The Wrong Question To Ask | 12 Nov 2025 | Louis-Vincent Gave | Gavekal Research · Nuggets
China//6 min read
The Wrong Question To Ask | 12 Nov 2025 | Louis-Vincent Gave | Gavekal Research
"Wars are not won by who is right but by who is left." - Bertrand Russell (Reflecting on the ultimate outcome of conflict and survival)
"In warfare, quantity has a quality all its own." - Joseph Stalin (On the strategic value of mass production over individual unit superiority)
"Access to high-end semiconductors is like driving a Ferrari to work: very nice if you can afford it, but hardly essential when a Toyota gets the job done." - Louis-Vincent Gave (Comparing high-end chips to functional technology)
"One of our Tiger tanks is worth four of their Shermans... but the Americans always bring five." - German tank commander (Explaining how industrial scale defeated technical superiority in World War II)
"The right question is no longer whether China can catch up with the US at the high end of technology, but whether—and how—the US can catch up with China in industrial scale." - Louis-Vincent Gave (Defining the new competitive landscape)
Executive Summary
This report argues that the US focus on maintaining a lead in high-end semiconductors is a "Tiger tank" strategy—building superior but limited machines—while China has focused on a "Sherman tank" strategy of massive industrial scale. Despite US technical advantages, China has proven it can remain competitive in AI and other sectors using "good enough" technology like DeepSeek and Qwen. Given the US's massive fiscal constraints and the low investment returns associated with industrial policy, the author concludes that the US-China Cold War is effectively over, as signaled by recent diplomatic shifts toward a G2 world order.
Key Takeaways
Quantity vs. Quality: In a conflict of scale, the ability to outproduce an opponent (Sherman tanks) is often more decisive than having technically superior equipment (Tiger tanks).
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AI Competitiveness:China demonstrated with DeepSeek and Qwen that it can remain a top-tier AI competitor without relying on the most expensive, high-end chips.
The Funding Gap: The US faces a significant hurdle in reindustrialization because it already runs "twin deficits" exceeding 10% of GDP.
Investment Shift: Moving from "capital-light" industries (social media, software) to "capital-intensive" ones (manufacturing, defense) will likely lead to lower returns on invested capital (ROIC).
End of Unilateralism: Recent summits in Kuala Lumpur and Seoul indicate the US has acknowledged its semiconductor edge is no longer an "unbeatable advantage."
Consumer Sacrifice:China's industrial rise required a domestic real estate bust and a depressed consumer; it is questionable whether US voters would accept similar hardships to fund industrial policy.
Detailed Summary by Topic
The Ferrari vs. Toyota Paradigm
The central question often asked by investors—whether China can catch up to the US in high-end semiconductors—is framed as the "wrong question." The author argues that high-end chips are like Ferraris: desirable but not essential for most tasks. China has already shown it can "get the job done" with Toyota-equivalent technology, as evidenced by the success of its Large Language Models (LLMs) like DeepSeek and Alibaba'sQwen.
Lessons from World War II
Drawing on Arthur Herman’sFreedom's Forge, the report emphasizes that World War II was won in Pittsburgh steel mills and Detroit auto plants rather than through battlefield heroics alone. Germany’s superior Tiger tanks were defeated by the US’s ability to produce overwhelming numbers of "good enough" Sherman tanks. Today, the roles have reversed: the US builds "Tiger tanks" (power-hungry data centers and ultra-high-end chips), while China builds the "Shermans" (vast industrial scale and cheaper energy).
The Economic Reality of Industrial Policy
A major obstacle for any US industrial policy is funding. The US government is not traditionally built for large-scale industrial planning, which often leads to "grift" or "pigs at the trough" scenarios without strict anti-corruption measures. Furthermore, industrial policy rarely delivers the high returns investors have come to expect from Alphabet, Meta, or Microsoft. Instead, defense and manufacturing are capital-intensive and likely to yield returns far below those of legacy tech.
The End of the Cold War
The author asserts that the US-China Cold War is over, citing Donald Trump's recent acknowledgments in Seoul as a turning point. The US has realized that its technological lead in semiconductors is no longer a "trump card" that can force global compliance. Consequently, the world is transitioning from a unilateral system dominated by the US to a G2 order, which the author views as a pragmatic path of least resistance.
Data & Figures
Data Point
Value
Context
Chinese Drone Cost
$500
Cost of a disposable drone used by contractors in Haiti
US Twin Deficits
>10% of GDP
Current level of combined fiscal and account deficits
2025 Twin Deficits
~11-12% of GDP
IMF forecast for the total US deficit in 2025
Battlefield Ratio
1 Tiger vs. 5 Shermans
Ratio of tanks described by a German commander in Normandy
Stories & Anecdotes
The Haiti Mission: Military contractor Radigan Carter recounted how his team in Haiti abandoned expensive US reconnaissance drones. Every time a US drone was lost, it triggered a mountain of paperwork and investigations. In contrast, no one cared if a $500Chinese drone crashed, leading the team to swarm the sky with Chinese hardware while US tech gathered dust.
The German Tank Commander: A tank commander in Normandy noted that while one Tiger tank could take out four Shermans, the Americans always brought a fifth, illustrating that production volume overcomes technical superiority.
BYD and DJI Integration: The report suggests watching BYD cars paired with DJI drones to see the future of practical technology—such as a drone warning a car of a deer or tractor on the road ahead—which showcases China's lead in integrated industrial scale.
References & Recommendations
Books
Freedom's Forge, Arthur Herman - Context: Discusses how US industrial mobilization won World War II.
Articles/Research Papers
Moore's Law and AI, Michael Power - Context: Explores the evolution of computing and the Nvidia-Huawei contest.
Another Sputnik Moment - Context: A previous Gavekal report on the impact of the DeepSeek model.
The End Of American Impunity - Context: Covers diplomatic shifts in Geneva, Kuala Lumpur, and Seoul.
People Referenced
Michael Power - Researcher who extended the Ferrari/Toyota analogy to WWII tanks.
Radigan Carter - Military contractor and blogger who writes about deep financial trends and drone warfare.
Bertrand Russell & Joseph Stalin - Historical figures cited for their philosophies on war and quantity.
Tools/Platforms/Products
DeepSeek - Context: ChineseAI model that proved competitiveness without high-end chips.
Qwen (Alibaba) - Context: Large Language Model mentioned as an example of China'sAI capability.
Nvidia - Context: The provider of high-end chips that the US tries to restrict.
DJI - Context: Chinese drone manufacturer noted for scale and cost-effectiveness.
Speakers & Credentials
Louis-Vincent Gave: Author and researcher for Gavekal Research. He provides macroeconomic and geopolitical analysis for institutional investors and market professionals.
Actionable Next Steps
Analyze Industrial Policy Risks: Evaluate the potential for "grift" or low returns in US companies heavily dependent on new government industrial subsidies.
Reassess AI Hardware Assumptions: Study how firms like DeepSeek and Qwen achieve high performance without top-tier chips to identify more capital-efficient AI investments.
Monitor Fiscal Stability: Watch the US twin deficits (currently 11-12%) for signs of currency debasement or inflation if industrial policy funding becomes unsustainable.
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