How China Outsmarted Silicon Valley — One Catfish at a Time
The Sunday Essay ☕️
In the cold, dark waters of the North Atlantic, the catfish is not a hunter of elegance or grace.
It is a provocateur.
When fishermen once shipped live cod across long distances, they discovered that the cod would arrive pale and lifeless—its muscles soft, its flavour dulled. Then someone had an idea: put a few catfish in the tank. The catfish harassed the cod relentlessly all the way to market. When the ship docked, the cod were lean, taut, and full of life. The catfish kept them sharp.
The story stuck because it captures a truth about competition: sometimes the best way to make something stronger is to put a little fear in it.
Western market analysts began using the term “catfish effect” in the early 2000s to describe a pattern in the Chinese economy — the government deliberately introducing strong foreign competitors to stimulate domestic innovation.
The Chinese state invites powerful foreign companies into its economy — Google, Facebook, Uber, Tesla — dangling access to the world’s largest pool of consumers. These firms are the catfish: swift, confident, and innovative. They teach. They build. They show what’s possible.
But in the process, the domestic “cod” toughen up. Local firms study the intruder, learn its secrets, and adapt. Then, just as the foreign catfish grows comfortable, the current changes. Regulations tighten, partnerships strain, and access narrows until the outsider is forced back to sea. Left behind are sharper, stronger local competitors — Baidu, WeChat, Didi, BYD — muscular from the chase, ready to dominate their own waters and swim out into the world.
The catfish effect, in nature and in economics, is the art of provoked evolution. Invite the predator in, let it stir the tank, and when it’s gone, what remains is not chaos — but a hardier ecosystem built in its wake.
A New Reality for American Tech
Two months ago, twenty venture capitalists from the United States and Europe flew to China to tour a selection of its advanced technology industries. Upon returning, they reported — and plan to announce publicly during Climate Week in New York — that they have identified at least half a dozen U.S. technology industries they now consider “uninvestable.”
Battery manufacturing, solar power generation, and energy storage were among them.
The VCs weren’t saying that American companies were uninvestable — they were saying the entire industries were. Why? Because Chinese competitors were already so far ahead that the investors could not justify financing the American equivalents. There is no longer a contest. There is already a winner.
Sobering? Yes. Especially when you consider that the value of the U.S. stock market has been carried by its technology dominance for the past thirty years.
The S&P 500 — representing the 500 largest publicly traded U.S. companies — has a cumulative value of roughly $57 trillion. Yet $23 trillion (40%) of that value comes from only ten firms. Nine of them are technology companies; Berkshire Hathaway is the lone exception.
How China Built Its Edge in Advanced Technology
Let’s start with electric vehicles.
China’s domestic EV and autonomous driving champions have executed a deliberate, multi-stage version of the catfish strategy — luring the world leaders into its waters, learning from them, and then overtaking them. Tesla, perhaps more than any other, exemplifies this pattern.
Tesla in China: A Timeline
In 2014, Tesla officially launched sales in China, delivering its first Model S cars. Early sales were modest; as the cars were imported from the United States and were expensive. But in 2018, China relaxed its joint-venture rules, allowing Tesla to become the first foreign automaker to wholly own a factory in China — Gigafactory Shanghai. By 2020, the Model 3 had become the best-selling EV in China, marking Tesla’s breakout moment.
But in 2021, the current began to change. Chinese authorities began to leverage subsidies, data localization laws, and full self-driving restrictions to tilt the field in favour of domestic brands.
By 2023–2025, Tesla’s share of China’s EV market had fallen to 4–6%, while BYD, (the local fish), has consolidated over 30% of the market.
This is the catfish effect in motion: invite the foreign innovator in, offer incentives, require data sharing and local integration, then gradually shift regulation to favour domestic champions once the knowledge transfer is complete.
The Broader Pattern
The same playbook has been used across industries — time and again.
Google → Baidu
2006: Google launched in China with Google.cn, a censored version of its search engine. Google quickly captured about one-third of China’s search market, earning strong traction among educated, tech-savvy users who valued its cleaner interface and global search results.
2008: State agencies began to promote Baidu as the “safe,” patriotic alternative. Baidu’s market share rose to 60%; Google’s fell below 30%.
2010: Google exited mainland China, redirecting traffic to Hong Kong.
