Adam Mullooly questions how the East-West political axis may become increasingly important to world trade.
The coronavirus pandemic has changed the way the world does business. Our day-to-day lives have been impacted with remote working and an onslaught of Zoom meetings. In the shadow of this uncertainty there have also been seismic shifts in perhaps the most important trade relationship in the world, USA – China. China is on the march, its influence spreading across Asia and the world. Aggressions in Hong Kong and the South China Sea are mixed with massive infrastructural investments in Africa, aimed at securing the one-party state’s place as the preeminent power in world business. The ‘West’ has finally awoken to this threat, and this will have far reaching consequences for new normal global businesses. In November, should the carnival of Trump end with the election of Joe Biden, the world will look to China and the ice-cold relationship with the US will take centre stage.
Although around 40% of the world’s finished goods are shipped from China annually, the days of China solely being the factory of the world are coming to an end. China now competes with the US in the development of important technologies such as memory, IoT (Internet of Things), consumer electronics components, and much more. Apple, for example, have always developed cutting edge technology and used their Chinese partners Foxconn to cheaply manufacture the products. However, they now face intense competition for technological superiority from Huawei and other Chinese manufactures.
Chinese businesses have been steadily growing and gaining market share in key industries for the last 30 years.
The BBK electronics group encompassing Oppo, Vivo and the popular One Plus brand is the second largest manufacturer of phones in the world, yet it is a name that almost no one knows. The Chinese government provides massive subsidies to strategic component suppliers who then sell cut price components to their domestic partners. This effectively subsidises domestic companies in one of the world’s largest revenue producing industries. OLED display manufacturer BOE received over 3 billion US dollars in subsidies in 2018 alone, as they aimed to compete with Samsung, who have been the dominant player in the industry for over 10 years. This corruption of free competition has resulted in many US companies dropping out of key markets or being sold to Chinese rivals, e.g Motorola’s sale to Chinese conglomerate Lenovo. Motorola has launched one of the first commercially available OLED foldable displays with a screen from BOE.
Also at the heart of disputes between Washington and Beijing is the theft of Intellectual Property. Earlier this year FBI Director Christopher Wray identified China’s theft of US technology as the biggest law enforcement threat to the United States. The FBI has about 1000 open investigations into Chinese technology theft across its 56 regional offices. Director of Counterintelligence William Evanina says that this theft is particularly focused on US aircraft and electric vehicle technology. Theft of technology is nothing new, especially in the United States. US conglomerates are sued hundreds of times a year for patent infringement often leading to 9 figure settlements. The difference is that the ability of companies to gain redress in China is seriously lacking when compared to large democratic common law countries like the US and Germany. While Chinese technology courts have improved in recent years it is still notoriously difficult to get fair and due process when litigating against a domestic company.
Trump has banned US companies from doing business with Huawei for their connections to the Chinese government. This is something we are likely to see more of, even with a new President, because it probably works. Huawei have had the performance of their phones drop significantly without essential Google operating systems. Huawei’s Kirin chips have been crippled by the sanctions; they have stated that they will begin mass production of their own chips by the end of 2020 - a task that industry insiders label ‘mission impossible’. Patriotic buying got Huawei through its ban from being sold in the US, but nothing will save them if they can not produce products that are as good as their domestic rivals. If Huawei does not survive these sanctions, Chinese companies may be forced to obey US instructions in the future.
We are already beginning to see the effects of this new business environment. The coronavirus has shown us that supply chains are only as stable and reliable as their environment allows them to be. At the height of the pandemic whole countries were shut down with crucial parts being delayed for months at a time. The colder relationship between the two superpowers provides a different challenge. China is undoubtedly a great place to manufacture goods, but the US is potentially overly reliant on this. The supply of consumer electronics, medicines and other vital goods could be cut off at any time. Apple has moved 40 billion dollars’ worth of iPhone production to India, Google has moved production of their Pixel line to Vietnam and enlisted the help of Thailand for its smart home products while Microsoft has also moved production of its Surface notebooks to Vietnam. Diversifying supply chains away from China will be a slow and arduous process but ultimately necessary to circumvent risks both environmentally, such as the coronavirus, and politically, such as a heightened trade war.
The corporate environment in the United States is a known entity but China’s path is far more difficult to predict
A frosty relationship between the US and China is undoubtedly bad for businesses in both countries. US companies will be forced to invest large sums of money in diversification of supply lines and Chinese companies may face existential problems should the main source of their customers dry up. However, China’s companies are not what they used to be. They have a growing domestic market that did not exist 20 years ago. Should US innovation falter they are well placed to take the hit. Perhaps the biggest risk Chinese companies will face is a brain-drain, should they lose access to the largest consumer market in the world. Will the best Chinese workers stay or take positions in Vietnam and other parts of Asia? The corporate environment in the United States is a known entity but China’s path is far more difficult to predict. The changing business landscape is something that will have to be closely monitored for all global businesses. The only thing that is clear is should the United States lose the distraction of Trump in November, all eyes will look East.