In May, my wife, Caro, and I spent two weeks in China. Our trip took us to three large Chinese cities: Xi'an (population: 9 million), Beijing (22 million) and Shanghai (30 million). For the latter two cities, we joined a group of 24 business leaders representing 10 countries, with one-third from the United States. Our hosts were Chinese business leaders, entrepreneurs, academicians and government officials. They provided us with site visits to leading tech facilities, interviews with top business executives, and in-depth briefings from professors at Tsinghua University in Beijing and the Harvard Center in Shanghai.
Caro and I were completely blown away. The last time we were in China was 1999. Then, it was hard to breathe and even hard to see; today, Beijing and Shanghai are clean, comfortable and clear. The change in 25 years has been astounding. China's airports, rail system and road network are world-class. Beijing's new Daxing International Airport, the world's largest, is stunning in its appearance and dazzling in its efficiency. Most impressive are the young people, who are hardworking, entrepreneurial and inquisitive.
My familiarity with China has been somewhat rudimentary, but over the years I have become familiar with China's business practices. In the 1980s, I was chairman and CEO of the Hay Group, a management consulting company with 100 offices in 30 countries, including Hong Kong and Taiwan. Over the past four decades, I have served on several public boards whose companies have significant operations in China. One of them has a major share of its business there. Our board had planned a visit in March 2020 but was kept away by COVID-19. Up until 2022, I was the majority owner of the Uptime Institute, the global leader in data center certifications and services, with major clients in China, including Alibaba, Tencent and China Mobile. I was also the majority owner of 451 Research (sold in 2019 to S&P Global), a leading provider of business intelligence and market data for the technology markets, which had a large number of Chinese clients. I also owned Investor Dealers' Digest (IDD), publisher of financial information, which in 1994 hired a young software engineer out of the University of Buffalo, Robin Li, now CEO of Baidu. For two years, he worked as a senior consultant for IDD Information Services.
Before the trip, our Chinese hosts provided us with background information, including some very informative books and articles. During our stay they presented daily briefings loaded with charts, graphs and statistics that were highly enlightening. In 2000, China's economy represented 6% of the global economy versus 29% for the U.S.; today, it's 19% (23% for the U.S.), and by 2035, the World Bank projects it will be 20%, the same as the U.S. China is on the forefront of many technologies, including self-driving cars, electric vehicle (EV) batteries, solar energy, space exploration, gene therapy and stem cell research. Chinese engineers and scientists are no longer just fast imitators, but also pacesetting innovators making scientific breakthroughs in the EV transformation, the green energy transition and the generative AI revolution. For example, Caro and I took a 30-minute drive in a robotaxi. After a few minutes getting accustomed to sitting alone in the back seat, we felt as if we were being driven by an experienced chauffeur. During the 2024 Chinese New Year holiday, there were an estimated 2 billion self-drive rides!
In 2023, China sold 17.1 million internal combustion engine (ICE) vehicles domestically and exported 3.5 million. The same year, China sold 7.8 million EVs domestically and exported 1.7 million. By comparison, in 2023, Tesla sold 1.8 million cars, of which 600,000 were sold in China. Last year, China's passenger EV sales, both domestic and export, accounted for 63% of the world's total units. With its 70% share of the global EV battery supply chain, China is well positioned to maintain its electric car dominance.
The rapid rise of EV sales in China is partially offsetting the severe decline in domestic ICE sales, resulting in a domestic EV penetration rate that is estimated to reach 50% in 2025 and 85% by 2030. In Shanghai, where EV penetration already exceeds 50%, Caro and I drove in a Xiaomi SU7 electric sedan, which has a range of 515 miles on one charge, almost 200 more than a comparable Tesla Model 3. China's focus on EV cars, as well as its increasing emphasis on clean energy, notably solar and hydro, have improved its sustainable energy consumption mix. In 2023, China's non-fossil fuel installed capacity surpassed 50%. Nevertheless, China remains the largest carbon dioxide emitter, producing about a third of the world's total emissions.
Since 2009, China has been the largest energy consumer, representing slightly more than a quarter of the world's total, and has developed the world's largest power sector with an installed capacity larger than the United States, Japan and Germany combined. China's power production capacity will help it meet the massive demands for data center computing necessary to power AI development. Combined with its omnipresent surveillance apparatus collecting massive amounts of data necessary to train generative AI models, China will have a significant advantage in the race to develop artificial intelligence, whose winner will likely dominate the burgeoning AI-enabled world.
These statistics highlight China's economic power and technological advantages. But China's economic miracle may be abating after three decades of unparalleled growth. China is facing enormous challenges, notably its massive debt at all levels of government, its rapidly declining population, its underdeveloped capital markets, its growing wealth disparity and its prolonged real estate bubble. In terms of the latter, Goldman Sachs estimates that unsold housing inventory has reached more than $4 trillion, equivalent to 10 times the amount sold in 2023.
Up until five years ago, many U.S. business executives and political leaders viewed U.S.-China relations as “Chimerica,” a portmanteau coined by Harvard historian Niall Ferguson suggesting that the two largest economies were inextricably intertwined in a mutually beneficial, symbiotic relationship. In 2001, the United States and its trading partners accepted China into the World Trade Organization, a decision that supercharged China's economic development. Subsequently, U.S. companies invested heavily in China, and some were rewarded with highly successful operations. Boards of these companies often visited China to get a feel for the country and the business opportunities offered there.
