In April, I undertook an around-the-world trip that started in Germany and continued with stops in China, Japan, and the US. The trip was a hybrid of a business and a leisure trip. Besides meeting with companies and investors, I took time to get to know the places I visited. In the Spring, I typically travel to China to visit our companies, take a vacation with my family over Spring Break, and attend the Berkshire Hathaway shareholder meeting in Omaha. Usually, these are two or three discrete trips. This time, I rolled all three into one. Accordingly, my wife and our son joined me for most of the trip, and the itinerary was a mixture of business and cultural activities.
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On the business side of the ledger, some of the highlights were attending the Bauma, Europe’s largest construction trade fair, in Munich, visiting companies in Beijing and Shanghai, and witnessing Warren Buffett’s final shareholder meeting in Omaha. From a non-business perspective, the highlight was attending a dear friend’s wedding in Shanghai. I also enjoyed venturing beyond the tier one cities in China for the first time and travelling around Japan (every positive thing you ever heard about the country is true). Disney Shanghai and Universal Studios Osaka were the highlights for our son.
It was difficult to distinguish between work and pleasure most of the time. For example, at my friend’s wedding, I had a fascinating discussion with a lawyer specialising in offshore listings for Chinese companies. I am grateful to have a job where it is often difficult to determine where work ends and play starts. Most of the time, it feels like play.
Purpose of this Postcard
This postcard describes what I learnt on the trip. Given the hybrid nature of the trip, the observations are drawn not just from conversations with companies, experts, and other investors but also from speaking with regular people and seeing how they live. See image.
The trade war features prominently in this year’s postcard. It dominated many conversations after President Trump declared Liberation Day on 2 April 2025, shortly before the trip began. And many of you told me you want to hear my thoughts on the subject.
The memo is not just about tariffs, though. Tariffs dominate the news cycle today, but news cycles are getting ever shorter. The balance of probabilities is that in six months, the world will have moved on to a different concern. It is important not to be so focused on the news that you miss the bigger picture.
One Caveat
There is a limit to how much can be learned from spending a few weeks in countries with millions or, in the case of China, billions of people, and speaking with perhaps 10s or 100s of people. When people ask me what the Swiss think of XYZ, I feel overwhelmed, even though the country has a fraction of the population, and I live here all year round. That said, there is value in reporting first-hand experience, and where the same responses consistently crop up to the same questions, there may also be some truth hiding in it!
More Similarities than Differences
The point of a postcard is to draw attention to the unexpected. After all, reporting that everything was like at home would not make for a particularly compelling read. However, at the risk of stating a platitude, I am struck by how much more unites than divides us whenever I travel to China or the US. This is true everywhere, but it seems particularly pertinent to China and the US today, given the deterioration in the two countries’ relationship. In both places, I meet kind, thoughtful, intelligent, and fun people. Many remain acquaintances, and some become friends. The idea that a generational project is currently being undertaken with the primary purpose of making the Chinese and American economies sufficiently autarkic that the two countries can fight a war is absurd beyond measure. The absurdity of the situation is brought home to me in Omaha, where I not only see my Chinese and American friends individually but together enjoying each other’s company. To the extent a generational project is undertaken, it should be to ensure peace. Anything else is utter madness.
Tariffs, Tariffs, Tariffs
The dominant topic everywhere was the trade war. The first stop on my trip was an investor event hosted by John Deere, the American agricultural and construction equipment manufacturer, at one of its factories in Mannheim, Germany. Deere’s executives told us that they had placed all major investment decisions on hold, given the inherent uncertainty of the situation. They also said that the tariffs would negatively impact their business. As a global business with factories around the world, they both export from and import to the US. The cost of both would go up. The Liberation Day tariffs aim to encourage investment in the US and support US businesses. In the case of Deere, the effect was the exact opposite.
