Good morning,
It’s interview day, a day early.
On to the update:
iPhone Production Site Locked Down
From Bloomberg:
Apple Inc. supplier Foxconn is halting operations at its Shenzhen sites, one of which produces iPhones, in response to a government-imposed lockdown on the tech hub.
The Taiwanese company, also known as Hon Hai Precision Industry Co., has its China headquarters in the area and a key manufacturing site in Guanlan. It is suspending operations at the two campuses and has reallocated production to other sites to reduce impact from the disruption, the company said in a statement. Foxconn didn’t specify the length of the suspension. The measures from the Chinese government call for non-essential businesses in Shenzhen to halt until March 20.
While the shutdown may affect production of many of the devices Foxconn makes for Apple and other brands, demand for electronics typically troughs in the first quarter of every year after the holiday-season peak.
I know that interviews typically run on Thursdays, but I got a chance to chat with Bill Bishop of Sinocism earlier this week about what is happening in China with the current COVID outbreak, China’s response to the Ukraine war, and also his experiences with Substack (Sinocism was Substack’s first publication). Given how quickly the situation is changing I decided to run the interview sooner rather than later.
Bishop is the founder and author of Sinocism, the go-to source for information about China; Bishop, who reads Chinese fluently, tracks sources both inside and outside of China and packages the most relevant pieces together for his newsletter audience, along with occasional commentary. I’ve been reading Sinocism for years and was thrilled when Bishop made it his business in conjunction with the launch of Substack; we also discussed his view of Substack and the company’s evolution.
This interview isn’t super tech heavy, but given the importance of China to the industry I think the content is extremely relevant to anyone trying to figure out what is going to happen next.
As a reminder, the Daily Update Podcast is particularly useful for interviews, even if you are generally a reader.
An Interview With Bill Bishop about China (and Substack)
This interview has been lightly edited for clarity.
Bill Bishop, it is good to have you back. The last time we talked was at the very dawn of COVID and we were wondering how it was going to play out in China, if it was going to come over to the US, needless to say, that happened.
It’s been an interesting two years and I reached out because I actually wanted to talk to you a bit about some of the Ukraine stuff and the way that China is thinking about this. But I think COVID is very much rising back to being a major issue. Shenzhen just locked down, there’s a worry that it’s going to happen to Shanghai too. Foxconn closed a couple factories, including one of which makes iPhones. What are you hearing or seeing about what’s happening in China as far as COVID goes?
Bill Bishop: Well, thanks for having me back on your podcast, it’s always great to talk to you. And I think a lot of your audience knows, but you were the inspiration for me going paid, so I owe you a very large debt every day.
Actually, I do want to talk to you about the Substack stuff. Because I wrote about that this week, and we chatted a bit offline. I think you are right, but we’ll save that for later. Let’s knock off COVID first.
BB: So back to your question on COVID, yeah it’s crazy, two years ago last night I had dinner the last time for over year in a restaurant in DC, and we were all talking about what’s going to happen and obviously a lot of bad stuff happened. China, since the original outbreak in Wuhan, has had a remarkably successful run at basically keeping COVID in check with a few flare ups here and there. Now, Omicron really appears to have broken through and so we’ve got the biggest outbreak in China since the Wuhan outbreak about two years ago. I think over the weekend it’s been three days in a row where they’ve had more than 1,000 cases. Which of course in most places in the world — I mean especially here in the US, that’s nothing — but for China that is big enough to basically shut down an entire province, the province of Jilin up in the northeast, have somewhat of a lockdown in Shenzhen, and have increasing restrictions in large cities like Shanghai and I think another city outside of Beijing may have been locked down today, called Langfang, I think I saw a headline about that.
China has a very high vaccination rate, they’re using their own homegrown vaccines, and like all these vaccines, they’re better than nothing. They don’t appear to be as good as the mRNA ones, but they do appear to work at preventing severe illness and death. But the problem for China really is they’ve launched and made a real political success out of this idea of zero-COVID, so it’s very difficult for any local official or the central government to allow any kind of outbreak, and so they are very much geared towards, if there are a handful of cases, they’re going to shut down, first, areas of a city, and then if they have to, an entire city,
This dynamic, I think, is super important to understand. A couple of times Chinese scientists or doctors have tentatively suggested, “Do we need rethink the zero-COVID strategy?” and I believe Xi Jinping himself sort of shot it down a few months ago, and when that happens, everyone is going to fall in line and make it extreme.
