By David Galbraith

This is the simplest diagram I could do to explain what is happening in the world and why China has already won:

Before this, there was the mantra that ‘software is eating the world’. It was true and the US beat Europe which failed to enter the digital era and build any dominant internet platforms. This was the best diagram that explained this:

But as the commanding heights of the new economy change from internal combustion engines to EVs, batteries, chips etc. China owns a majority of the manufacturing of everything:

And the above was for the whole world. When you compare it to the US alone, the contrast is even more stark:

And while it’s true that China doesn’t own the best  lithography machines or high end chips, yet. There are building the former and the latter are here and this is where Nvidia gets its chips made…

And while it’s true that the US also has Apple and Tesla as modern hardware companies. Apple doesn’t really manufacture anything and nearly all of it is done in Asia, mostly in China. Half of Tesla’s cars are made in China. Collectively both of their sales have been eclipsed by domestic Chinese brands.

And one way to make software irrelevant is to make it free. This is what Microsoft did to the browser to kill the threat from Netscape and this is how an open source AI model like DeepSeek is a business model threat to the entire US software industry.

The US cannot retaliate by making physical things free because that is impossible, so China has won. This is the new world order, like it or not.

If you want an expanded view of this thesis, from @futurakiado it is here.

To add to this and to explain why this era’s ‘economic commanding heights ‘ manufacturing is different – it’s software enabled. For example an EV,  smartphone, drone and obviously a robot, rely on software. But if you make the software free, as BYD has with its self drive software, then you can sell more hardware.
This means that you have added network effects to hardware (Nvidia does this with CUDA, Apple do this to phones with IOS – but they don’t own the whole manufacturing).
The issue for the US (and Europe) is that China does own all the hardware manufacturing for its network effect enabled hardware and it owns the supply chain too, and with a population of 1.4 billion,  it has stronger network effects than the US.
There have been two eras of digital era distribution: PC era and smartphone era, but there have been three eras of internet business model: 1. Online only (social networks), 2. Online meets the real world (Uber, Airbnb etc.) 3. Online meets hardware and manufacturing.
The third era is exacerbated by the fact that AI has production rather than distribution network effects (software is cheaper to build not just cheaper to acquire users) so it can be used for manufactured goods which have smarts embedded.
Europe fell behind with software so companies like German car manufacturers can’t compete with EVs. Meanwhile the US not only has less network effects than China, it has less control of supply chains (e.g. batteries and components) so still relies on China for manufacturing or components so Tesla can’t compete with BYD. China wins this third era of digitisation where it meets all physical goods.

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