destroy their own domestic industrial capabilities. The rising backlash from the world economy’s China problem is another salient limiting factor to the pursuit of export-based economic growth strategies.

Weekend reading links

1. Jemima Kelly calls out the delusion among the successful Silicon Valley venture capitalists about the limits to their knowledge.

“If you go back, like, 400 years ago it never would have occurred to anybody to be introspective,” said a great sage of Silicon Valley last week, during the modern-day equivalent of a Socratic dialogue (a podcast). “Great men of history didn’t sit around doing this stuff.” The sage was none other than Marc Andreessen — venture capitalist, crypto enthusiast, devoted Democrat turned Donald Trump adviser, and author of the 2023 late-capitalist cry for help, the “Techno-Optimist Manifesto” (“love doesn’t scale . . . let’s stick with money”). The man who bet big on Web3 (remember that?) and NFTs (remember them?), and who once described criticisms of the metaverse as “reality privilege”. (Meta, on whose board Andreessen sits, announced this week it was all but pulling the plug on the metaverse.) The a16z founder was proudly explaining to Founders podcast host David Senra that he had “zero” levels of introspection. “Move forward. Go,” was his own anti-introspective mantra. “I’ve found that people who dwell on the past get stuck in the past. It’s a problem at work and it’s a problem at home.” He went on to claim that the very concept of the individual was only invented a few hundred years ago and that it wasn’t until the start of the 20th century that we started to believe in guilt and self-criticism.

She says something which more people should be talking about.

Andreessen seems to conflate the idea of overthinking, and even of guilt, with introspection, a word deriving from Latin that simply means “looking within”... He also fails to realise that the current era is the only one in which we would even have the option of not being introspective; the only one in which the a16z-backed merchants of the attention economy have made non-optional boredom extinct. In a recent X post, Andreessen described his “information consumption” thus: “1/4 X, 1/4 podcast interviews of the smartest practitioners, 1/4 talking to the leading AI models, and 1/4 reading old books. The opportunity cost of anything else is far too high, and rising daily.” (One wonders whether he reads the old books, or asks those leading AI models for their summaries.) My main issue with Andreessen is not so much that he’s wrong; it’s that he’s so confident about it. He sounded similarly confident when he told us that bitcoin represented a breakthrough akin to the internet, that Web3 was the future and that we shouldn’t fear AI because “the moral of every story is the good guys win”. We seem to believe, as a society, that wealth, influence and confidence can be equated with wisdom.

2. The market does not think that the war is about to end anytime soon.

In the last two weeks, there has been a big build-up of call options — which give a holder the right, but not the obligation, to buy an underlying futures contract — compared with put options, which give the holder the right to sell a futures contract. In the first week of the conflict, the opposite was true. That suggests the market believes we are in for further upside in oil prices rather than downside. The average strike for call options expiring in June expiration was $126 a barrel of oil whereas for put options it is $81. Worth noting, there is a small build in call options with a June strike price of $450 a barrel.

3. Off-grid energy is on the rise in the US to power data centres.

By the end of 2025, an estimated 39 percent of the gas power capacity being developed in the United States was designed to serve data centers on-site, according to the Global Energy Monitor, a nonprofit organization that tracks energy projects. That is up from 5 percent at the end of 2024...

Wait times vary by region, but it now takes an average of four years or more for data centers to connect to U.S. grids, according to JLL, a real estate services firm... Companies are gravitating to gas because it can theoretically generate electricity all day, unlike the wind or sun. And smaller gas generators and engines can be installed much faster than nuclear power plants... Industry analysts and executives also question whether power plants built alongside data centers will remain competitive if it becomes easier to connect to the grid.

3. Paul Graham has a brilliant essay on how the brand has become the product itself, illustrated with the example of Swiss watch makers. 

The most striking thing to me about the brand age is the sheer strangeness of it. The zombie watch brands that appear to be independent and even have their own retail stores, and yet are all owned by a few holding companies. The giant, awkwardly shaped watches that reverse 500 years of progress in making them smaller. The business model that requires a company to rebuy their own watches on the secondary market to catch rogue customers. The very concept of rogue customers. It's all so strange. And the reason it's strange is that there's no function for form to follow.

