Yanwen’s blog

January 31, 2025

Right before China’s Lunar New Year, I read The McKinsey Global Institute’s Geopolitics and the Geometry of Global Trade: 2024 Update. It’s a lengthy report analyzing how shifting geopolitical dynamics are reshaping global trade among three major economic blocs: the U.S., Europe, and China. The study highlights how countries are increasingly reconfiguring their trade relationships based on geopolitical considerations, leading to significant shifts in trade flows.  

Key Findings:  

1. U.S. Trade Diversification: The U.S. has been reducing its reliance on China, instead strengthening trade ties with countries like Mexico and Vietnam. In some cases, these nations act as intermediaries in trade between the U.S. and China.

2. Europe’s Trade Realignment: European nations have scaled back trade with Russia, shifting their focus to alternative partners, particularly the United States.

3. China’s Evolving Trade Partnerships: Developing economies now make up the majority of China’s imports and exports. Countries such as those in ASEAN, Brazil, and India are deepening trade ties across different geopolitical spheres.

This ongoing shift reflects a broader trend toward friendshoring, nearshoring, decoupling, and derisking in global trade strategies—particularly in efforts to reduce dependency on China.

McKinsey’s report presents a mixed picture for China—both challenges and opportunities.

The possible challenges for China: 

1. Trade Diversion: The U.S. and Europe are actively reducing dependence on China, either by shifting trade to alternative partners like Mexico, Vietnam, and India or by strengthening intra-alliance trade (e.g., between the U.S. and Europe).

2. Geopolitical Isolation: While China is still a key player in global trade, its reliance on developing economies instead of Western markets suggests a gradual economic decoupling from major industrial powers. The loss of European and U.S. trade could slow China's technological and industrial advancement.

3. Supply Chain Restructuring: Companies increasingly seek to mitigate risks by diversifying supply chains. If more global firms relocate production away from China, it could weaken China’s manufacturing base, employment, and foreign investment.

Opportunities for China:

1. Stronger Trade with Emerging Markets: China is deepening trade ties with ASEAN, Brazil, and India,  and Global South allowing it to diversify its trade dependencies, which could help offset losses from the U.S. and Europe.  

2. Resilience through Self-Sufficiency and Self-Reliance: Reduced reliance on Western economies may push China to strengthen its domestic industries, innovation, and supply chains, making it less vulnerable to external shocks. 

3. Global Trade Realignment is Gradual: Despite it all, China remains a crucial part of global supply chains. Countries that move away from direct trade with China often still depend on Chinese-manufactured components directly or indirectly.

A Chinese saying goes, “风物长宜放眼量” (Fēng wù cháng yí fàng yǎn liáng), means "Take a long-term view of changing circumstances." It emphasizes the importance of maintaining a broad perspective and long-term view in times of uncertainty.

Overall, the report presents a mixed outlook for China. In the short term, it faces strong headwinds from the U.S., but its ability to adapt and build new economic alliances could ultimately turn this challenge into a long-term strategic advantage.

January 30, 2025

Within three days of my arrival in Beijing, China saw the announcement of two significant developments in chemical manufacturing: Sika Expands Global Footprint with New Plants in China and Singapore and Evonik Forms Hydrogen Peroxide JV in China, as reported by Chemical Engineering.

Sika AG, a Swiss multinational specializing in construction chemicals, and Evonik Industries AG, a German specialty chemicals company, have each made notable investments in China. These announcements underscore China’s growing role as a global hub for industrial and chemical manufacturing, reflecting key trends in international business strategy, innovation, and market dynamics.

1. Strengthening Supply Chains in China   Both Sika and Evonik are deepening their investments in China, emphasizing its critical position in global supply chains. Despite economic and geopolitical uncertainties, these moves demonstrate confidence in China’s market potential, infrastructure, and industrial ecosystem.

2. Regional Focus and Market Tailoring  

   - Sika's Expansion in Xi'an:    By establishing a plant in Northwest China, Sika aims to serve less saturated yet rapidly growing regions. This strategic move highlights an understanding of China’s regional economic diversity, where growth increasingly extends beyond coastal areas.  

   - Evonik's Joint Venture in Sichuan:     Sichuan Province, with its rich resource base and strategic location, is ideal for industries like solar panels and semiconductors. Evonik’s focus on producing specialty-grade hydrogen peroxide supports high-tech and green technology markets, aligning with China’s push for innovation and sustainability.

3. Alignment with China's Industrial Policy   Both announcements reflect alignment with China’s broader industrial and environmental priorities: Sika’s construction solutions contribute to urbanization and infrastructure development. Evonik’s specialty chemicals for solar panels and semiconductors support China’s focus on renewable energy and advanced manufacturing technologies.

4. Commitment to Sustainability and Innovation   These investments underline global sustainability trends:  Sika’s waterproofing and flooring solutions aim to enhance energy efficiency in buildings. Evonik’s hydrogen peroxide production for solar panels supports cleaner energy solutions and underscores a commitment to innovation in green technologies.