Over the past few years, Chimerica has become a chimera — an illusion. The two countries have been decoupling, with U.S. companies friendshoring their operations to India and other Asian allies, nearshoring to Mexico and reshoring back to America. Few boards are venturing to China, and visits by Americans have fallen to a relative trickle, deterred by the decline in direct flights from the United States to China from 330 per week in early 2020 to 50 today. U.S. companies and U.S. investors have been withdrawing from China, citing its scant legal protections (i.e., rule by law rather than rule of law), its sweeping campaign against dissent, its crackdown on billionaire entrepreneurs and its theft of intellectual property.
Nothing brings Americans together more than their negative impressions of China. Democrats and Republicans are bitterly divided, but they are closely united in their opposition to China. Our leaders tell us that China is our political foe, economic rival and military adversary. Our government has drawn a “red line” to ensure free and safe passage in the South China Sea, reaffirmed its commitment to Taiwan through “a status quo policy of strategic ambiguity,” beefed up cybersecurity at strategic installations and fortified military bases in the Pacific. High-level U.S. lawmakers, including then-Speaker Nancy Pelosi in summer 2022 and a bipartisan congressional delegation this spring, have made visits to Taiwan in support of its self-government and self-defense, heightening tensions with the Chinese government and provoking its military exercises around the island.
The Chinese economy consumes 13% of global manufactured goods but produces 31%. From 2018 to 2023, the U.S. cumulative trade deficit with China totaled $2.2 trillion. This imbalance is not simply “a reflection of the vitality and creativity of China's economy,” as The People's Daily recently proclaimed. Rather, it has been created by China's massive public subsidy of its excess capacity for goods, such as EVs and solar panels, which are flooding markets in Europe and the United States, potentially hollowing out their industrial cores.
This spring, Treasury Secretary Janet Yellen warned the Group of 7 finance ministers that “China's industrial policy ⦠has put the viability of businesses around the world at risk.” Most prominently, China is now the world's largest auto exporter, accounting for 17.4% of its total auto sales, up from 4.3% in 2020. China's utilization of its auto production capacity plummeted from 86% in 2013 to 65% in 2022, prompting its current focus on exporting both ICE and, increasingly, EV vehicles. To “level the playing field,” both President Biden and former President Trump are proposing stiff trade policies with huge tariffs intended to save America's strategic industries, in particular its nascent clean energy sectors, from China dumping its overcapacity.
No politician — particularly no presidential candidate — wants to be seen as “soft” on China; thus, they vie for being the toughest on sanctioning Chinese businesses, such as Huawei, BYD and TikTok. President Biden recently imposed a 100% tariff on EV cars made in China, effectively closing the U.S. market to its high-quality, low-cost vehicles, such as BYD's Seagull, which is priced at 87,000 renminbi, equating to $12,000. Will this policy work? Our 2018 sanctions against Huawei may have backfired, subjecting its Western rivals, including Apple, to “friendly fire.” Shrugging off U.S. sanctions, Huawei not only has made a roaring comeback in China, but also is on the verge of overtaking Apple as the world's largest smartphone maker.
If the United States is to compete successfully in global markets, American companies and their boards must understand what's happening in China. The growing influence of China in an increasingly multipolar world is upending 75 years of a U.S.-led world order. Over the past three decades, China has made great strides, most notably lifting 500 million citizens from poverty into middle-class status. The Chinese Communist Party has a long-term perspective, clear focus and intense determination to continue advancing politically, economically and militarily, with the objective of overtaking the United States by 2040. Despite this overt challenge, Americans seem to be burying their collective heads in the sand. For example, fewer than 1,000 Americans are studying in China, while 300,000 Chinese students are studying at U.S. universities.
I have written several “Letters from the Chairman” in Directors & Boards suggesting that corporate governance should include our nation as a fundamental stakeholder along with employees, customers, suppliers and shareholders. Thus, I have recommended that boards take into account our nation's interests when making major decisions regarding the site of manufacturing operations, the location of supply chains and the transfer of intellectual property. Like their Chinese counterparts, American corporate leaders should keep uppermost in their minds our national interests, so that the United States can remain economically strong, prosperous and self-reliant.
My intensive two-week visit has given me a heightened respect and admiration for the Chinese business community. However, I remain concerned about the Chinese government's practices, in particular China's “surveillance state,” its threat to our national security, its theft of IP and its unfair trading practices. But American companies should not turn their backs on China. American boards must understand what's happening there in terms of technological innovations, consumer behavior and political outlook. China is too big, too important and too impactful to ignore. Disengaging from China runs the risk of losing sight of the opportunities it offers and the threats it presents.
My recent trip was eye-popping in terms of how far China has come (e.g., its ultramodern infrastructure), eye-opening in terms of where it is heading (e.g., its advancing technologies), and eye-washing in terms of how it portrays human rights abuses (e.g., “the reeducation camps” for Uyghurs). I saw China's past, experienced its present and glimpsed its future. I recommend taking your board there to see for yourselves.