Up to the end of the golden age, mechanical watches were necessary. You needed them to know the time. And that constraint gave both the watches and the watchmaking industry a meaningful shape. There were certainly some strange-looking watches made during the golden age. They weren't all beautifully minimal. But when golden age watchmakers made a strange-looking watch, they knew they were doing it. In fact they give the impression of having done it as a deliberate exercise, to avoid getting into a rut.

That's not why brand age watches look strange. Brand age watches look strange because they have no practical function. Their function is to express brand, and while that is certainly a constraint, it's not the clean kind of constraint that generates good things. The constraints imposed by brand ultimately depend on some of the worst features of human psychology. So when you have a world defined only by brand, it's going to be a weird, bad world.

4. Interesting correlation between Truth Social posts of President Trump and oil market actions.

Traders made bets worth half a billion dollars in the oil market about 15 minutes before Donald Trump’s post touting “productive” talks with Iran sent the price of crude tumbling and ignited volatility in other assets. Roughly 6,200 Brent and West Texas Intermediate futures contracts changed hands between 6.49am and 6.50am New York time on Monday, just a quarter of an hour ahead of the US president’s post on Truth Social that there had in recent days been “productive conversations” with Tehran to end the war in Iran. The notional value of those trades was $580mn, according to FT calculations based on Bloomberg data... It was not known whether one entity or several entities were behind Monday’s trades. Trump’s announcement at 7.04am triggered a sharp sell-off across global energy markets and jumps in S&P 500 stock index futures and European equities as investors dialled back bets of a prolonged conflict.

The well-timed trades echoed the flurry of large highly profitable bets made on prediction market Polymarket on the timing of the US’s attacks in recent months on Iran and Venezuela... Several hedge funds noted that this was one of a number of examples in recent months of large trades being made ahead of official US government announcements. One trader at a major hedge fund said energy consultants had recently noticed several large block trades that they found to be unusually timed. Another portfolio manager said a series of large and well-timed trades had created a “level of frustration” among investors. “My gut from watching markets for the last 25 years is this is really abnormal,” he added. “It’s Monday morning, there’s no important data today, there aren’t any Fed speakers you’d want to front run. It’s an unusually large trade for a day with no event risk . . . Somebody just got a lot richer.”

See also this by Paul Krugman.

After the War broke out, the statements of Trump and his team have sharply lowered prices. Researchers somewhere are surely working on these to scrutinise market actions emerging alongside these decisions. 

5. Ed Luce brilliantly points to a striking home truths about the war in the Middle East.

One moment, Trump is threatening “an amount of strength and power that Iran has never seen or witnessed before”. Then, roughly 36 hours later, he declares that the US and Iran have been having “very good and productive conversations”. Few took the latter on trust. It is a strange situation where the world must await a statement from Iran to check whether there was any truth to what a US president said. Iran replied that no talks had taken place. Who were we to believe? 

... Trump will dial the invective up or down depending on Iran’s apparent negotiating position. The one offer Iran will never make is to give up its ability to disrupt the global energy markets. Yet that is the one thing Trump must have. Indirect talks are thus geared to swing from wild threat to outsized promise in line with Trump’s mood. Each time he is exposed as having made an empty threat that failed to push Iran into the desired concession, he will need to step up his threat level. This used to be known as the credibility gap. It does not take a seer to guess that at some point he will hint at using nuclear weapons.

6. A less discussed risk associated with the Gulf war is that on the semiconductor industry. Tej Parikh writes that the chip industry will face supply chain squeezes as the war drags on. 

7. Mohammed El Erian writes about how the Gulf war could impact global financial markets. 

The GCC countries have generated a current account surplus of more than $800bn in the past four years... Over the years, the GCC countries have expanded the scale and scope of their strategies to invest their patient capital, embracing the full spectrum of public and private markets, direct investments and more. Along the way, the countries have built deep financial relationships around the world and, most recently, the GCC has been at the vanguard of investments in AI, life sciences and robotics.

