Bringing back American Manufacturing? Probably not a software problem...
Bringing back American manufacturing is one of the most important challenges we face as a nation, and I see a lot of delusional VC garbage takes on the matter.
The source of many a VC’s delusion is that they think bringing back American manufacturing can be solved by robotics, software, and efficiency.
Unfortunately, the problem is much deeper than that. Time for a quick history lesson...because it’s important to understanding how we fix this.
LET'S HEAD OVER TO CHINA...
Because fixing this problem involves figuring out what we are competing against.
Let’s go back to 1979. Deng Xiaoping decides to open up China. He enacts a few policies that have MASSIVE impacts on the United States' ability to manufacture—specifically related to financial subsidies:
Special Economic Zones: Geographic zones were created with lower taxes to establish CLUSTERS of manufacturing expertise. This was massive. The entire chain of manufacturing was strategically geolocated to minimize supply chain friction. Financial subsidy here? Lower taxes.
Infrastructure Investment: They built out massive infrastructure projects, but I’m going to highlight two important ones: highways and industrial parks. The government ACTIVELY BUILT COMMERCIAL REAL ESTATE that they gifted to the chosen few. This is insane. Imagine us doing this at SCALE. Financial subsidy here? Literally free infrastructure.
Direct Manufacturing Subsidies: Where do we even start here?
-They gave free land to factories.
-They provided below-market loans to entrepreneurs.
-They SUBSIDIZED ELECTRICITY, WATER, AND RAW MATERIALS. They gave REBATES FOR EXPORTS (!!!).
Don’t believe me? Let’s look at a few examples.
Steel Industry:
Baosteel (now part of China Baowu Steel Group) received massive state support, including:Below-market loans worth billions from state banks
Government-funded infrastructure for new plants
Subsidized iron ore through state trading companies
Hebei Iron & Steel (HBIS) benefited from:Provincial government land grants
Electricity subsidies
Debt-to-equity swaps when struggling
Aluminum Processing:
China Hongqiao Group became the world’s largest aluminum producer through:Subsidized coal power from the local government
Discounted loans from state banks
Tax rebates on exports
Chalco (Aluminum Corporation of China) received:Direct cash grants for technology upgrades
Preferential access to bauxite resources
Government-backed bonds for expansion
Notice how I haven’t even MENTIONED the low-cost labor. Maybe that’s for a different thread.
Let’s look at some fun numbers from the Kiel Institute:
According to conservative estimates, China’s industrial subsidies amounted to €221 billion or 1.73% of GDP in 2019. This is 3–4 times higher than subsidy levels in large EU countries and up to 9 times higher in more comprehensive studies. Over 99% of listed firms in China received direct government subsidies in 2022.
If you aren’t sensing a theme here yet, let me make it explicit: China used the power of government subsidies to dominate the entire manufacturing world in 25 years. They may be smart. They may be hardworking. But the main reason they won was INSANE government subsidies that would give your favorite libertarian cold sweats.
Trump and JD Vance claim to want to bring back American manufacturing. Some of their advisors also claim to want small government. Unfortunately, this problem (imo) is ONLY solved by an extreme partnership between the government and private industry.
IMO, you can have one of two options:
No government involvement, and we continue losing manufacturing to China.
Lots of government involvement, and we maybe win.
Choose wisely Donald…