Импортозамещения не будет. (English subs) / @Максим Кац

Импортозамещения не будет. (English subs) / @Максим Кац

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Today we will talk about import substitution. Primarily we want to look at import substitution in a sense that authorities see it: a way to replace western technologies with something else and at the same time, maintain if not increase living standards — keep planes flying, trains running, so that you could do a medical examination at a hospital or buy home appliances in a shop. But the very idea of import substitution denies basic logic. Because what do its adepts tell us? They say that the limitations imposed on us by the West is a chance for our domestic producer for a technological breakthrough.

So while it was all good, while there were no problems with attracting foreing investments, with the acquisition of components, while we had all we needed for development — the technological breakthrough wasn’t happening. But as soon as problems arose in everything big and small, when the economy has become so risky that investing became too much of a risk, because on this side of the border you have Big Brother watching you and on the other side you have sanctions, and problems buying the very basic stuff — in this extremely aggressive environment, technological breakthrough should somehow happen. Following this logic, the first thing a runner should do in preparation for Olympics must be breaking his leg, because only through pain a true success is possible. Jokes aside though. The purpose of this video is not to make sarcastic jokes, which would not be difficult, but to figure it all out.

To figure out how the modern economy works and why all the fantasies of import substitution are indeed nothing but pure fantasies. All industries begin with artisanal production. If it’s the beginning of the XX century and you are producing the very first cars, you can’t just be producing cars, your company must become equal to a whole industrial sector. The world cannot provide you with much at this point yet: there is no one to produce engines, transmissions, brake systems, car wheels and suspension elements, there are no gas stations or repair shops, and what is worse, nobody knows why they need a car at all.

Has it ever struck you as odd that the most respected restaurant guide is published not by someone you might expect it to be, not by someone related to the food and service industry, but a car tire producer - Michelin? Thing is you can’t just create a new industrial sector and begin producing something that humanity never knew it needed, but you need to explain to a potential buyer what they could do with this novelty of yours, where they could drive it — like a good restaurant for example. Same thing with cinema. You can’t just start making movies. The world doesn’t have cameras for you to buy yet, there are no projectors, no cinemas, no cameramen and no technicians to work with all of this. You must invent it all and produce it all for yourself, you can’t just be a filmmaker, you yourself must become equal to a whole industrial sector. As time goes and industries develop it becomes clear that it cannot go on like that.

That car production, car sales, refining and selling petrol are different kinds of businesses, that a braking system isn’t just a rim covered in rubber but a complex mechanism that must be produced separately. That film making, training of actors, creating decorations, producing cameras and film tapes, distribution and advertising are all very different kinds of activities that can’t exist under one roof. Because for there to be a sense to produce cameras you need to produce many of them, much more than one studio can use, you can’t have a whole production line producing just a few of them. For a movie theater to pay off, movies must be shown there constantly, it cannot be tied to a production cycle of a single studio. Also, an acting studio, directing courses or camera school cannot be working for just one manufacturer, they need an entire market.

This is the moment when artisans who work on pure improvisation and have to always reinvent a wheel, leave industries and are replaced with professionals. A new film in a cinema, a new car at a car store is a result of cooperation of professionals from many different sectors. As time went by, artisanal production had been replaced with cooperation of specialized enterprises. And after WW2 the world decided that it’s good for politics, too — because if people and enterprises from different countries cooperate, they won’t be as eager to fight each other. They wouldn’t need it. So globalization is the process of unifying production chains around the world. Now not only we don’t have full-cycle handicraft production within one company — we have no countries, even the largest and most developed ones, that can independently produce any complex, much less high-tech product.

We’ll interrupt for a commercial now, and then talk about economies of scale — the reason why it’s economically impossible to go back to artisanal production. And of course how it applies to our country and our today's situation. We'll say a few words about USSR too. But first, a short commercial break. ADV You may have noticed that professional and highly specialized equipment is alway unexpectedly costly.

Take medicine for example. That thing that you could see in hospitals or in movies and TV shows about medicine is called a patient monitor. It is usually installed in intensive care units or operation rooms and it shows pulse, oxidization, heartbeat diagram and various other indicators of a patient's condition. And it is unexpectedly costly. Even most basic models start at $5 000.