But now it’s really bad in Hong Kong, and I have a couple questions on this. So one of the problems in Hong Kong is the vaccination rate in the elderly is particularly low, and it’s actually pretty low in China too, it’s in the high fifties range. Interestingly enough in Taiwan, they’ve also had the most difficulty getting seniors vaccinated — I believe it’s higher, I think it’s more in the seventies — despite the fact this is the most at-risk population. I’m kind of curious, you have a Chinese mother-in-law. Why is it so difficult to get the elderly vaccinated? Is there a Chinese angle to this? I don’t know. This is a bit of speculation on my part, I’m curious if you have any insight into that.
BB: Well actually, my mother-in-law has five shots, so she’s probably bulletproof.
(laughing) Yeah.
BB: She came back last July after having two of the Chinese shots, and then we promptly got her three Pfizer shots over the course.
It’s a good question, I think that Hong Kong especially — in China the rate is a bit higher because they’re more — it’s not so much coercive — but they’re better able to persuade in China on the mainland, but in Hong Kong really less so. So I think what you’re seeing in Hong Kong is very high death rates among the unvaccinated. But again, actually among the vaccinated, people are getting sick, but it seems like the Chinese vaccines actually do work at preventing severe illness and death in a pretty reasonably efficacious way, so that’s positive. But why are some people are reticent? There isn’t the sort of anti-vax movement per se inside mainland China, but I don’t have a great answer as to what is cultural. I mean, I know all my friends have all done their best to get their parents vaccinated because they’re all absolutely terrified of their parents getting it.
The thing, back to this question of zero-COVID, the Chinese recently switched from zero-COVID to this idea called Dynamic zero-COVID, where the idea was that they really are trying to minimize the social and economic disruptions from these lockdowns, and so they’re trying to be what they say more targeted, more precise. The problem is when it gets a little bit out of control, they go back to just full-on lockdown, like they’ve done in this entire province up in northeast China.
Still, I’ve got to say, from all my Chinese friends and contacts, they’re sitting there looking at what’s going on in the US and Europe, and the sacrifices are worth it. I mean, life has been basically normal for the last almost two years, with a few disruptions. They haven’t had the mass death, they haven’t had the mass sickness. For the political system, and for Xi Jinping in particular, this has been a massive victory, because it’s really allowed Xi Jinping and the Communist Party to say, “Look, our system is better. We actually take care of people.” We can argue whether that’s true, but I worry that a lot of people outside China, especially the US, don’t appreciate how much resonance that message has, because we look like a disaster.
Is there an issue where, because there is this strong political push for zero-COVID, and to your point it is one that is popularly supported, but is there an aspect where, 1) to keep it that way they’re going to snap back to lockdowns, like you just noted? But then 2) people will become actually more reticent to get tested or to report their sickness for fear that their family’s going to get quarantined? That it’s going to come down on them? I’m curious to what extent this has played a role in Hong Kong in particular and maybe this speaks to Hong Kong still being a generally freer society where you could get away with not getting tested. Whereas China, like they just line you all up and test you.
BB: Well, yeah. I mean because in China you have your health code that’s attached to WeChat, and if your number’s up to go get tested because somebody in your office building or your apartment block or on your train or your bus gets it, if you don’t go get tested basically your code turns a different color, like it turns yellow, red, and you can’t do anything. So there’s a much more effective way to force people to get tested in China.
When it comes to Hong Kong, over the last month or so as this fifth wave in Hong Kong has gotten really bad, you’ve seen a fair number of commentaries and comments from Chinese mainland academics and pro-Beijing newspapers about how the Hong Kong bureaucracy is full of people who have too many Western ideas, meaning they are too soft in terms of taking a much tougher approach towards COVID; they’re more on the lines of, like the UK, just sort of living with of it, and that’s the root of the disaster in Hong Kong, is what one of the arguments is. And so in Hong Kong they don’t have the health code, they can’t force the kind of testing in the mass way that they do in the mainland.
They also don’t have the bureaucratic infrastructure. One of the things that China’s done that’s really remarkable and has worked for them in terms of this approach to dealing with COVID, is basically out of Wuhan they effectively revitalized this entire grassroots infrastructure of people at all levels who come out and are paid a little bit of money to basically enforce all these rules. So they have this massive grassroots infrastructure that they can mobilize that most societies can’t, and Hong Kong definitely cannot.
What happens if this ends up failing in the end though? Where just Omicron is too much, the breakthrough is not contained, it does sweep through China, you have this relatively low vaccination rate in the elderly. Again, not as low as Hong Kong, but in the fifties is not great.
BB: It’s not great.
Given the danger there, what might be the sort of knock-on effects? Especially since so much political capital has been staked on, “We are not the West. We’re not as screwed up as the US. We can actually manage this.” What happens if that ends up not happening? Or is this too speculative at this point? We just have to wait and see.