Bewilderment and Resolve in China
In China, the response of all the locals I spoke with was a mixture of bewilderment and resolve. They were bewildered why the US was intent on moving down the manufacturing value chain, when China has spent decades trying to move up it. They questioned why finished electronics goods were exempted from tariffs whilst components were not, effectively kneecapping US manufacturers. And they wondered who in the US was going to do these tedious, low-skilled tasks when the US economy was already close to full employment and increasingly turning its back on immigrants. At the same time, they viewed the tariffs as an attack on their economy and were resolved to prevail. The Chinese system of government does not tolerate dissent, but in this case, people’s rejection of the tariffs seemed genuine.
The country seemed prepared for the trade war. Tariffs against China were prominently featured in President Trump’s election campaign, so China was not caught off guard, unlike many other countries. The government had prepared various fiscal measures, and companies had adapted their businesses where possible. For example, Temu, the international arm of the e-commerce company PDD in which we are invested, encouraged its merchants to build out local inventory under the so-called semi-managed model in anticipation of the removal of the de minimis exemption.
No Consumer Backlash
Consumers in Canada and Europe reacted to the tariffs by cancelling travel to the US and boycotting US goods. How did Chinese consumers respond? If there was a backlash, I could not see it. As a shareholder in Yum China, I went into several KFCs, and they seemed to be doing a brisk trade. For our son, this had the bonus of having some Western food for a change. We also went to Disney Shanghai, which was jammed despite it being a weekday in April. Queues are a fact of life at Disney theme parks, but in Shanghai, it took us nearly an hour just to get through the front gate! When inside, I saw thousands of Chinese consumers wearing Disney paraphernalia, slurping on their Coca Colas, and standing five rows deep to cheer Goofy and Elsa on the parade. See video.
Are these the same people who are supposedly bent on destroying the American way of life? They looked more like super fans to me.
Despondency in Japan
In Japan, the mood was different and best described as despondent. The US is the largest export market for Japanese-manufactured goods. As Japan exports more to the US than it imports, the potential to respond to trade tariffs in kind is limited. Furthermore, the country depends on the US military to maintain a balance of power in the region. Much is made of the impact on Taiwan of a potential conflict between the US and China, but the situation of Japan and, for that matter, South Korea is not all that different. Japan relies on the Taiwan Strait for 32% of its imports and 25% of its exports. The main card that Japan has to play is that the US is equally dependent on Japan to the extent it wants to maintain a military presence in the region. However, the expectation amongst the people I spoke with was that they would have to pay up to keep the US on side.
Overall, the main message I took away was that the trade war brought home to many Japanese how dependent they are on the US and how vulnerable they will be if US support is withdrawn. I suspect most European countries have drawn a similar conclusion.
Self-Censorship in the US
The final stop was the US. During this and other trips, what struck me was the reluctance of people to discuss the trade war, or anything else that is in the broadest sense political. This is true across the entire socio-economic spectrum, from Uber drivers to CEOs. Even Warren Buffett seemed reticent, stating cryptically at the shareholder meeting:
Trade should not be a weapon.
This was not the only time I missed Charlie Munger and his plain talk.
Prior to travelling to the US, there was a lively discussion in some of my WhatsApp groups about whether chats should be deleted before entering the country, after reports that some people had had their phones checked at immigration. For what it's worth, my experience at immigration was normal.
In any case, what keeps people from speaking their minds is not fear of the authorities but of their fellow citizens. Some of my closer US friends told me heartbreaking stories about how familial relationships have been irreparably damaged over differences of opinion about the current political situation. The conclusion drawn by Uber drivers hoping for a tip, homemakers inviting family members to a Thanksgiving dinner or CEOs aiming to keep their jobs is that politics should be avoided at all costs. At face value, this is not a bad thing. However, my concern is that the definition of “politics” is far too broad and effectively shuts down all critical debate.
My Takes on the Trade War
As I write this, the trade war rages. Policies change constantly, apparently on a whim. I am loath to write on the current situation and short-term outlook as it will likely be out-of-date within a few days. That said, having chastised my unsuspecting Uber drivers for their silence on the topic, I can hardly duck the issue myself. So, what do I think?