He points to reduced revenues and increased war reconstruction expenditures as likely to lower surplus flows into the global markets. This would come at a time when the global financial markets are feeling the pressure of sharply increased government deficit financing, refinancing of maturing debt, and a massive surge in AI investment-related borrowings. He says that the net impact on bond yields, even if in the short- to medium-term, can be significant. 

8. It can have adverse long-term impacts on the energy markets.

Critical Gulf energy infrastructure that was presumed to be safe is now seen as vulnerable, he said. A precedent has been set. “Buyers will price that risk for longer than the initial outage itself,” Jan-Eric Fahnrich, a senior analyst at Rystad Energy, wrote in an analysis. Countries in Asia and Europe, which depend on L.N.G., are likely to face more expensive gas prices long after the Strait of Hormuz reopens.

And this

“This is by far the largest disruption of crude oil and refined products that we’ve ever seen in history,” said Jason Miller, a professor in supply chain management at Michigan State University. “Petroleum goes into everything,” he said, so the inflationary impact could be enormous… Higher energy prices tend to slow economic growth, increase unemployment and speed inflation. It is also important to note that the price of diesel and jet fuel — which are processed differently — generally rise faster than the gasoline that drivers buy at the pump. And that has a disproportionate effect on moving goods around the globe, whether by plane, ship or truck. Those elevated energy prices could eventually increase the priceof practically every avocado, automobile, pair of sneakers, cellphone and drug that is bought and sold around the world.  

9. Nice article that points to how much of Trump's current actions are a replay of what he said and did nearly four decades back. 

He sketched out the first outlines in 1987, spending $94,801 to place a full-page ad in three US newspapers. The world was “laughing” at America’s leaders over the Gulf crisis triggered by the Iran-Iraq war, Trump declared. As the US escorted tankers through the Strait of Hormuz, he said Washington was trying to “protect ships we don’t own, carrying oil we don’t need, destined for allies who won’t help”. It is a line that his tirades echo today. But back then, as he tested the waters for a possible presidential run, Trump had concluded the problem was a lack of “backbone”. Appearing a few weeks later at a New Hampshire rotary club event in 1987, Trump sneered at how the Iranian navy — “little runabouts with machine guns” — had held America to ransom. “Why couldn’t we go in there and take some of their oilfields near the coast?” he asked. The then 41-year-old businessman put it even more starkly in a 1988 interview with the Guardian: “One bullet shot at one of our men or ships, and I’d do a number on Kharg Island. I’d go in and take it.”

This is similar to his belief that tariffs should be used to correct trade deficits, which he advocated in the case of Japan in the 1980s. 

10. Saudi Arabia may be a bigger proponent of regime change than Israel. A NYT report suggests.

Prince Mohammed, the people familiar with the discussions said, has argued that Iran poses a long-term threat to the Gulf that can only be eliminated by getting rid of the government. Prime Minister Benjamin Netanyahu of Israel also views Iran as a long-term threat, but analysts say Israeli officials would probably view a failed Iranian state that is too caught up in internal turmoil to menace Israel as a win, while Saudi Arabia views a failed state in Iran as a grave and direct security threat... 

Prince Mohammed has argued that the United States should consider putting troops in Iran to seize energy infrastructure and force the government out of power, according to the people briefed by U.S. officials... while Prince Mohammed probably preferred to avoid a war, he is concerned that if Mr. Trump pulls back now, Saudi Arabia and the rest of the Middle East will be left to confront an emboldened and furious Iran on their own. In this view, they say, a half-finished offensive would expose Saudi Arabia to frequent Iranian attacks. Such a scenario could also leave Iran with the power to periodically close the Strait of Hormuz.

11. German railways fact of the week.

Last year, Deutsche Bahn’s punctuality fell to the lowest level recorded in the 190 years since the first railway line was opened between Nuremberg and Fürth in Franconia. A mere 60 per cent of all long-distance trains arrived with less than six minutes delay, compared with 90 per cent two decades earlier. But this data excludes all of the trains that were cancelled. Deutsche Bahn now underperforms even the worst British train operator.