BB: No, it’s a great question. It’s why I think for all this talk about dynamic zero-COVID and more precise scientific approaches, when things start looking bad it’s much more of a, “We’re just locking it down,” kind of approach. And one of the things too, that I think is under-appreciated in the West, or in a lot of countries, is as modern as mainland China has become, its medical system is still woefully inadequate. Their hospitals, if they were really in a mass outbreak, their hospitals would very quickly become overrun. There are just too many people and there are not enough doctors, there are not enough hospital beds. So the government, rightfully so, is extremely worried about what would happen if things got out of control. And like you were just asking, if they get out of control, it’s a social problem, it’s a health problem, it also becomes a political problem because there’s been so much legitimacy that’s been tied to what’s been seen as this very successful COVID response.
The problem though, is it keeps delaying any ability to reopen, because until there’s a vaccine that basically prevents not just severe illness but actually prevents transmission, which there doesn’t seem to be on the horizon, and/or there are cheap and massively available therapeutics, it’s very hard for the policy makers to say, “We can open up enough to tolerate a higher incidence of disease.” And the problem too is pretty much the messaging. I’m not a scientist, so I’m not going to say if it’s true or not, but what the government has been saying is that all these outbreaks in one way or another are imported infections, meaning that they’re coming from people or goods that are brought in from overseas, and more recently brought in from Hong Kong. So that’s another reason why they have such strict border controls, and that there doesn’t seem to be any prospect in the near future for those border controls being lifted.
Does China want to open up again? Is there some aspect where this is actually kind of a nice byproduct of this COVID response? It’s almost impossible to get in as a foreigner, if you do, it’s an unbelievably rigorous process, 21 days quarantine and multiple tests, some of potentially the more unpleasant variety. Or is it just like, “We’re bearing this burden because that’s the way we’re going to handle it”?
BB: Unfortunately, I think, in at least some parts of the Chinese political system, it’s not seen as too much of a negative. What’s interesting is, not only is it very hard to get into China, it’s very hard to leave now because they’ve basically stopped renewing and issuing passports. One of the challenges they have is the Chinese government can’t close its borders to Chinese citizens around the world, but they really don’t want Chinese citizens traveling and then bringing it back. They add a lot of friction to the process of leaving the country now and there’s so few flights that it’s hard to get a flight, it’s expensive.
But more broadly, and this is something that I worry about a lot is really, again, we’re going to be trying to understand the impact of this pandemic for decades or longer, but it really does seem to be coinciding with more of a closing of the society, a much more marked shift away from the West. The inability to travel, the inability to go to China, or recently for people to leave China, it’s exacerbating all those things, I think. If you’re really cynical, sure, it may have some political benefit. It certainly has some financial benefits because a lot of Chinese people aren’t spending their Renminbi and not converting it into US dollars and spending outside of China, it theoretically helps consumption inside China if people could travel more but the problem is with the zero-COVID policies, it’s harder to travel inside China too because you don’t want to risk —
You don’t want to stuck away from home.
BB: — going somewhere and then getting stuck for like three weeks in quarantine and some random place where you can’t get back and get to work and see your family.
That’s actually an interesting way to transition to what’s happening in Ukraine and the way China’s approaching and dealing with it. I was telling some friends when this first happened that because there’s sort of a conflicting messages, some Chinese banks were not forwarding financing for Chinese companies buying energy from Russia, for example, it’s like “Oh, yeah, China’s leaping on board”!, and then meanwhile, you would have diplomats being on the other side giving the talk about this territorial integrity and “NATO’s actually the real problem”, and it’s like territorial integrity seems to only apply to Russia, not to Ukraine. It does seem like that latter message is starting to really carry the day, you haven’t heard any real deviation from that. Is that your read too? They’re trying to straddle this line of not out and out endorsing Russia’s action, but at the same time, they also believe that big countries should be able to take territories that they believe are theirs, and that US encroachment is the real problem.
BB: That’s right. China is very clearly leaning towards the Russian side. You see it in the way they talk about the roots of the crisis. You see it in the way they don’t describe it as an invasion, they use the Russian term, I think is like “special military operation”. They are coordinating and amplifying Russian disinformation. The big thing in the last few days has been the biolabs in Ukraine, and this is all before the news today. This was leaked out of the White House, they were spreading it around DC yesterday, to multiple outlets and people this idea that the US has intelligence that the Russians have asked Beijing for military aid and China hasn’t said yes, so that’s not necessarily an indication of Beijing leaning to one side or the other. But clearly, governments in Europe, NATO, there is not a lot of doubt where China really is leaning, and you have to go back to the February 4th statement when Putin went to Beijing for the Olympics opening ceremony and before that in a summit with Xi Jinping and they put out this 5,000+ word document that was effectively a manifesto for a new international order that was basically a Sino-Russian-led order. I don’t know that Xi Jinping knew and I doubt he would have approved or not approved of what Putin was doing, but it’s not a coincidence that within a matter of weeks Putin went in and Beijing has not really done anything to criticize the Russians.