Depressing
Most obviously, the ongoing deterioration in the relationship between the world’s two superpowers in general and the trade war in particular is deeply depressing. My assumption has always been that the benefits of trade are so enormous and the downside from war so cataclysmic that a conflict could not happen. I now realise that was naive. I recently came across a book called “The Great Illusion” by Norman Agnelli that made a similar argument. It was a bestseller that was translated into over 20 languages. The catch is that it was published in 1909 and widely circulated in 1912 - two years before the conflagration that was World War I.
A Bad Idea for the US and the World
In my opinion, the tariffs are a bad idea. They are bad for the world. The last global trade war was in the 1930s, and it led directly to the Great Depression, which in turn created the conditions that led to World War II. At the Bretton Woods Conference in 1944, all 44 nations present - whether communist or capitalist - agreed that this should not be allowed to happen again. It is disappointing that the lessons of the 1930s have been forgotten.
The tariffs are also bad for America’s position in the world. Allies have realised how dependent they are for trade, for technology and for military assistance. Their response will be to decouple and strengthen alliances elsewhere.
And the tariffs are bad for American companies. While the intent might be to strengthen US companies, the impact will likely be the opposite. As Deere pointed out, they place US-made goods at a cost disadvantage to the extent they import parts from overseas. The US has many of the world’s most successful international companies, so they have the most to lose from de-globalisation. And if US companies are insulated from global competitors, they will inevitably lose competitiveness over time.
China: A Relative Winner
There are no winners in a trade war or any other type of war. However, China seems to be a relative winner. Twelve months ago, China looked increasingly isolated, its economy was in the doldrums, and there were dark forbodings about the prospect of tariffs in the event of a Trump presidency. Fast-forward to today, and tariffs have come and at least partially gone, and the economy is far more resilient than expected. China also seems less isolated. With the US no longer championing free trade and open markets, China has taken on this role. Given that its companies are increasingly successful (see later section), this is somewhat self-serving, but the impact is real.
Rest of the World: Relative Losers
If the US perhaps overestimated the extent of its leverage over China, my sense is that the opposite may be the case in the rest of the world. In Japan, there was a realisation that the country is heavily dependent on the US economically and militarily. The situation in Europe seems no different, especially given the US’s wavering support for Ukraine. It will be interesting to see what the US does with this leverage in the coming weeks. If it overplays it, it will likely only accelerate the desire to decouple from the US. If so, it will be a pyrrhic victory.
The US’s Strengths
For better or worse, the US finds itself in a geopolitical competition with China. China’s big advantage in this competition is that when the big guy gives an order, he can count on 100% compliance. This lets it get things done more quickly, but there is no obvious way to correct course if the big guy sets the wrong direction. The US’s competitive advantage is that when the big guy gives an order, people say, “Hang about, does this make sense?”. This is inherently slower but all but rules out the risk of a catastrophic error. I firmly believe that the US has a better system in the long run. China should seek to emulate it, in its own interest. However, you must first negotiate the short run to reach the long run. The quicker Americans disabuse themselves of the idea that any criticism of a policy, no matter how dumb, is political and hence forbidden, the better.
The Trade War and Our Investments
The impact of the trade war on our investments is likely of more interest to my investors than my geopolitical musings. What is the impact?
It is less disruptive to our Chinese investments than expected. If a year ago, the consensus was that tariffs were a big risk for the Chinese economy, today, the consensus is that tariffs are a big risk for everyone. On that basis, the hefty discount applied to the valuation of Chinese companies or the premium applied to non-Chinese companies was unwarranted.
In evaluating the impact on our stocks, I distinguish between first-order, second-order, and third-order effects. A first-order effect might be considered a direct impact, for example, an exporter to the US subject to new tariffs. In our portfolio, no companies are directly affected. Our Chinese companies have mostly domestic businesses with little revenue in the US, and none are manufacturers. Yes, Temu exports to the US, but Temu is a small part of PDD’s business, and the US is a small part of Temu’s business. Moreover, Temu’s US business is not going away and may even emerge stronger.
