From “blitzscaling” to leveraging network effects, China is using the same methods to dominate supply chain and disrupt markets.

What are the origins of China’s leverage in the trade war? And why are China’s exports disrupting markets across the world? That China has a strong hand is largely because it has picked up lessons from Silicon Valley and deployed the tactics at every level of the supply chain.

Just as Silicon Valley companies “hacked” markets by upending traditional notions of best business practices and industry dynamics, many Chinese companies are doing the same with the global economy – and transforming policymakers’ understanding of scale.

The Silicon Valley paradigm includes four key dynamics. First, companies focus on “blitzscaling” – growing as fast as possible, even at the expense of profit. Social media platforms, ride-sharing companies, artificial intelligence developers and others burned through billions in start-up capital to establish markets of scale long before they made a penny in profit. Once scale was achieved, other market actors had no choice but to build atop or in relation to these new platforms and infrastructures.

Second, with penetration pricing, companies offered free or low-priced products to create a large market and/or network. Why pay for news, for instance, when you can browse Facebook, Reddit or TikTok for free?

Once everyone is on one or two social media platforms, media companies and advertisers have no choice but to operate within that network. Ride-sharing companies like Uber and Lyft offered impractically cheap prices for years. Every major model developer offers at least one free version. These companies ignored the laws of supply and demand for a time so as to emerge as practically the only supplier for a market.

Third, Silicon Valley’s business environment gave rise to massive network effects: the winners became super rich and powerful, able to influence the economies and politics of entire countries, while the “losers” were bought up or otherwise faded away.

Lastly, tech companies have driven regulatory arbitrage to a whole new level, by taking advantage of legal grey areas and a general lack of practical regulatory capacity. Regulations come out years after the tech hits the market, and even the wealthiest, largest and most sophisticated government agencies take years to develop the expertise, personnel and regulatory mechanisms to really shape company behaviour.

Chinese industrial hubs and companies have taken each of these dynamics to the next level and are implementing a “whole of society” approach towards developing and deploying emerging technologies.

In the early 2000s, Apple’s Tim Cook (later its CEO) saw a number of advantages in moving iPhone production to China. Lower labour costs (at least at first), excellent infrastructure, geographically close and increasingly sophisticated supply chains, and good political relations with the Chinese government guaranteeing Apple access to the Chinese market – these all served to decrease costs and increase profits.

Decades later, Chinese companies have blitzscaled the entire smartphone supply chain, from critical minerals to assembly. Electric vehicles (EVs) provide a starker example of blitzscaling and seizing market share with price wars. Chinese EV manufacturers are disrupting automotive industries across the planet, even within China (but not the United States).

On top of that, Chinese companies control the supply chains for and lead the manufacturing of the latest battery technology – and the future of energy as a result.

As American and other solar and EV developers are learning, they cannot build without China’s critical minerals nor can they avoid building atop China’s supply chains. China has more than the goods; it has a powerful ecosystem difficult to replicate and increasingly impossible to live without.

The combination of Chinese state policy and private-sector prowess has expanded the definition of network effect. In addition to building the networks of a large (perhaps dominant) market share, the Chinese tech ecosystem aims to establish dominance at every level of the tech stack, from raw materials to applications.

This dynamic is a product of massive state investment and the synergies that come from China’s leading urban tech ecosystems such as Hangzhou and Shenzhen. These ecosystems boast leading hardware developers, software creators, world-class universities and talent, and the infrastructure to support the flows of people, money and expertise across the growing number of companies.

Finally, many of China’s tech companies were built atop a mountain of lax regulation and arbitrage. In China, for example, they enjoyed a lenient regulatory environment due to the combination of state policies aimed at supporting growth with favourable financial and regulatory outlooks as well as a lack of state capacity by some agencies. Until the tech crackdown of the early 2020s, Chinese regulators struggled to exert control over tech companies and their growing “walled gardens”.

Despite having the clear authority to regulate tech companies, it still took government regulators such as the State Administration for Market Regulation (an agency created in 2018 in part because previous entities lacked the capacity to enforce anti-monopoly rules against big tech companies) some time to develop the mechanisms and processes to practically enforce rules against tech giants.

Last year, the government decided to again loosen its regulation of tech companies and AI; government agencies all retain the same rules and powers but are using them in more routine ways with a softer touch.

China’s hybrid state-backed, private sector-led approach to dominating supply chains and disrupting markets by controlling multiple levels of the technology stack is expanding. Policymakers across the world should respond with similarly broad thinking, or risk losing control over their economic futures.

Republished from South China Morning Post, 26 June 2025

The views expressed in this article may or may not reflect those of Pearls and Irritations.