What do you think has been China’s view of the response of the West? Because I think even those of us in the West have been surprised and struck by the vigor of that response. Is that a similar sense in China too, where they expected the West to roll over and it be like a similar Crimea sort of situation or in China’s case, a South China Sea situation, and the degree of fervor in response has been a shock to them? Or is it like “The West is raising a big hissyfit and it’s not going to make any difference”?
BB: No, I think it’s been a bit of a shock, I also think it’s been useful to them.
First on the shock part, I do think that they’re especially surprised by the German and the EU reaction, not so much by the US reaction. And certainly, I think China in that February 4th statement with Russia, they called out NATO, China does not like NATO, and I think it is disturbing or distressing for them to see what looks like a strengthening NATO, as opposed to one that was kind of almost destroyed under the previous US president who might have pulled out.
From a utility perspective though, seeing this set of sanctions is incredibly useful to Beijing, as it has been working for several years on how to strengthen its financial system to be able to deal with what they expect to be US-led financial war against China at some point in the future. Xi Jinping over the last few years has been talking up self-sufficiency in all sorts of areas. Last year, he made a big point of talking up the importance of building up strategic reserves, and they’ve built up strategic reserves for a long time, but this signaled a much more concerted push and a much larger number of sectors. There was a joke going on from some Russian foreign policy guy about “The great thing for Beijing about Russia and the Soviet Union is they get to look at their big brother up north and learn from all the mistakes they make” because, obviously, Xi Jinping and the Communist party made a big deal about learning from why do the USSR fall and how do we avoid that here and the people’s Republic of China. So, there is a lot of value, I think, for Beijing in watching how these sanctions unfold, seeing what the US and EU can do, but also seeing who’s not participating. India’s not participating, a lot of the Middle East, the global South — it’s not the whole world. As much as here in say, DC or Brussels, maybe people talk about everyone’s united, in fact, not really.
When the UN vote happened, I saw a tweet and someone was like, “Oh, Russia stomped at the UN”. And I’m like, well, no, actually, if you go through and calculate by population, this is pretty close to 50/50. Particularly, since a lot of the largest countries in the world abstained.
I guess this is really the critical question about what China is going to do in response. To what extent are they really going to lean into building an alternative to the US dollar, US tech-dominated world? To what extent is that going to be a super explicit policy? Is this going to be “We’re going to do stuff on the edges” or is this going to really be a hardcore focus going forward? And how does that play into the Russia thing? Are they going to sell stuff to Russia? Are they going to allow a flourishing grey market that they can sort of pretend doesn’t exist but does? I mean, how do you see them responding to this in the long run?
BB: So, there are a few questions there. First, I think China already wants to build a tech ecosystem that is as independent as possible from US domination and risks in the US. I mean, that was the lesson they learned from a little bit from ZTE, but really from Huawei and the way the US government effectively destroyed that company. On the financial side, China has also been trying for a long time to move away from the dollar-based global financial system. It isn’t happening and it’s been far too slow and far too hard to do.
Are they really actually willing to go all the way to be what would be necessary to be a global reserve currency? I guess the question I have about China is they always tend to default towards what’s best for China, and there’s some extent where if you want to be a global hegemon, you have to do things that benefit the hegemon, the overall broadly, even if there’s some angles that hurt you specifically. The US, in some aspects they’re hurt by the deficits that they run, but running the deficits is critical to the dollar being dominant. Is China willing to actually go all the way?
BB: Not yet. A great question, it’s one of the great points. It’s one of the reasons why it hasn’t worked. You can put money in China, but you can’t get it out. There are a lot of reasons why most people or most countries, most big investors, don’t want to put a lot of their cash into Renminbi.
This is not something that happens overnight, but what’s happening though, and especially, under Xi Jinping and especially given the relationship with the US over the last several years, is all of these things have taken on a lot more urgency inside China and inside the Chinese leadership, and I think the Ukraine crisis and the sanctions against Russia will only add to that kind of urgency. China has to look at “If there’s certain things we want to do that involve taking territories that we see as key to our national rejuvenation, how will the rest of the world react and how do we harden our system to be able to withstand those shocks?”
To one of your earlier questions though, I think actually that the big Chinese banks, I would be very surprised if they flout the sanctions, because they have too much to lose globally. Sanctions on North Korea, the big banks have tended to actually go along because, again, they have too much to lose. The issue’s going to be in some of the smaller banks, some of the banks that are not as worried about losing access to the global financial system. And certainly, there’s going to be a lot of people trying to make money on the side, on arbitrage trades, where even if there’s some big deal where some state-owned company buys a bunch of oil from Russia at a discount, I can pretty much guarantee you that they’re going to be people who then take some of the oil and then try and probably resell it overseas for the markup. This actually opens up a whole bunch of business opportunities from the Chinese side to deal with these sanctions, because Russia does not have a lot of leverage or bargaining power right now when they’re selling all the things that China wants.