5. Global Competitiveness and Localization   By establishing local production facilities, both companies reduce reliance on imports, improve supply chain resilience, and enhance cost efficiency. Evonik’s joint venture with Fuhua Tongda Chemicals also signals a long-term commitment to localized partnerships, further strengthening their foothold in the Chinese market.

Broader Implications:  

First, for China, these developments affirm China’s dual role as a major consumer market and a manufacturing powerhouse. They also highlight how foreign companies are adapting to China’s transition toward high-tech and environmentally friendly industries.  

Second, for the global market, these investments emphasize the interconnected nature of global industries, where advancements in one region, such as China’s renewable energy initiatives, can shape corporate strategies worldwide.

Third, for competitors, western companies must carefully weigh the risks and rewards of engaging with the Chinese market. The growth opportunities in sectors like construction and green technologies may justify navigating geopolitical complexities.

China’s ability to attract such significant investments, even amid global geopolitical tensions and uncertainties, underscores its enduring importance in the future of industrial innovation and sustainability.

January 29, 2025

Happy Spring Festival from Beijing! January 29 marks the Spring Festival, a time that always takes me back to my childhood, when we celebrated the holiday. I remember we all wore new clothes during the Lunar New Year and savored special dishes on this occasion. I still don’t understand why wearing new clothes for the occasion, especially when meeting relatives, perhaps we didn’t have enough for other occasions, perhaps it’s part of the customs of 总把新桃换旧符 (zǒng bǎ xīn táo huàn jiù fú), that is, “Always replace old charms with new ones." Though it was a time of scarcity, we still managed to enjoy ourselves back in the 1960s.

The day I arrived in Beijing, Reuters carried groundbreaking news: "China's solar, wind power installations soared to record in 2024."  

"China broke its own records for new wind and solar power installations again last year, official data showed on Tuesday, accelerating from a breakneck pace set in 2023 as the country looks to peak its carbon emissions before 2030.  

Installed solar and wind power capacity climbed 45.2% and 18%, respectively, in 2024, the National Energy Administration said.  

There is now 886.67 GW of installed solar power, up from 609.49 GW in 2023, it said. The United States had 139 GW in 2023, according to the International Renewable Energy Agency."  

This achievement highlights several key dimensions of China's leadership in renewable energy and its broader implications for global energy dynamics:

1. A Leader in Renewable Energy   China's record-breaking installations of solar and wind power underscore its unparalleled commitment to clean energy. Adding 275 GW of solar capacity in 2024 alone, China has outpaced all other nations in both speed and scale. This achievement aligns seamlessly with its long-term vision of reducing carbon emissions and transitioning to a sustainable, greener economy.

2. Economic and Strategic Implications  China’s aggressive investments in renewables solidify its position as a key player in the global green technology market. From solar panels to electric vehicles and battery production, China is not only reducing its carbon footprint but also enhancing its economic competitiveness. Meanwhile, the U.S. risks ceding leadership in these critical sectors, allowing China to dominate emerging markets for renewable technologies.

3. Commitment to Climate Goals  China’s progress in renewable energy places it on track to meet—or exceed—its Paris Agreement targets. In stark contrast to the Trump administration’s retreat from climate agreements and its prioritization of fossil fuels, China’s actions demonstrate how proactive climate leadership can drive both environmental progress and economic innovation.

4. A Global Leadership Vacuum   The U.S.’s withdrawal from climate leadership during the Trump era left a vacuum that China, alongside Europe and India, is actively filling. This shift raises questions about the long-term implications for the U.S.’s role in shaping global energy and environmental policies.

5. Vision Versus Short-Term Gains   The Trump-era mantra of "Drill, baby, drill" epitomizes a short-term focus on fossil fuel extraction, which stands in stark contrast to China’s forward-looking investments in renewable energy. This divergence highlights two competing approaches to energy policy—one prioritizing immediate gains and the other emphasizing sustainable development.

A New Chapter in Responsible Stewardship

A Chinese saying goes, “功在当代，利在千秋” (gōng zài dāng dài, lì zài qiān qiū) The accomplishments made at the present generation, will benefit for a thousand years, reflecting the long-term vision and impact of China’s investment in renewable energy in the long years to come.

China’s remarkable progress in renewable energy is a statement of responsible environmental stewardship. By achieving parity between solar, wind, and coal power capacity, China has redefined what is possible under challenging conditions. These advancements showcase not only the transformative power of innovation but also the strong determination required to lead on the global stage in safeguarding Mother Nature.

In an era where environmental challenges demand collective action, China’s leadership exemplifies how nations can balance growth with sustainability. As the world grapples with the climate crisis, China’s actions serve as both an inspiration and an example for others to follow suit. This is a race where the finish line benefits us all.

January 28, 2025

Right after New Year, while I was still in the U.S. and people were worried about the incoming Trump tariffs, I came across an article that I found rather amusing: "Tesla Starts Production at Shanghai Megapack Factory."

Tesla is ramping up its grid-scale Megapack battery production with a new facility in Shanghai, set to begin mass production in early 2025. The factory, built in record time with a $200 million investment, will initially produce 10,000 Megapacks annually—equating to 40GWh of energy storage. This new site marks Tesla’s second major Megapack facility, following its existing operation in Lathrop, California.