Facebook → WeChat / Weibo
2007: Facebook launched in China and gained early popularity among China’s urban youth and university students, becoming a niche social network for globally minded users.
2009: The CCP encouraged citizens and businesses to adopt WeChat and Weibo for communication and payments. Facebook access was blocked the same year.
2009: Facebook exited China permanently.
Uber → Didi
2014: Uber launched in China and quickly captured up to 30–40% market share in key urban centers through aggressive driver subsidies and partnerships with Baidu for mapping and payments.
2015: State-linked investors bankrolled a local firm, Didi, and its merger with Kuaidi, creating a national ride-hailing monopoly.
2016: Uber exited China, selling its operations to Didi for a 17.7 % stake.
LinkedIn → Maimai
2014: LinkedIn launched its localized Chinese platform.
2015, LinkedIn surpassed 20 million users by localizing its platform, partnering with state-owned firms, and positioning itself as the trusted global network for Chinese professionals.
2016: The CCP restricted LinkedIn’s visibility while local firm Maimai expanded freely.
2018: Maimai surpassed LinkedIn as China’s dominant professional network.
2021: LinkedIn exited China.
Amazon → Alibaba
2005: Amazon entered China via the acquisition of Joyo.com.
2011–2013: New customs, inspection, and data-storage rules constrained foreign e-commerce firms. China’s cross-border zones granted Alibaba preferential tax treatment.
2015: State media campaigns began urging consumers to “buy Chinese, use Chinese platforms,” boosting Alibaba’s user base.
2019: Amazon exited China, closing its domestic marketplace but retaining AWS.
A Strategy, Not an Accident
What looks like a coincidence is in fact a design.
China’s economic planners have built a system that uses foreign innovators as catalysts — importing technology, competition, and expertise, then converting them into domestic advantage.
The state opens the door just wide enough for learning to occur, then quietly closes it once local players have mastered the game.
The result is a generation of Chinese champions — Baidu, WeChat, Didi, BYD, Alibaba — each forged in the friction of foreign competition.
The catfish were invited in to stir the tank; the cod that survived now rule the sea.
Critics will argue that these companies are merely a consequence of Chinese state capitalism and that government intervention and state control have propped up their value.
I don’t dispute that.
However, state capitalism has now arrived in the United States and is about to heat up in a major way - so it’s a good time to understand it well. More on that next week (and why this is actually great news for commodity investors).
The Chinese economy is one of the most misunderstood subjects in the West, so I spend a disproportionate amount of time studying it.
At the end of 2025, China will announce its 15th 5-Year Plan. Tracking the priorities of the 5-year plans from 1949 to today will give you a play-by-play of how China has moved from a poverty-stricken nation of rice farmers to the most competitive economy in the world.
What used to focus on coal and grain production quotas - “we need to feed our people and heat their homes” - has evolved into “dominating the world’s energy and advanced technology sectors.”
From my perspective, it’s working.
Let me know what you think in the comments.
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Having witnessed the Chinese approach to Nortel in the 90's - planting bugs and imbedding spies (willing or unwilling) in the workforce, this seems like a smarter strategy. Thanks for shining a light on this. IMO it's the best piece you've written.
Your metaphor of the Catfish effect is certainly valid. That is actually a common phrase in Chinese business circles. Your examples of how China lured Tesla, Google and Amazon in and then turned on them are based on western media disinformation. They are simply not true.
I was a tech executive in China in the 20 years since the start of the internet age and lived through the period when tech exploded in China. Actually I led eBay's China business when the company went in the market. I can assure you eBay and Amazon exited the Chinese domestic business, not due to government policies but purely due to competitive pressure. Neither was flexible and nimble enough to win in the domestic market. However, both have retained a profitable cross border business with China-based merchants selling on their platforms to global buyers. This segment is successful because they are competitive in demand generation outside of China.
Tesla lost to BYD, Nio, Li Motors, and Cherry not because the government discouraged people from buying its cars. Instead consumers just want better price and quality from the other brands. Facebook was never in China because it couldn't comply with Chinese laws regulating all social media including domestic ones. Google was in for a while but refused to follow the local regulations and moved to HK.
you need to spend a bit more time learning about the truth if you are interested in understanding China. Relying on western propadanga machines won't get you very far. You would end up regurgitating the same falsehood with just a different spin.