One of the striking things about COVID is I always felt like China really wasted an opportunity where it was a pandemic, people felt bad for them, they were suffering going through this, and then they got it under control. They had things like PPE, and they could have come out of that initial 2020 period being like, “Hey, here’s the lessons we learned, here’s the way to handle it, let’s send you medical supplies” and being really sort of generous and open, particularly when the US was just flailing around, and really made a dent in global opinion, in European opinion I think in particular. Instead, they started talking about “Oh it’s US soldiers from Fort Bragg” or whatever, or imported seafood, and they just went the total opposite direction. That’s been a trend with this sort of wolf warrior class of diplomatic engagement that China’s been engaged in, it felt like a real wasted opportunity.
The reason I bring this up is you look at say, China and Russia, and there is not necessarily a great history of getting along diplomatically. You look at China and India and there is an even worse history of getting along diplomatically. It almost feels like there’s this opportunity for China to build this broad alternative to the West, but there’s just no real evidence that they have the diplomatic chops or grace to accomplish that. Is that too harsh or do you think that’s a fair critique of how they might handle this opportunity?
BB: No, it doesn’t seem like it. They really have squandered, I think an opportunity to make a lot of inroads in terms of building out their soft power. I mean, they talk a lot about soft power, they’ve talked about it for years, and it’s just not something that their system seems to be particularly good at doing.
Some of the reaction was because of the U.S. allegations about the COVID origins, but a core part of Xi Jinping’s thought is there Xi Jinping impact diplomacy. People talk about the wolf warriors, but in fact, it’s really, they’re like Xi Jinping diplomatic thought warriors, because one of the tenets is basically, “If we’re attacked, we fight back”. There’s a sense that these guys all have to perform. It’s sort of performative anger, where they have to lash out and criticize and really for the most part attack to U.S., because so much of what we’re seeing around the COVID stuff, but then also around Ukraine, the February 4th statement with Russia, it’s really about delegitimizing the United States and pushing a different narrative for the rest of the world to effectively end the unipolar order that’s led by the U.S.
I think that the question though, is can you sustain “Your enemy is my enemy”? I’m not sure that means we’re friends, I guess, is going to be the question going forward.
BB: I’ve talked to plenty of my Chinese friends and interlocutors, and I’ll tell you, there’s nobody that I’ve spoken to who thinks this is a good idea, or that they really want to be in bed with the Russians. It’s really more driven from the top, where Xi Jinping sees China as in a long term struggle with the United States, and he needs whichever allies he can get to help wage that struggle. Russia and Putin are an obvious choice, or they were, although there are potentially a lot of downsides for China. There also are potential upsides, because if whatever the outcome of this horrible tragedy in Ukraine is, as long as Putin stays in power in Russia, Xi Jinping is going to have a weakened state and large country on its border with all sorts of resources and things that China wants, that’s going to need China’s help, and in many ways it’s going to be beholden to China. And that in at least in the short to medium term, I think you could certainly make an argument that that has some benefit for China. Things could also go really badly, the wrong way, and it could completely blow up in Xi Jinping’s face, but at this point the odds of that happening aren’t zero, but I don’t think they’re particularly high.
Yeah. We’ve talked about this before, but there’s so many people predicting doom for China or Xi Jinping, and they’re just wrong again and again and again, and it’s very easy for wishful thinking, I think, to enter the equation and engender motivated reasoning.
BB: Hopium. I think it’s called hopium.
That’s right.
What do you think are the long term implications for companies in China? I guess there’s two angles, there’s obviously the more consumer companies, consumer brands, but the big one in tech is Apple. Apple is obviously exposed on both sides, both because they sell products there, but also they’re so enmeshed in China from a production standpoint and we see the situation now, just to go back to the COVID angle with that iPhone factory being shut down. When it comes to the priority stack, Apple is below zero-COVID, right? But when it comes to other priorities, I think people underrate too how important Apple is to China. Apple employs a ton of people with good jobs, they are a poster child for doing business in China and what it enables, all the things it unlocks. I think it’s been striking to people — it was to me until I thought more about it — that Apple was never retaliated against for Huawei or anything on those lines. I think it really spoke to the depth of that relationship. Is that as strong as ever or what are the risk factors there?
BB: I think it’s very strong. Apple has worked extremely hard to lean into the Chinese government’s priorities and to basically do what needed to be done for them to be able to build such a big business. I mean, I think a fifth or so of their revenue also comes from mainland China.
