I was pleased to have Emily de la Bruyere join me on the Acquisition Talk podcast. She’s a co-founder of Horizon Advisory, a geopolitical consultancy, and a senior fellow at the foundation for defensive democracies. She’s frequently cited on China and industrial matters, and she has brought some excellent voices together on these topics in a new publication called Force Distance Times.
Download the full-text transcripts.
In the episode we discuss:
- Vertical integration of supply in China
- If the term ‘industrial policy’ is naughty or not
- Whether US or European firms are transferring more tech to China
- How the DC consensus has changed
- The dangers of underestimating China
Peak China?
It is interesting that by the time the DC-policy crowd has created a consensus on the national security threat that China poses, strong evidence also emerges that China is not “10 feet tall.” Certainly the evidence has been there for a while, but the real estate bubble, stock market crash, tech CEO crackdown, and pandemic lockdown has made Chinese shortcomings clear. Emily responds to the hype over “peak China”:
… the US community or international analytical community has said over and over, over the past decade or decade plus, China is being in inefficient in its allocation of resources. This is something it can’t afford. Look at these ghost cities. Look at the Belt and Road. We’ve said China’s going to fail. And what’s happened? China has gotten more powerful. And part ly I think that’s maybe misunderstanding what China’s trying to accomplish.
Emily argues that Beijing’s industrial strategy is to create incentives for private and state owned companies to invest in redundancy and excess capacity. While it produces inefficiencies, analysts on the outside are inclined to look at the failures rather than the totality of investments. Not only have many sectors been successfully developed, they have gained enormous leverage over US supply chains that gives it coercive power — not to mention how redundant industrial capacity is a critical to mobilize the nation for a major conflict.
Emily worries about the implications:
I think we’re a lot weaker than we think in terms of industrial mobilization. The line you hear again and again is: “Remember what the US did in World War II? We turned on a dime. We were able to just go into a wartime production mode. And of course we can do that today.”
… But can we? There’s been so much offshoring. There’s been such a hollowing out of our industrial capacity. I’m not sure we have that general foundation that we can then scale up on, whereas China, as we already discussed, they have over capacity.
Three Problems with Bans
Certainly there’s been a major push towards limiting Chinese supply dependencies in defense programs. Buy American provisions do some of that by requiring on-shoring of a percentage of the supply chain. There are outright bans of companies like Huawei. There is even a DFARS 225.770 provision that bans many purchases from companies associated with the PLA. Here is Emily’s succinct diagnosis of the problems with these measures:
One is enforcement and general supply chain transparency. The other is waiver. There are so many waivers. And the third thing is limited scope. It’s not just a military supplier issue, it’s also a commercial supplier issue. And there’s overlap.
Emily says the US system for addressing Chinese supply dependencies or security threats are conducted like “whack-a-mole,” dinging certain Chinese bad actors. However, an industry park in China will have all sorts of entities at different parts of the value chain, and will simply start doing business under a different entity or insert at a different part of the value chain. “It creates this many headed Chinese system that’s able to integrate into the international system and then have robust, resilient industry at home.”
The Threat Lurking Inside Allies
Many people have heard of instances of reliance on Chinese suppliers in defense programs, such as the halt to the F-35 deliveries until an alloy from China was weeded out of a magnet. But Emily finds that European defense firms are even more reliant on China than the United States. Airbus is Europe’s counterpart to Boeing, and their exposure to China is glaring. They have joint ventures and innovation centers with the Chinese state owned aerospace conglomerate AVIC. While it is apparent aerospace technology is being transferred there, it’s not clear how Airbus maintains military firewalls. 20 percent of Airbus sales are from China.
This not only impacts allied security, European firms are an important and growing supplier of the United States. Emily says that if DoD isn’t accepting deliveries for the F-35 due to magnets, then what does that mean is Airbus is a part of a program like the potential Lockheed-Airbus team on the KC-Y tanker. Airbus’ exposure is much greater to sole source suppliers in China.
There’s tons more in the episode, so listen to the whole thing! I’ll leave you with another good line: “
A vertically integrated system isn’t necessarily going to make you the most money in the short term, but it is what lets you have your own industrial base and asymmetric leverage over another players… China’s optimizing for being able to compete with industry. We’re optimizing for quarterly returns.
Thanks Emily de la Bruyere!
I’d like to thank Emily for joining me on the Acquisition Talk podcast. Be sure to check out the magazine Force Distance Times. The latest commentary is an analysis of critical mineral dependencies and stockpiling needs, so interesting topics! You can follow Emily @edelabruyere and check out some of her publications at NBR including Understanding China’s Digital Strategy and The Network Great-Power Strategy. She was on the China Talk podcast and many others such as Talks on China and China Power. If you’d like to contribute an article to Force Distance Times, email submissions@forcedistancetimes.com.
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