A second-order effect might be a company that is not directly impacted but has customers that are. Here, I see more impact, but it is not overly significant. For example, Meta sells advertising to many e-commerce companies that export from China. However, Meta has over ten million advertisers. If one customer group reduces spending, others will fill the void.
Third-order effects are so wide-ranging that every company is probably impacted somehow. Going down that particular rabbit hole is beyond the scope of this postcard. However, one possible consequence of the trade war is a recession. In this case, nearly every company will be impacted.
Overall, I remain optimistic about our companies’ ability to weather the storm. For example, Carvana has such a tailwind at its back that even though a recession would be bad for the used car market as a whole, I expect it would continue to grow rapidly thanks to the popularity of its offering and the pace at which it is scaling its capacity to fulfil demand.
De-listing of ADRs
One possible side effect of the trade war could be the delisting of Chinese companies from US stock exchanges. On 2 May 2025, Senate and House members wrote to the SEC demanding as much. I have always been sceptical that this would happen, as it would potentially catalyse a transfer of wealth from US to Chinese investors. Why would a government do something so detrimental to the interests of its citizens? That said, the idea no longer seems so outlandish. My Chinese lawyer friend told me he is inundated with requests from Chinese companies seeking a secondary listing in Hong Kong.
It will not change my view on our Chinese holdings if they are forced to relist in Hong Kong. Arguably, Hong Kong is a more natural home for a Chinese company. Volatility could spike, though, if some US investors become forced sellers of Chinese stocks.
Beyond the Trade War
The trade war garners all the attention currently, but it is important not to lose sight of the bigger picture. Gradual changes never make it onto the front page of a newspaper, but if they persist long enough, they are likely more impactful. With that in mind, what else did I learn on the trip?
Opening Up
China goes through phases of becoming more and less open. During Covid, it certainly turned inward. On this trip, I felt that the pendulum had swung more towards openness. Shortly before I arrived influencer IShowSpeed toured China and posted unfiltered livestreams of the places he went to and the people he met. One of my favourites was his encounter with the Chinese Donald Trump.
My filmmaker friend in Shanghai, Malcolm Clarke, confirmed the trend. He told me he had been given carte blanche to film whatever he wanted in the country. I also heard that the government plans to permit full access to the Internet in some cities, but I saw no evidence of it whilst I was there.
That said, the heavy hand of government remains omnipresent. To get on a train, you must go through two ID checks—the first to enter the station and the second to get on the platform.
More Business Friendly
China has also become more business-friendly. Before I arrived, President Xi hosted separate meetings with the leaders of some of the largest domestic and international companies in China. The newfound enthusiasm for business is likely due to the realisation that innovative companies and a thriving domestic economy are the best defence in a trade war. Nevertheless, it is a welcome development for investors in China.
It is too early to say whether this change in direction is cyclical or secular. However, cycles can be self-reinforcing, and I hope the trend towards liberalisation continues.
Navigability
It always interests me how easy it is to get around when I go to China. China has a great story to tell. The biggest favour it could do itself is get more people over there to see it.
I am making progress. I downloaded the ride-hailing app Didi this time and made it from A to B most of the time without adult accompaniment. Whereas in the past I have described myself as a pre-schooler (i.e. needs adult supervision 100% of the time), I would now characterise myself as a teenager (can be let loose in a controlled environment with adult supervision close at hand). If China wants a step function change in the number of people visiting the country, it needs to be child's play for people like me to get around. In this respect, there is a long way still to go.
Venturing beyond the Tier One Cities
In my prior posts, I have written about how impressive Chinese cities are. When you stand on the Bund watching the light show play on the skyscrapers lining the Huangpu River, it feels like you are living in the future. See image.
I was conscious, though, that it is necessary to venture beyond tier-one cities to get a fuller picture of the country.
On this trip, we visited two lower-tier cities: Suzhou, which is a 20-minute high-speed train ride from Shanghai, and Hangzhou, which is roughly one hour away.