Right. So it’s both sides of it.
BB: The lesson is, I think if you’re in a boardroom or you’re a strategic consultant, and you’re looking at worst case scenarios, what just happened in Russia, I don’t think was on a lot of people’s “this is a likely scenario” slide, and what I mean is in the event of some sort of military action that leads to these massive crippling sanctions, your business can be gone in a weekend. For example, if Apple had a large manufacturing presence in Russia, do we think that they would’ve gotten exemptions by the U.S. or the E.U. from those sanctions, or would that businesses have gone away?
And so when you switch back to China, and this came up a lot, the Trump administration especially was pushing this idea of decoupling and trying to tell U.S. companies specifically that they needed to move their manufacturing out of China, on the COVID side, it turns out that China actually has turned out to be one of the better places to be to manufacture because of the way they’ve managed COVID. The geopolitical risk just is much higher now than it was a month ago, so companies with large dependencies on China or vulnerabilities in China need to really think a lot harder about how they reduce those dependencies.
And the ones on the market, “I get 20% of my revenue from China”, that’s going to be really hard to find 20% somewhere else, but “I make 80% of myself in China”, well, maybe you should find a way to make less in China. That’s easy to say talking on a podcast, I know it’s incredibly complex and expensive, but if we’re four years since the Trump administration started this decoupling campaign, and companies have not started to really formulate a plan for what a robust supply chain looks like that doesn’t include China, they could very well wake up one day with a huge problem.
To be honest, back to the lessons from Ukraine, the big lesson around sanctions and the reaction is if, and I still think it’s a low probability event, but if Beijing were to make some sort of a military move on Taiwan, it’s hard to envision a reaction from the U.S., at least in terms of sanctions, that wouldn’t match how the U.S. has reacted to Russia. And that would devastate a lot of businesses that had too much reliance in China.
It’s such an interesting question because on one hand, yes the U.S. has much closer ties to Taiwan, particularly cultural ties. Taiwan, I think, is traditionally been larger in the to the extent people know about either Taiwan or Ukraine, they probably know more about Taiwan. But at the same time, to cut off China, that’s going to actually hurt the U.S. in a way that it’s not going to hurt cutting off Russia, right?
BB: Right.
At the same time, if there’s military action against Taiwan, there’s the whole chip industry. I actually think of invasion as less likely in part, because I think that China doesn’t want a destroyed Taiwan. Ideally they can bring them in at their full economic potential. But the variables are in some respects, you can see the similarities, there’s very clear similarities, right? Big country, “Traditional part of our country, we believe, and we’re going to take them back”. On the other hand, it couldn’t be more different in some respects. I guess the question here is, is the lesson from Ukraine that wow, the West is really going to respond strongly, or is the question that it was easy to respond strongly because Russia was so weak. Which way does that matter? That’s totally different for China from either perspective.
BB: It’s a really hard question to answer, I think it’s a little bit of both. I think that certainly the West’s response, I mean, look at the U.S. won’t actually engage in Ukraine because basically Putin threatened nuclear retaliation. Well, who else is a nuclear power? And so you could see a similar scenario where for all this talk about the U.S. intervening, the U.S. would be left mostly with a sanctions toolbox, which is in many ways overused, it has, especially in the case of sanctioned China, has a lot of blow back and can do a lot of damage to the U.S. economy. It’s one of the reasons why for all the bluster, the Trump administration with a couple of exceptions like around Huawei, they really didn’t pursue some of the harsher sanctions, especially in the financial sector. But the thing to your early question about China is actually pretty nice to Apple, the one thing I think they realize is they want to make it as hard as possible for countries to leave China. The more that they can bind these big countries to producing in China, the more I think they see it gives them running room for their other initiatives, because it makes them more expensive and more painful for the U.S. to take harsher actions.
Where’s your probability meter on China taking action against Taiwan these days?
BB: I think it’s low. I mean, I think that it’s not zero and it’s higher than it used to be, but to your point, it would be disaster for everybody involved starting with the people in Taiwan. It’s unlikely the things that matter to the technology industry, for example, would likely get destroyed, which would be a disaster for China too. And so I think that if the mainland has to use force on Taiwan, then they failed. But the problem is that any sort of political solution seems much further than it did even five years ago, primarily because of what happened in Hong Kong. Because the people in Taiwan are going to see all the promises that were made over Hong Kong and then see what happened and say, “We just can’t believe a word that you say”. So in many ways the best case scenario is find a way to keep the basic status quo going for as long as possible.