You may think that they are made with some unusual and extremely complex electronics that are produced in single copies, some especially complex processor units and matrices. But they aren’t. In fact, all the modern electronics, be it your phone or a tablet, laptop or a TV set, a server responsible for complex financial operations or monitoring life and death of a man, are made with the same components, produced with the same technologies, manufactured at the same factories under control of the same engineers. From a technological point of view, a patient monitor is nothing but a simple computer with your usual Linux or BSD with some additional specialized programming and interfaces for specialized sensors.

In the same way, you can pull a server out of the Google data center rack, plug a regular video card into it through a standard interface and play your favorite Cyberpunk. Google servers are equipped with all sorts of additional technologies but in essence it’s just an ordinary consumer computer. But if a patient monitor is basically a touchpad and Google server is basically a computer not unlike the one you have at home, if some data terminal in a large logistical complex is basically an outdated smartphone then why are they so expensive? Why do we pay only a few dollars for video games that cost tens of millions of dollars to create, but a simple program for organizing a taxi fleet can cost thousands and tens of thousands of dollars to buy? The answer is the same as the answer on another question: how come the famous Zolgensma costs two million per doze? The answer is that it's all about scale when it comes to technology sector. Pharma is a technology sector too by the way. The main cost of technological industries is not in producing a single unit of output, which in the case of digital goods can actually be equal to zero.

The main cost is in developing those goods, in designing and producing production lines, in design, marketing, and process management. A factory that produces computer processes is expensive. Macroeconomically expensive. So expensive that the absolute majority of famous brands like AMD, NVidia, Qualcomm, Mediatek and the absolute majority of those whose logos you can see on computer chips (in Soviet Union you’d call them design bureaus) — they just make blueprints and that's it.

A computer processor factory costs billions of dollars, there are only a few of them around the world, and their chips are everywhere. But the cost of producing a specific good, a specific processor is practically zero, it costs practically nothing. From all this it becomes more or less clear why the world doesn’t know of any national phone or plane producers, why pharma is always “big” and “transnational”, why there are only 4 producers of long-haul aircrafts in the entire world, 3 companies that produce engines for them, and why there are 4 families of operating systems and not 40. Because constructing a production line for a processor costs tens of millions of dollars no matter what. Creating an operating system costs hundreds of millions no matter what, and the only difference is in how many copies you can sell, which is what you divide the cost of it’s development by.

In economic theory this phenomenon is called economies of scale. The more you produce, the more you split the costs and the less prices are influenced by them. But there is no point in producing goods just to have it lying around. Goods are produced to have them sold. And to sell them, you need markets.

If you make processors in a free country, your market is everywhere. Everything needs a processor these days, be it the International Space Station or an electric kettle. No matter how many of them you produce it still won’t be enough, the market can swallow them all. But should you decide to make computer chips in Iran (let’s ignore the question of acquiring components for the sake of argument, suppose you somehow managed to acquire them) — you will soon discover that you simply don’t have a market. You can flood all of Iran and its friendly countries with computer chips, you can even sell them in the West through gray dealers and intermediaries, but the width of this channel would be so small that either each of your chips will be insanely costly or you’d be working at a loss. Adherents of import substitution like to use soviet experience as an example.

ZiL, they tell us, produced its trucks all by themselves, from smelting pig iron and until the truck leaves the line. There were no imported components. It is all true but there is a nuance. In theory you could launch a production like that even now — except that in 2022 no one needs those trucks from the 1970th.

This is why we no longer have ZiL in Moscow, and in the place where its factories used to be there is now an apartment complex. Let’s double-check that observation on the example of another well-known automobile factory from Moscow — the AZLK. After Renault left, the ownership of the factory was transferred to the capital, and mayor Sergey Sobyanin famously announced the resumption of production of Moskvich cars. The last major model of Moskvich was the legendary 2141, which had been produced under the name of Svyatogor until the beginning of 2000th.

In theory they could be producing Svyatogor today too, but I suspect no one will be eager to buy them. Apparently there was a specific reason for stopping the production of those cars almost a quarter of a century ago. Especially considering the fact that Moskvich-2141 was created on the basis of Chrysler’s Simca 1308, which they stopped producing in the 1980th. Best case scenario would be that they’ll buy some no-name model from China, stick the Moskvich nameplate on it, and start producing it on the AZLK conveyor.