Interestingly, the article pointed out that this move challenges the prevailing U.S. narrative of "decoupling" or "de-risking" from China.

Tesla's Strategic Expansion

Tesla’s decision to expand Megapack production is a clear strategic move. It showcases the company’s commitment to tapping into China’s unmatched manufacturing expertise and advanced technology for its global supply chain. This aligns with Tesla’s broader goal of scaling production while cutting costs. 

Shanghai, with its world-class infrastructure, competitive manufacturing costs, and proximity to vital battery supply chains, offers undeniable advantages. By locating the plant there, Tesla ensures that it stays competitive in the rapidly growing global energy storage market.

The Irony of U.S.-China Tensions

There’s an undeniable irony in this development against the backdrop of "decoupling" from China. Tesla continues to expand their operations in China, obviously drawn by China's unparalleled manufacturing ecosystem and expertise in clean energy technologies.

Take the case of CATL, China’s largest battery manufacturer, for instance. While the U.S. warns against its dependence on firms like CATL, American companies still benefit from their technology and products, underscoring the paradox of the situation.

Broader Implications: China’s Growing Role in Clean Energy

This news further highlights China’s pivotal role in the global clean energy transition. Beyond being a manufacturing powerhouse, China is making unprecedented leaps in renewable energy, batteries, and electric vehicles (EVs). Its advancements position the country as a critical key player in achieving global climate goals.

Elon Musk’s strategy reflects a pragmatic approach: rather than following geopolitical narratives, Tesla focuses on efficiency, cost-effectiveness, and scalability—principles that must inevitably involve collaboration with China.

Business Realities vs. Geopolitical Narratives

Tesla’s Shanghai Megapack facility reflects the interconnectedness of the global economy, especially in the clean energy sector. It underscores the reality that, while geopolitical narratives may sound loud and even threatening, business decisions are still driven by the search for efficiency, innovation, and competitiveness. As the U.S. pushes for decoupling, companies like Tesla show that collaboration with China remains essential for staying competitive in the increasingly green and innovative future.

January 27, 2025

As I was preparing to leave for Beijing, something happened in China that has sent shockwaves through Silicon Valley—so much so that it's causing a meltdown. A Chinese saying captures this perfectly: 一石激起千层浪 (yī shí jī qǐ qiān céng làng) A single stone creates a thousand ripples.

On January 20, DeepSeek, a relatively unknown AI research lab from China, released an open-source model that has quickly become the talk of the town in Silicon Valley.

1. A Surprise from an Unknown Lab. 

Out of nowhere, DeepSeek, a little-known AI lab in China, has made a significant splash by releasing its open-source AI model, DeepSeek-R1. This model has outperformed industry giants like OpenAI’s o1 in key areas such as math and reasoning benchmarks.

2. Defying the Odds in a Hostile Environment

What makes this breakthrough even more impressive is the context in which it occurred. In a landscape shaped by harsh U.S. export controls limiting China’s access to advanced AI hardware, DeepSeek has managed to thrive. While most AI firms are forced to rely on large-scale hardware and resources, DeepSeek has taken a different route—focusing on software-driven optimization and efficient resource management.

3. Innovation in Model Architecture

DeepSeek's innovation lies in its ability to optimize model architecture using techniques like multi-head latent attention (MLA) and mix-of-experts. These strategies have enabled their models to achieve remarkable efficiency, requiring far fewer computing resources than competitors such as Meta’s Llama 3.1.

4. A Bold Vision and a Stellar Team

The driving force behind DeepSeek is its founder, Liang Wenfeng, who pivoted his hedge fund, High-Flyer, into an AI research firm with the bold vision of advancing the field of AI. Unlike other AI startups in China, DeepSeek prioritizes long-term scientific research over quick commercialization. The company’s technical team, mostly composed of recent graduates from top Chinese universities, fosters a collaborative culture driven by curiosity and a shared mission to overcome challenges.

5. Turning Constraints into Innovation

DeepSeek's ability to thrive despite the strict U.S. export controls on AI chips, like Nvidia’s H100, is another shoutout to its innovation. Faced with a scarcity of resources, the lab embraced creative solutions to optimize model training and architecture, transforming challenges into opportunities.

6. Efficiency at Its Finest

While it took Google years and billions of dollars to develop its Gemini model, and Meta spent considerable resources on Llama, DeepSeek achieved similar—or even superior—results in just two months, with a modest budget of $5.6 million. This surprisingly remarkable efficiency highlights the lab’s ability to do more with less, a key differentiator in the AI space.

7. Gaining Global Credibility Through Open Source

DeepSeek’s decision to make its model open-source is a game-changer. By sharing their work, they’ve garnered credibility and support from the global AI research community, positioning China’s AI sector to compete on the world stage, despite hardware limitations. This open approach fosters collaboration, attracts contributors, and accelerates innovation.

The success of DeepSeek reminds the world so much of Huawei’s experience. The unexpected breakthrough from this small lab also challenges existing assumptions about vast resources needed to achieve such advancements. In a sense, DeepSeek will not only reshape AI development but also force people to re-think of the effectiveness of export restrictions in stopping China's technological advance.