Signaling and supply chains in the Chinese startup scene
Recently I was talking with someone who works extensively in the Chinese startup space and at some point we got onto the topic of information. To many in the West, the stifling of free speech is seen as an anathema to human rights. To us, it might seem as though the country is constantly in the dark about its own world, but that doesn’t stop information from flowing in the form of gossip and hearsay. The result of this information ecosystem is a heightened information asymmetry, which should be understood on its own terms.
In the startup world of US and Europe, it is commonplace to announce upcoming projects, and perhaps even list the staff that has been dedicated. If the announcement makes a splash, you could benefit in getting more attention from the right crowd, leading to more capital backing and the ability to come to market quicker. Kickstarter is a platform for this kind of model. Many of the projects don’t have working prototypes or might not have fully hashed out an idea, but still receive backing.
But in a world where information cannot be easily trusted, where there is more information asymmetry, signaling your intent to sell becomes less valuable as a method of coming to market. In China, there is less signaling. Products are developed and brought to market without much fanfare, and either fail or succeed. True, there is more potential risk in this kind of world but that risk is mitigated by interpersonal relationships because you can learn what others are doing through the right channels.
Of course, it doesn’t hurt that Chinese supply chains are among the most developed in the world, so products can be produced quickly. Just this morning in the New York Times, there was an article explaining why Apple will probably never move back to the US illustrating exactly this point:
But when Apple began making the $3,000 computer in Austin, Tex., it struggled to find enough screws, according to three people who worked on the project and spoke on the condition of anonymity because of confidentiality agreements…
The screw shortage was one of several problems that postponed sales of the computer for months, the people who worked on the project said. By the time the computer was ready for mass production, Apple had ordered screws from China.
The challenges in Texas illustrate problems that Apple would face if it tried to move a significant amount of manufacturing out of China. Apple has found that no country — and certainly not the United States — can match China’s combination of scale, skills, infrastructure and cost.
Just how significant is this advantage in supply chains? Research in solar photovoltaic manufacturing suggests, “The historical price advantage of a China-based factory relative to a U.S.-based factory is not driven by country-specific advantages, but instead by scale and supply-chain development.”
That conversation this weekend made me look at the NYT story in a slightly different light: The tendency to trust local information might have been a reason why local supply chains developed. You can’t really trust someone in another region to make your inputs, so you contract locally where you can check production. The particulars of Chinese information asymmetry isn’t the whole story to tightly integrated supply chains, obviously, but the topic isn’t one I haven’t seen discussed all that much.
