In addition to COVID accelerating the slowing GDP for China, recent U.S. policy has been made aimed squarely at crippling China’s growth at its core.
The $53 billion CHIP act aims to bring semiconductor manufacturing infrastructure back onshore while the new U.S. export controls bar western suppliers from selling not only chips but semiconductor manufacturing equipment to China.
Many have pointed out that cutting China off from U.S. chips will only accelerate China’s independence from the U.S. semiconductor ecosystem, but the new export control aimed at its manufacturing capability by barring Chinese companies from being able to build its fab to begin with. Semiconductor fab is one of the most difficult manufacturing technologies in the process. It would be extremely difficult for China to catch up to U.S. chip technology without the fab equipment.
There is no stability without sovereignty
Most people do not know that the official name for Taiwan is the Republic of China. Without going into the entire history, Taiwan was once a formal part of China, hence the name. In China’s eyes, Taiwan is still part of China; they just broke away when China was economically and militarily weak.
Taiwan is, therefore, a threat to China’s legitimacy—and subsequently the CPP— because it would require that China accepts a territory breaking away from its sovereignty. The country absolutely cannot do this for fear of other territories breaking away.
This culminates in Taiwan reunification as a requirement for achieving “China Drew” tied to CCP’s long-standing goals for 2049, the 100th anniversary of the PRC’s founding.
To top that off, there has not been a consolidation of power seen in Xi for decades, possibly since Mao Zedong. Few are in a position to stop him from any rash decision, and a lone man with a multitude of unchecked power is much more likely to start a war than a group of people sharing a balance of power.
There are three likely outcomes
Knowing what is important to China and the outside forces that continue pushing it toward a less-than-favorable position, there are three likely outcomes:
1 – China is subjugated, and there is no war because there is no point in invading Taiwan.
China has grown into a global economic powerhouse that could feasibly challenge the U.S. So, while it still lacks in terms of military power compared to the U.S., the economic gap has been steadily reducing over time. China is closing in on the U.S.
2 – China surpasses the U.S., invades Taiwan, and the U.S. does not intervene.
In this scenario, the geopolitical world ultimately transitions into China’s hegemony. This could happen if China is left unchecked, but obviously, this has not been happening while the U.S. continues doing all it can to keep China in check.
3 – China and the U.S. force each other into a stalemate.
Should the US and China go into a long battle of attrition, the finale would only come until one side decides to act more aggressively or both sides find a way to peacefully coexist.
Personally, I believe the third scenario is most likely. Should it occur, it is much more likely that China will be forced to act as they seemingly have more to lose.
Is all-out war inevitable?
It can be argued that we already are in somewhat of a stalemate, with the U.S. having somewhat of an upper hand. Still, this perceived upper hand could change over time, and if it does, we will eventually end up in the second scenario.
But what is more likely to happen is that China will continue to be at least semi-subjugated to where its economy is suppressed enough for the general public to begin questioning CCP’s strength. The growth required to continue distracting the public under ongoing conditions is much too high. The equilibrium at which China could continue to grow enough to keep its citizens distracted and happy without surpassing the U.S. likely does not exist.
It’s most likely then that China will go to war, but not as a means of demonstrating sovereignty, but as a means of preventing the total collapse of the CCP. Still, in order for CCP to maintain its power, stability and sovereignty will be used as propaganda to justify going to war.
The result? The citizens of China remain unified while Xi and the CCP remain in power. After all, war creates a common enemy that binds countries together and a distress situation that requires continuity of leadership.
What do VCs and founders need to do?
The long and short of it is this: pick a side and build your business and supply chain around it.
While it is possible that the U.S. and China will eventually figure out how to co-exist together peacefully, current global conditions suggest we are on a long and winding road towards that reality—or a short and fast highway to WWIII hell.
Until China decides which road to take, however, we are most likely to endure a long battle of attrition between both sides. The geopolitical world will be divided into Team U.S. and Team China, making it impossible to predict the extent to which geopolitics will ultimately intervene with business as usual. For all we know, there could be another export ban in another industry or another sanction might be put in place that increases costs.
As venture capitalists and startup founders, all we can do is understand the situation and choose the right people to work with. No matter which “team” you are on, it is best to build your critical infrastructure and business relationships within your team or risk your business becoming totally disrupted.
For all we know, tomorrow’s war could have already started today.