I was very impressed by both. They are large with populations of around 13 million each. This makes them roughly half the size of Shanghai, but I was no less awestruck by their scale. Looking out the window from the backseat of a taxi, it is difficult to discern the difference between a city with 13 million inhabitants and one with 25 million. They have modern infrastructure. And they have beautiful public spaces. In Hangzhou, we enjoyed visiting the West Lake and the Leifang Pagoda.
In Suzhou, we took a spectacular cruise through the water town. See video.
When you travel through the Chinese countryside, you see what I can best describe as forests of high-rise buildings. As you approach the cities, these forests become denser and denser until they stretch as far as the eye can see. It could scarcely be more different than the US and Europe, where there are pockets of high-rise buildings in the centre of the larger cities, but elsewhere people tend to live in freestanding houses.
Frankly, I prefer to live in a freestanding house to one cell in an enormous hive. However, what is best for the individual and society is not always the same. Denser agglomerations make better use of the land and are more environmentally friendly. They also allow for all kinds of efficiencies. For example, more people can be connected per mile of subway line, and e-commerce works far better. The yellow helmets of Meituan riders are ubiquitous in Chinese cities, allowing near-instant delivery of virtually anything. I prefer where I live, but the design of Chinese cities strikes me as more adapted to modernity.
EVs Taking Over the Roads
Electric vehicles (EVs) are an increasingly familiar sight in Chinese cities. In most places, the green plates of EVs outnumbered the blue plates of combustion engine cars. When I booked a Didi, an EV mostly showed up.
EV Winners and Losers
The growth in the electric vehicle market has led to a Cambrian explosion in Chinese automotive OEMs. My understanding is that BYD is the only clear winner. After that, there are a handful of close followers, of which perhaps two or three might succeed. Amongst the pretenders are Xiaomi, Li Auto, Huawei, Nio, Xpeng and a few others. The rest are - well - roadkill.
Western manufacturers have largely failed to make the transition to EVs. The transition to electrification is going hand in hand with massive market share losses for Western OEMs. Tesla is an exception, but it is also struggling. It still sells, by and large, the same models as several years back. Its lineup looks increasingly tired compared to Chinese cars. See image.
I asked friends why they thought Chinese car makers innovated more quickly. They said that Chinese OEMs approach cars as smartphones on wheels. Smartphones have much shorter development cycles than cars have traditionally. Apple releases a new iPhone annually, whereas BMW refreshes its 3-Series every six to seven years. It is no coincidence that two leading players—Huawei and Xiaomi—also make smartphones.
Self-driving cars
During my visit, the subject of self-driving cars was a hot topic. Chinese OEMs are going all-in on self-driving cars, and some higher-end models already include LIDAR sensors. Like everything else, they are much cheaper in China, and the cost is expected to fall much further. As such, more cars will have them, and then there will be more per car. This, together with the higher number of cars on Chinese roads, may supercharge the development of self-driving technology in the country.
There are two philosophies for self-driving cars: the more deterministic “if-then” model, which has been pioneered by Alphabet subsidiary Waymo and the AI approach pioneered by Tesla. The Chinese OEMs have mostly adopted Tesla’s AI approach. I do not have a strong view of the right approach, but if the AI approach wins out, it seems likely that there will be many competing solutions. Similar to LLMs, this will likely drive the price down to zero. In this scenario, self-driving cars will not be a long-term source of differentiation for Tesla.
Artificial Intelligence
Another hot topic during this trip was AI. It felt like AI was everywhere. As discussed above, the automotive OEMs all have an AI strategy for self-driving cars. In addition, everyday items such as household appliances are increasingly AI-infused. In one shopping mall, I saw a retail outlet selling pet robotic dogs which interact with their owners using AI. See video.
Are Chip Controls Slowing the Spread of AI?
My sense is that US chip controls have not slowed down the pace of AI development in China and may even have accelerated it. A lack of chips forces Chinese companies to be more innovative and use what they have more efficiently. Most famously, this led to important breakthroughs in LLM design by Deepseek. The shortage of chips is also likely to accelerate the development of locally produced alternatives.
