Liyang is not a City; it is a Node in the R.I.C.E. Protocol.
Rui, this is an exceptional field report. You have successfully peeled back the "Invisible Layer" of System B. What you witnessed in Liyang confirms the core thesis of the ChinArb Framework:
1. The "Designed System" = The R.I.C.E. You noted that Liyang isn't just a cluster of factories but a "deliberately engineered environment." In our model, we call this R.I.C.E. Liyang is a perfect instance of a System B Fractal:
Infrastructure: The dedicated ports and "1220" permit speed.
Chain: Relocating the entire supply chain (not just CATL) to minimize physical latency. This isn't just "Manufacturing"; it is "Industrial Permaculture." They are terraforming the environment so that only high-efficiency organisms (factories) can survive.
2. Profit vs. Endurance (Evolutionary Biology) Your observation that "Profitability is treated as a constraint, not a metric to be maximized" is the key to understanding the West's confusion. System A (Wall Street) plays a Financial Game: Maximize ROE. System B (Liyang) plays a Biological Game: Maximize Survival. In an evolutionary system, "Fat" (Excess Profit) is a liability. "Muscle" (Scale/Efficiency) is an asset. The "Involution" (内卷) you describe is actually Natural Selection on steroids. It creates a species of companies (like CATL/BYD) that are metabolically superior to anything grown in the protected gardens of the West.
3. The Energy Transition as a Civilizational OS You asked why they cut costs even when solar is already cheap. Answer: Because they are not building a "Product"; they are building a Civilizational Operating System. Cheap energy (Solar/Hydrogen) is the base layer code. If the base layer is free, the application layer (Industrial Goods) becomes unstoppable. System B is trying to lower the Thermodynamic Cost of Civilization.
Brilliant work. Liyang is the future, and you are one of the few showing it to the world.
The Underlying Operating System of Chinese Manufacturing: The R.I.C.E. System
I liked your China angle. Looking at real manufacturing advantage instead of just narratives is rare and useful. Curious how you think about risk and structural edge when you form that view. Over at After the Close i talk a lot about process and how external forces shape setups without overwhelming discipline. If you ever feel like swapping notes on that, I’d enjoy hearing your perspective.
Thank you, Rui. Excellent article. So as an individual investor looking to invest in public Chinese companies, what am I to look for if not for growing profits and/or margins? Perhaps growing market share, revenue, and/or dominance (e.g. CATL)? Anxious to hear your thoughts.
Most companies in the sector are focused on gaining market share and scaling, but margins are not something to take for granted, and the sector dynamics deserve a closer look. One additional wrinkle is where a company is listed. If it is listed domestically or in Hong Kong, it is effectively operating under the CSRC’s framework, which has a clear preference for discouraging speculation and promoting what is often described as a “slow bull” market. Others have written about this more extensively, but the short version is that Chinese markets operate very differently from those in the U.S. Even with similar financial performance and outlooks, companies can end up with very different valuations, shaped by investor composition and policy considerations rather than fundamentals alone.
No because software works differently. Once you hit scale, the margin structure can change dramatically because you get real operating leverage.
Examples like Uber or OpenAI are a different kind of question. There, the issue isn’t manufacturing-style margins, but whether the constraints come from the underlying business model or from heavy operating spend during the scale phase. In OpenAI’s case especially, that’s still very much open for debate as people are unsure where the margin ceiling is (or floor, ahaha). For Uber, it is largely the latter.
I really appreciate your article. I agree that China’s real advantage may not just be scale or cheap labor, but the speed of learning built into the manufacturing ecosystem. When you have suppliers, equipment manufacturers, and production lines all in one spot, the iteration cycles get way faster. It's an underappreciated reason why these companies manage to improve so quickly.
Your description of the ecosystem around Liyang was especially interesting in that regard. It actually made me wonder about a few things:
Do you think other countries could realistically replicate this kind of supply chain density and rapid iteration, or does it take decades of industrial buildup like what China's already gone through?
And when you visited these factories, did you get the sense that companies are consciously thinking about this ecosystem advantage? More specifically, are you seeing more firms moving their operations into that area to be closer to the action?
I spend quite a bit of time thinking about how long-term structural strategies hold up when industries face short-term pressure, and your observations made me curious how that tension actually feels from inside these manufacturing ecosystems. I’d love to hear more about how you see that dynamic playing out in practice.
My comment is looking to Europe and see the failure to commit to belief. Transforming to a new paradigm - green - must align all layers for transformation. China is able to do it through its authoritarian way. Europe would need politians able to sell an engaging vision to most of the population. But buying consensus is always a difficult challenge and seems unsurmontable from the perch in Brussels. As such, unlike a lever where Beijing fist works well, multiplying force, Brussels is a fake lever, with low impact on results and dissipating trust among all. But I confess reacting too soon, what you write deserves more thought and consideration.