I think to your point about seeing the sanctions and what they have to do to build, to respond, I think actually lowers the risk, at least in the short term, because it’s like, “Wow, we have years of work to do, to get ourselves in a situation where if we were sanctioned to this degree, we could survive it”. My sense is it decreases the short term risk, even as there’s a long term risk that to the extent China does decouple itself and does make itself sustainable independent of the U.S. order, then they have more freedom of movement and that’s when the risk is higher.
BB: I would tend to agree. I would say though, I think it depends on who’s making the assessment. One thing, one other lesson from Ukraine for Taiwan may be that they need to get a whole bunch more weapons that aren’t like fighter jets.
Yeah. That’s a huge problem.
BB: The sort of the man portable anti-aircraft weapons, they need lots of mines to put on the beaches, all sorts of things to create what people talk about as a sort of hedgehog strategy to make it really, really difficult for China to take it. And so if, for example, you start seeing large arms packages that are designed more like that, instead of “Here’s another 30 F16s”, there may be parts of the Chinese system to say, “Well it’s only going to get harder”. The other thing I would say is there are certain scenarios where I think the likelihood of the mainland doing something kinetically go up significantly. One is things like, former Secretary of State Pompeo was in Taipei, I think last week or the week before, basically saying the U.S. should recognize Taiwan. The U.S. recognizes Taiwan, I think that would trigger a pretty significant and pretty hairy crisis.
Yeah.
BB: Another would be if there were some sort of a set of blanket sanctions from the US on all chips made with US origin technology out of Taiwan where it effectively cuts off the mainland from-
Then who cares if you destroy TSMC, because you’re not getting any benefit from them anyway.
BB: Right. Who cares? And I think that’s why there has been, at least in certain parts of the US government, there are people who argue for restraint for that exact reason. Saying, “Well, if you take away their incentive to keep it going, then that adds a lot more risk”. It’s awful to even have to contemplate this, but I think what we’ve been seeing over the last year or so there’s certainly a lot more tension but really, especially with Ukraine and I know most of your audience are technology executives and investors, is all the things that seem crazy, all these awful scenarios — the world is changing. We cannot rule these things out in ways that I think we maybe confidently or flippantly did previously.
Well, speaking of the world changing and things that are not terrible, you mentioned the at top that yes, you were my long term project. I told you for years, I think before I started Stratechery, that you ought to be doing this pay model. I think you were the original author on Substack, they built the original product around your newsletter. I’m curious, there’s been a little controversy and stuff about Substack launching their own app, but it’s branded Substack, it’s not branded by the writer or anything. What’s your opinion, as the Substack OG, on the company and where they’re going, where they ought to go?
BB: So first of all the app, I like the app. I beta tested it for probably four months or so, and I find it useful. I think in your issue today, you mentioned you subscribe to 37 newsletters. I think I might actually subscribe to more than you do, and so I’m very happy to have them out of my Gmail and into this app, I find it to be a better experience.
You’ve written about Substack a few times, and I do think you’ve been right about a bunch of things. I should also say I’m an angel investor, so no conflict, no interest! But I do think that they’ve started to get traction around helping existing authors build the network effect where you start seeing some crossover from one newsletter to the other. They need to do more around discovery, they need to do more around building that virtuous interaction where once you’re on Substack, it’s easier to then subscribe to other Substacks. I think that the founders are very clear that even though the app is branded Substack, they’re very focused, they don’t want to do the algorithmic recommendations, they don’t want to end up where Facebook has ended up or Twitter has ended up.
There certainly though is, like anywhere, there’s revenue pressure. They get, and they’re public about it, they get 10% of the gross revenue. You have to sell a lot of newsletters to scale that into a massive business. And so the question is, how do you do that? Or, what other revenue can you find? And those guys, they were smart about how they raised money, I think they’ve got a lot of runway as far as I understand. They’ve done some tuck-in acquisitions, they’ve done some acqui-hiring stuff. They’re clearly getting traction, they’re getting mind share, they’re getting people’s time and as we saw with, as you know, Facebook developed early on and Twitter, they’re getting the audience and then ultimately I think that the business models will evolve.
But in general, I’m kind of shocked. I was their first customer and it was just Chris [Best] and Hamish [McKenzie], and then Jairaj [Sethi] came later, the third co-founder. You had basically hooked me up, I was going to do the Memberful kludgy plug-in with WordPress and these guys came and I said, “This seems a lot easier. Why not?” I had no idea it would get as big as it has gotten. It’s interesting because you think it’s an easy thing to copy, and yet they figured out how to basically reduce all the points of friction in terms of publishing a newsletter. It is pretty impressive how they’ve done that. If you look at the numbers, I could afford to hire a customer support person, I could afford to do it myself but I also then have to manage people and manage time, and I don’t want the headache.
