China spent 25 years failing to build a globally competitive domestic car industry through hundreds of billions of dollars of subsidies and forced partnerships. Then they tried something radical.

In 2018, they invited Tesla to build a wholly-owned factory in Shanghai. No joint venture required. Chinese officials called it the "catfish effect" - Tesla would force domestic companies to compete or die.

The impact was brutal. When Tesla's Model 3 launched in 2020, it quickly became China's best-selling EV. BYD's total vehicle sales actually fell 7.7% that year to just 427,000 units.

By competing with the world's best, BYD was forced to address what they were missing: Chinese EVs had great battery tech and software, but the cars weren't appealing. So BYD learned design. Sales exploded. Today BYD sells over 4 million vehicles annually - 10x their 2020 numbers, and more than Tesla globally.

America should do the same thing. In the long run, the only way to win high-tech manufacturing is to actually compete against the very best in the world.

We should encourage BYD and other leading Chinese companies to build factories in America in exchange for the access to the U.S market. This would allow us to build up process knowledge and the the relevant supply chains domestically, and force American companies to catch up.

The alternative is to fall further and further behind.

I talked to Arthur Kroeber @arkroeber, one of the sharpest observers of China’s economy, about this and much more.

Full episode out tomorrow.