«it becomes clear that profitability occupies a different place in the hierarchy of goals. This is exceptionally confusing to investors, and with good reason. [...] scale is often prioritized over near-term financial optimization. Scale brings bargaining power, learning effects, and endurance. It increases the cost of displacement.»
This is an overlap of what engineers call "learning curve pricing" and accountants call "sustainable depreciation".
It may be "confusing to investors" because as a rule "investors" from mature cultures expect to profit from asset stripping because in those cultures there is a widespread "sharecropper" problem (agent-principal conflict of interest between relatively short-medium term agents and often absentee principals). Other countries where asset stripping is not the main exit strategy of both executives and "investors" are Germany and Italy and Japan that either have a large number of medium-size family businesses or a different culture.
But that does not necessarily apply in the long term to China (PRC or ROC) but seems to have applied more to the overseas chinese. A clear example that asset stripping can be popular in the PRC too is the large number of businesses that have chosen so far to sell poor quality products to make quick big profits soon at the cost of destroying the opportunity to make repeat sales (or be executed if the products were dangerous and they were caught by the police). The examples of China-Taiwan and Korea-south are not encouraging as they are definitely going the UK/USA way towards rentierism and asset stripping as the most profitable activities.
Countering this there has been a tradition of centers of trade and industry in China that have lasted many hundreds of years as they were run as going concerns.
Hopefully the PRC will continue to be run by people with an engineering mindset as some claim.
Always good to read about the details on the ground in China and the principles driving enterprises forward. Thanks.
Such a different set of priorities.
It's almost heartwarming how "long term" outlook meshes with the core meaning of "sustainability".
It's not the usual "profit above all else" that everyone is force-fed in the west. The "everything for the present, forget about the future" has demoralised and unmotivated us westerners.
Even if China is polluting a lot, the pace of business and scale of production as eminent global supplier, brings the glow of hope, if the frames of reference and Modus operandi you describe are the real deal. Not suggesting you are lying, it's just a bit hard to understand as a real, lived experience for Chinese people. The drive and intensity and the amount of hard work undertaken strikes me as highly admirable...and daunting...and exhausting.
I'm reading that the zeitgeist in China is "strong, but brittle." No wonder.
The World should probably be more grateful towards China, for these monumental efforts at catching the future before it slips away from us all.
Liyang is not a City; it is a Node in the R.I.C.E. Protocol.
Rui, this is an exceptional field report. You have successfully peeled back the "Invisible Layer" of System B. What you witnessed in Liyang confirms the core thesis of the ChinArb Framework:
1. The "Designed System" = The R.I.C.E. You noted that Liyang isn't just a cluster of factories but a "deliberately engineered environment." In our model, we call this R.I.C.E. Liyang is a perfect instance of a System B Fractal:
Infrastructure: The dedicated ports and "1220" permit speed.
Chain: Relocating the entire supply chain (not just CATL) to minimize physical latency. This isn't just "Manufacturing"; it is "Industrial Permaculture." They are terraforming the environment so that only high-efficiency organisms (factories) can survive.
2. Profit vs. Endurance (Evolutionary Biology) Your observation that "Profitability is treated as a constraint, not a metric to be maximized" is the key to understanding the West's confusion. System A (Wall Street) plays a Financial Game: Maximize ROE. System B (Liyang) plays a Biological Game: Maximize Survival. In an evolutionary system, "Fat" (Excess Profit) is a liability. "Muscle" (Scale/Efficiency) is an asset. The "Involution" (内卷) you describe is actually Natural Selection on steroids. It creates a species of companies (like CATL/BYD) that are metabolically superior to anything grown in the protected gardens of the West.
3. The Energy Transition as a Civilizational OS You asked why they cut costs even when solar is already cheap. Answer: Because they are not building a "Product"; they are building a Civilizational Operating System. Cheap energy (Solar/Hydrogen) is the base layer code. If the base layer is free, the application layer (Industrial Goods) becomes unstoppable. System B is trying to lower the Thermodynamic Cost of Civilization.
Brilliant work. Liyang is the future, and you are one of the few showing it to the world.
The Underlying Operating System of Chinese Manufacturing: The R.I.C.E. System
https://chinarbitrageur.substack.com/p/the-underlying-operating-system-of?r=71ctq6
I liked your China angle. Looking at real manufacturing advantage instead of just narratives is rare and useful. Curious how you think about risk and structural edge when you form that view. Over at After the Close i talk a lot about process and how external forces shape setups without overwhelming discipline. If you ever feel like swapping notes on that, I’d enjoy hearing your perspective.
Thank you, Rui. Excellent article. So as an individual investor looking to invest in public Chinese companies, what am I to look for if not for growing profits and/or margins? Perhaps growing market share, revenue, and/or dominance (e.g. CATL)? Anxious to hear your thoughts.