In a recent interview, Nvidia CEO Jensen Huang pointed out that preventing the diffusion of Western AI technologies in China not only weakens the American ecosystem but also strengthens the Chinese one:
If we don’t compete in China, and we allow the Chinese ecosystem to build a rich ecosystem because we’re not there to compete for it, and new platforms are developed and they’re not American at a time when the world is diffusing AI technology, their leadership and their technology will diffuse all around the world.
In the early 2000s, China created the Great Firewall to control the flow of information and inadvertently fostered a domestic consumer Internet industry. Today, the US is building a firewall around China to prevent the diffusion of AI and inadvertently fostering a domestic AI industry.
If the chip ban is ineffective, it is perhaps not such a bad thing, though. AI has the potential to improve lives and increase productivity. It seems unfair to deny 1.4 billion Chinese people access to it on the basis that it may have some military applications. If electricity had just been invented, would it be right to block its diffusion in China because it can be used to light up military camps?
Companies going from Strength to Strength
Every time I visit China, I am amazed by the progress of its companies. It is not just in the automotive sector. Chinese companies have successfully established themselves in a wide range of high-end manufacturing industries, including high-end electronics, robotics, and medical equipment, not to mention non-manufacturing sectors.
On this trip, I visited Xiaomi, the consumer electronics manufacturer. In the West, it is most likely known for its Android phones. In China, it makes over 1’000 SKUs ranging from smart home appliances to high-end cars. It sells its products through over 2’000 retail outlets. These look somewhat like Apple Stores but have a much broader range of products. It hints at what Apple might have been if it had built cars and penetrated deeper into the home.
Exporting Overcapacity?
Western investors’ attitude toward Chinese companies has evolved since I started following them. However, it still seems characterised by denial about their progress. The most frequent complaint I hear today is that Chinese companies are “exporting their overcapacity”. It is a strange turn of phrase. Does Porsche export its overcapacity of 911s? Does Apple export its excess capacity of iPhones? I guess so in the narrowest sense. However, it is an incomplete explanation of their success. Similarly, the reason for Chinese companies’ success is not just due to overcapacity. It is due to their willingness to invest, their innovativeness, and above all, the incredible work ethic of Chinese employees.
I am increasingly sceptical that high-end manufacturers in the West can compete with their Chinese counterparts unless they have significant customer lock-in. Many will go the same way as low-end manufacturers in the 2000s and fall by the wayside. One investor friend told me that the Head of BMW China spends most of his time trying to find a Chinese JV partner, tacitly acknowledging this reality.
This is not the end of the world for Western companies. There are plenty of areas where Western companies excel and Chinese companies do not. My lawyer friend told me that Western companies in China and Chinese companies overseas prefer to use international law firms due to the shortcomings of the Chinese legal system. Companies like Disney, LVMH and KFC are also thriving. Disney could and should triple the size of its theme park in Shanghai.
The implications for investors are clear. It is better to acknowledge the shifting fortunes of Western companies and the growing prominence of Chinese companies and invest accordingly, rather than hope that legacy Western companies are protected from more efficient competitors through tariffs or other forms of protectionism.
Parting Thoughts
My aim in this postcard is not to be political in the narrow sense of the word. I have no desire to know the political leanings of the managers I invest in, and I assume the same is true for you. That said, the definition of “political” should not be so broad as to shut off debate on topics far removed from voting preferences in the next election. In this postcard, I attempted to tread a fine line between avoiding falling into this trap whilst not thrusting my politics on anyone. If I did not always succeed, I ask for your forbearance.
Many of the observations in this memo, particularly concerning the development of Chinese companies, are positive. This is because their development is positive! It is a message that some my Western readers may want to hear. If so, please do not shoot the messenger. If it makes the message more palatable, consider me a friendly spy providing intelligence on enemy positions.
Finally, whilst the gulf in understanding between China and the West is concerning from a geopolitical perspective, it constitutes an opportunity for the enterprising investor willing to do the work to understand its implications. The best investment opportunities arise when companies with great prospects are perceived as having poor ones. It is difficult to think of a place where this is so obviously the case as China today.
Article by RV Capital