Yeah. I would say, I’ve come around on the price point. I think it’s actually totally reasonable for what they offer. Even if you are a big publisher, you look at that number like, “Wow, that’s a lot of money” and then you think about all this stuff that you have to do. I know, because I do this stuff, so I do think that’s a fair point.
I think one thing that you pushed back on me about my post today, and I think you were right and before this is published I’m going to write about it again, where the Analyst Ben is like “They need more lock in. They need ideally stuff flowing through the same payment system. It gives them more flexibility to bundle stuff later, to put things together. They need more rights in their contract with publishers to give them more ability to do this.” I think you had a good bit of feedback, which is then they wouldn’t have Bill Bishop on their platform, and I think that’s a great point.
My question is, “Was there a time where they could have flipped the switch and got a little more greedy about that stuff”? I think there’s an issue, it’s just hard for me to be objective about this, because it’s hard for me to take off my personal publisher hat and think about what I would want to do, and what would be important to me. It feels like there was a time where they were such a hot thing and people were jumping on them, that they could have had a little bit stricter terms. You’re a centralized service, you’re never going to be the most open service. You’re fundamentally constrained, so why not lean a little in the other direction and be, not to say a little more evil, but a little more “We’re going to make this a service that benefits everyone, even if that means we were getting a little more control of the big publishers”. I don’t know, that’s not really a question, it’s just me rambling. It’s the tension though I feel, writing about them in particular.
BB: The thing I wrote to you this morning after your issue was just the idea that they should collect all the Stripe money and have a master account and I just told you, when we were starting out, it was discussed, and I just said, “I like you guys, but you’re a startup with a few angels. I’m not going to let you keep my money.” This was almost five years ago, because it’s your money and a startup that doesn’t have a lot of funding, and they have big pot of money somewhere, maybe you use it for something else for a little while and then you put it back in. Not that they would have, but it’s one of those risks that you have when you’re dealing with a brand new company. That’s obviously not a risk anymore and so it’s something that maybe would work. I will tell you as a publisher, an area where I hope that they add more tools is around things like financial planning. I pay Stripe a little extra money for some of their financial reporting. There are a lot of things as you get bigger that I think writers, again, they don’t want to deal with building their own CMS or building their own email-
It’s a great point. But if they controlled all the money, they could actually provide a better service in some regards and smooth out more pain points, instead of having publishers have to go get their own Stripe account and do their own analytics and things along those lines.
BB: Right, but I would say that one way to do that is you don’t have to build it and turn everybody to one account, you build it and then let people try it and if they like it, maybe you say, if we move it to a more centralized account, these are the other benefits. I have not talked to them about this stuff but as a publisher, I will just say that I much prefer to get a payment every business day, like you get from Stripe. It’s one of the most amazing things about this business, is you get money in your bank account every day.
It is nice. I endorse getting money in your bank account every day. I’ve enjoyed the experience.
BB: And so to give that up, there has to be something else given back to you, there has to be some benefit to do that.
I think that’s right. I think I was a little hard on them. I thought about starting a business like this years ago and I never personally worked through the “How do you actually get a sufficient return, particularly if you raise money”? It’s a great business and needs to exist, but there’s just that tension, particularly once they’ve raised a fair bit of money, they’ve got to capture that value somehow. How big is this market? I think the market is bigger than a lot of people thought. I’m not sure it’s bigger than I thought, I’ve always been pretty bullish about the model. But it needs to get, to your point, even bigger, and we’ll have to wait and see how that goes.
BB: And the only thing I’d say to that is if you’ve been at year four of Twitter or year three or four of Facebook, you could probably have said the same thing. Not that these guys are going to be like Twitter or Facebook. But I think, and I’m putting on my angel investor hat, is I started on Substack, I liked it so much I begged them to let me invest, because I just figured these guys are onto something. What that is exactly, it’s unclear, but they’re clearly at the forefront of, and we had talked about this, you and I, some much bigger shift in the way content is produced and consumed on the Internet. And so to be a part of that, they’ll probably figure it out.
Yeah. I’m cheering for them. I think they’ve taken overall a great approach and I’m just a big believer in the model and I love the fact that you proved it out. I get the double gratification.
BB: Well, the next bit is I need to figure out how to make a Dithering for China. I love your and Gruber’s Dithering, it’s a great podcast, and I’d love to find a ho a co-host to do something about China like that. There are too many long podcasts, 15, 20 minutes is perfect.
Well, we’ll have to talk offline about that. See what we can figure out. Sounds good, Bill. It was good to connect again. We covered a whole bunch of stuff, there’s a whole bunch of stuff to talk about and I look forward to talking to you soon. Maybe not in 15 minute intervals, but we’ll see how it goes.
BB: As always, thanks for having me on your newsletter.
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