Most companies in the sector are focused on gaining market share and scaling, but margins are not something to take for granted, and the sector dynamics deserve a closer look. One additional wrinkle is where a company is listed. If it is listed domestically or in Hong Kong, it is effectively operating under the CSRC’s framework, which has a clear preference for discouraging speculation and promoting what is often described as a “slow bull” market. Others have written about this more extensively, but the short version is that Chinese markets operate very differently from those in the U.S. Even with similar financial performance and outlooks, companies can end up with very different valuations, shaped by investor composition and policy considerations rather than fundamentals alone.
Thank you, Rui.
Isn't point 3 identical to how American corporations (say OpenAI or Uber) operate? First scale up at a loss, gain power, then increase margins.
No because software works differently. Once you hit scale, the margin structure can change dramatically because you get real operating leverage.
Examples like Uber or OpenAI are a different kind of question. There, the issue isn’t manufacturing-style margins, but whether the constraints come from the underlying business model or from heavy operating spend during the scale phase. In OpenAI’s case especially, that’s still very much open for debate as people are unsure where the margin ceiling is (or floor, ahaha). For Uber, it is largely the latter.
Yeah that makes sense, thanks
A thoughtful and insightful piece and a pleasure to read. Thank you and congratulations.
Thanks, appreciate all the detail and your insights.
I really appreciate your article. I agree that China’s real advantage may not just be scale or cheap labor, but the speed of learning built into the manufacturing ecosystem. When you have suppliers, equipment manufacturers, and production lines all in one spot, the iteration cycles get way faster. It's an underappreciated reason why these companies manage to improve so quickly.
Your description of the ecosystem around Liyang was especially interesting in that regard. It actually made me wonder about a few things:
Do you think other countries could realistically replicate this kind of supply chain density and rapid iteration, or does it take decades of industrial buildup like what China's already gone through?
And when you visited these factories, did you get the sense that companies are consciously thinking about this ecosystem advantage? More specifically, are you seeing more firms moving their operations into that area to be closer to the action?
I spend quite a bit of time thinking about how long-term structural strategies hold up when industries face short-term pressure, and your observations made me curious how that tension actually feels from inside these manufacturing ecosystems. I’d love to hear more about how you see that dynamic playing out in practice.
Should we just throw in the towel now ? - and what will happen to us if we do ?
My comment is looking to Europe and see the failure to commit to belief. Transforming to a new paradigm - green - must align all layers for transformation. China is able to do it through its authoritarian way. Europe would need politians able to sell an engaging vision to most of the population. But buying consensus is always a difficult challenge and seems unsurmontable from the perch in Brussels. As such, unlike a lever where Beijing fist works well, multiplying force, Brussels is a fake lever, with low impact on results and dissipating trust among all. But I confess reacting too soon, what you write deserves more thought and consideration.
So interesting as usual.
«it becomes clear that profitability occupies a different place in the hierarchy of goals. This is exceptionally confusing to investors, and with good reason. [...] scale is often prioritized over near-term financial optimization. Scale brings bargaining power, learning effects, and endurance. It increases the cost of displacement.»
This is an overlap of what engineers call "learning curve pricing" and accountants call "sustainable depreciation".
It may be "confusing to investors" because as a rule "investors" from mature cultures expect to profit from asset stripping because in those cultures there is a widespread "sharecropper" problem (agent-principal conflict of interest between relatively short-medium term agents and often absentee principals). Other countries where asset stripping is not the main exit strategy of both executives and "investors" are Germany and Italy and Japan that either have a large number of medium-size family businesses or a different culture.
But that does not necessarily apply in the long term to China (PRC or ROC) but seems to have applied more to the overseas chinese. A clear example that asset stripping can be popular in the PRC too is the large number of businesses that have chosen so far to sell poor quality products to make quick big profits soon at the cost of destroying the opportunity to make repeat sales (or be executed if the products were dangerous and they were caught by the police). The examples of China-Taiwan and Korea-south are not encouraging as they are definitely going the UK/USA way towards rentierism and asset stripping as the most profitable activities.
Countering this there has been a tradition of centers of trade and industry in China that have lasted many hundreds of years as they were run as going concerns.
Hopefully the PRC will continue to be run by people with an engineering mindset as some claim.
Always good to read about the details on the ground in China and the principles driving enterprises forward. Thanks.
Such a different set of priorities.
It's almost heartwarming how "long term" outlook meshes with the core meaning of "sustainability".
It's not the usual "profit above all else" that everyone is force-fed in the west. The "everything for the present, forget about the future" has demoralised and unmotivated us westerners.
Even if China is polluting a lot, the pace of business and scale of production as eminent global supplier, brings the glow of hope, if the frames of reference and Modus operandi you describe are the real deal. Not suggesting you are lying, it's just a bit hard to understand as a real, lived experience for Chinese people. The drive and intensity and the amount of hard work undertaken strikes me as highly admirable...and daunting...and exhausting.
I'm reading that the zeitgeist in China is "strong, but brittle." No wonder.
The World should probably be more grateful towards China, for these monumental efforts at catching the future before it slips away from us all.