Worst case — and the most probable one — it will all end in nothing except the bankruptcy of the factory and its final demolition, following the example of ZiL. But even if by some miracle we could make it work and start producing modern ZiL and Moskvich on the level of BMW and Mercedes — just imagine how much they will cost. In the best case, like a good truck or a bus, if not like a plane. There will be a dilemma: no one wants to buy outdated Russian cars, but only oligarchs can afford to buy modern Russian cars.

If there is no market, there is no production. Import substitution while maintaining a competitive economy is only possible at the level of technological development of the mid-20th century, like it happens in DPRK. But even then it won’t be absolute — even North Korea depends heavily on technologies from China? The USSR with all its ZiL and Moskvich did depend on imports. The whole history of first five-year plans is the history of buying western technologies with grain that was taken away from farmers. Stalin’s great projects were paid for not only with the blood of prisoners in labor camps, but also with millions of victims of Holodomor.

Then there was the Cold War and confrontation with the West — and they stopped selling us technologies. This is why in the following years it all hanged on reverse engineering everything Soviet engineers could lay their hands on, and then trying to replicate it. Sometimes they succeeded. But more often they failed. The jokes were merciless back then: i don’t fly, i don’t buzz, and can’t fit into ear, what am i? A soviet flying ear buzzer! Millions of soviet children who spent hours a day playing with Soviet “Nu Pogodi” electronic game in which you were playing as a wolf trying to catch falling chicken eggs, had no idea that the game was simply stolen from Nintendo with the subsequent replacement of characters with those that were familiars to the people of the USSR. But Nintendo still exists to this day, while the Soviet “Electronica” that produced Nu Pogodi and other similar games is long dead.

The USSR tried to survive partly with the help of stolen Western technology, and only in part with its own technology. Which was mostly about tanks and space. Over the years, its industry had become less and less effective.

Goods became more complex, expenses rose, factories made losses, and in the end, they collapsed. And it was easier for the Soviet Union than it is for modern Russia: it had the whole eastern-european bloc with Poland, Czechoslovakia, and East Germany, who still maintained very strong industry. But despite all this, it was hopelessly falling behind technologically. Why? Because even with all its satellite states, the USSR is a much smaller market than the Western world. The American automobile industry produced more cars because it had someone to sell them to, there was a great demand for American cars in the States themselves, and also in Europe, in Asia, and in Latin America. And it helped the growth of metal smelting, electricity production, and all sorts of side industrie.

Economies of scale, that is, reducing the cost of production of a single good, and splitting specialization across the globe made production profitable: we pay lower prices for higher quality. This is how the world economy developed during the last decades. Everyone focuses on what they can do better than the rest, and imports that which they aren’t good at. And it happens not because governments told so, but naturally, through competition and desire to profit. By courtesy of Vladimir Putin who desired geopolitical victories, Russia excluded itself from that process. And this is a shame, because Russia is actually a very rich country with some serious advantages that could be working on us in this global system of division of labor and reducing costs.

I’m not talking about oil and gas now, but about people. Since the times of the USSR which required a huge number of engineers to maintain its isolated and militarized economy, we still have a strong technological education, which is why there are so many IT specialists in Russia. We could find our place in the sun and give people an opportunity to fulfill their talents, to create startups and develop them into international corporations, and not have them scared away with police and tax and prosecutor offices. What they did by the way, until the government decided to get into it all.

And we could succeed if only we didn't scare people off with visits from the police, tax department and prosecutor's office. If Estonia, another former Soviet republic, could do it, then there is no reason for Russia to fail. But this development plan implies developing democratic institutions and giving up on imperial ambition, because authoritarianism and geopolitical fantasies aren’t favored by business. Especially a highly technological one, one that doesn’t involve factories and whose means of production are a laptop and a cup of coffee. For such businesses, moving to another jurisdiction doesn’t take much longer than flying there by plane But we didn’t take that route. Russia started a war. Both western corporations and its own citizens — primarily IT specialists — have fled.

And now instead of developing we are in for degradation and big talk of immense successes of import substitution. And this is a prognosis you could make without a shred of a doubt: this is how it will be. No way Russia can make import substitution work. It cannot happen. See you tomorrow!

2022-06-09 15:14

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