12. Sanctioned oil, where it used to go and where it goes now.

13. Fascinating account of China's genius-class students.

An estimated 100,000 talented Chinese teenagers are selected every year to enter a network of science-focused talent streams run across the country’s top high schools. The genius classes, also called “experiment” or “competition” classes, coach gifted students to compete in international competitions in maths, physics, chemistry, biology and computer science... For decades, genius classes have been turning out the leading lights of China’s science and technology sectors... Genius-class graduates include the founder of TikTok’s parent company, ByteDance, and the core developers behind its powerful content recommendation algorithm. Both leaders of China’s two biggest ecommerce platforms, Taobao and PDD, came from the genius stream, as did the billionaire who started the food delivery “super-app” Meituan. The two brothers behind the chipmaker Cambricon, now one of the leading Chinese rivals to Nvidia, were in genius classes. So were the core engineers behind leading large language models at DeepSeek and Alibaba’s Qwen, not to mention Tencent’s celebrated new chief scientist, poached from OpenAI late last year...

China’s genius classes differ in important ways from talent streams in the west. First, the system dwarfs its international competitors in scale. Second, it is state-driven. China graduates around five million majors in science, technology, engineering and maths every year, according to the state media Xinhua, compared with about half a million in the US. Tens of thousands of these graduates are genius-class students, taken out of regular classes for an intense period of study between the ages of 16-18. While others swot for China’s feared college admissions exams, the gaokao, those on the genius path have the chance to bypass that fate altogether, bagging places at top universities before they are out of high school, depending on their results in starry international competitions. The best students continue to more advanced talent schemes at the top Chinese universities, such as the elite computer science programmes at Tsinghua and Shanghai Jiao Tong universities... Starting in the 2000s, university admissions were reformed, giving more flexibility to colleges to allocate places without relying solely on the results of the gaokao. National competitions were set up for students at the end of their sophomore year of high school. Those who won top prizes in the national exam could receive direct admission to one of the 985 Project universities, China’s 39-member Ivy League equivalent...

The chance to skip the gaokao was a strong incentive for students to participate in the genius stream. The traditional pathway for high-school students in China is three years of study in the gaokao’s mandatory subjects of Chinese, English and Maths, as well as three more chosen subjects from physics, chemistry, biology, history, geography and politics. Exams in all six subjects are taken at the end of the third year. Genius-class students, on the other hand, focus on their “competition subjects”. A student competing in the International Physics Olympiad, for example, needs to not only finish three years of high-school physics but also at least half of the college-level syllabus, in order to be competitive enough to take the national exam.

Should it be any surprise then that Chinese teams sweep most of the gold medals at Olympiads, with 22 out of the 23 contestants sent in 2025 winning gold medals.  

14. Energy consumption responds to prices.

After the Russian energy price shock, German households and industry used 17 and 26 per cent less gas respectively. A study of Britain’s response by economists at the Institute for Fiscal Studies found that a 45 per cent rise in residential energy prices triggered a 14 per cent drop in households’ consumption.

15. Some staggering statistics about the age of omniscalers and extreme business concentration. A new MGI report identifies nine "super-wizard" companies, omniscalers - Alphabet, Amazon, Apple, Microsoft, Meta, Tesla/SpaceX, Alibaba, Huawei, and Samsung - that are set to dominate many of the 18 fastest growing markets of the future. 

Collectively they generated $2.7tn of revenue in 2025, a sum larger than the GDP of Italy. They also invested more than $800bn in research and development and capital expenditure, a share of revenue three times greater than at companies in traditional industries... In 2024, the six US omniscalers generated $550bn of operating cash flow. That was 2.5 times the money raised on US equity markets that year and not far shy of the $600bn of total bank lending to the non-financial sector... Over the past 20 years, these nine companies have been active acquirers of smaller businesses, with Alphabet and Microsoft snapping up more than 200 companies apiece. Even when a US judge found Google to have been operating an “illegal monopoly”, he refrained from breaking up the company.