Riding the Freedom Train to a New Economy
The most gratifying feeling comes from strong quarterly reports from Paradigm Portfolio companies such as Tencent (TCEHY) and Alibaba (BABA) — as well as the recent announcement that Ping An (PNGAY) has climbed to number 21 on the Fortune Global 500.
BABA reported 34% year over year (YoY) revenue growth and a 30% increase in adjusted EBITDA. As we have noted before, BABA’s growth consistently outpaces that of China as a whole because it grows outward to the rural areas — a mission that founder Jack Ma treated with almost religious zeal — as well as upward in the wealthy cities.
Tencent’s numbers were similarly splendid, with a 28% YoY increase in revenue and adjusted operation profits up 31%.
All good news. Yet it only intensifies the question “What are investors to do about China?”
The Qualcomm Paradigm
Our answer goes to what we mean by an investment paradigm. An investment paradigm is an economic factor so dominant for a given period, that it will tend to overcome the give and take of ordinary events or tactical forays in determining the future of an industry or even an entire economy.
Peter Drucker taught us that it is more important for a company to “do the right thing” than to “do things right.” A company perfectly executing on the business plan “make the best horse drawn carriages” will fall before a company making horseless carriages even if, being early on the learning curve, the latter’s execution is still clumsy.
An example, you ask? In my four decades of trying to identify paradigms and the companies riding them to victory, Qualcomm (QCOM) remains exemplary both for its success and the clarity of the paradigm it pioneered.
Qualcomm’s paradigmatic insight — first manifested in its Code Division Multiple Access (CDMA) wireless technology — was that wireless systems that share spectrum among multiple users can provide more bandwidth per dollar, than those that give each user its own exclusive bit of spectrum.
Paradigms are not eternal; they are typically born of an emerging economic abundance, often resulting from technological progress. In the case of Qualcomm and shared spectrum, it was Moore’s Law that did the trick.
Sharing spectrum requires distributing multiple very low power messages from multiple senders across a single wide frequency band, and then enabling each of many receivers to detect and capture the message meant for it alone.
This is a massive computational task. Just a decade before Qualcomm started doing it, it could not have been done. The required computation would have been prohibitively expensive, and the power requirements far too great for a portable device. Whether the battery would first burn out, or your ears would first burn off would have made for a close wager.
Only when computation became a characterizing abundance of the age, could shared spectrum become a paradigm.
But let’s get back to China.
The Truth About China
Our bet has been that the restoration of capitalism in China is itself a paradigm — a force that will overpower any number of contrary trends.
Take the largest nation on Earth, with a powerful centuries-long commercial tradition. Subject it for 30 years to the most repressive and irrational regime ever imposed on a country of its size. Impose by policy the most-deadly famine in history, which has the unintended, if salutary effect, of teaching an entire generation that freedom and enterprise stand between life and death.
Then liberate, even partially, those people and allow them to recapture the spirit of enterprise. Thereby created is a force that will not be thwarted by any number of natural disasters, political plagues, policy detours, Trumpian discursions, or dictatorial fantasies of presidenting for life.
We just don’t think it can be stopped, at least not short of astonishing violence, reimposition of totalitarianism on a massive, Maoist scale, and as a not unlikely result, civil war. Absent such cataclysms, China will remain the fastest growing economy on Earth for decades to come. The details won’t matter. The paradigm will prevail.
Yes, growth can be slowed by the government, even if it can’t be easily derailed. US government policy from 1776 to the present has been almost always a net negative for economic growth, and not infrequently a disaster. But government policy could not stop the American economy because government policy did not start the American economy.
America powered forward because no matter the pretenses of the politicians, no matter the impositions of the administrative state. Disregard the 40% or more overhead of taxers and spenders, they have always left enough wiggle room for entrepreneurs and enterprise to flourish.
Freedom is the key. But just as important is the lesson that an enterprising people can take a little freedom a long way. The US did not need to be a libertarian paradise to become the world’s greatest economy. Neither will China.
The current Chinese government, by almost any measure, is worse than those that immediately preceded it. Growth very likely will be less than it could have been under different leadership. The enforced shift of capital back towards state owned enterprises, and the Communist party’s rediscovery of those companies as sources of political patronage will have consequences, perhaps serious, for the economy as a whole.
Still, with far lower tax rates, far less government spending, and a less intrusive and more adept regulatory regime than the US — we believe China will remain the ascendent force in the global economy.
Editor, The George Gilder Report
Lead Analyst, The George Gilder Report