Xi Jinping's coronavirus crucible
It is true that once supply chains have adjusted away from an existing supplier, they rarely shift back. But the issue is not a simple one. For one, production facilities are capital investments that are expected to run for a certain period of time in order to pay off that initial investment. Shifting away from an existing facility means writing off a previous investment, and even if it is just a portion of that initial investment, still represents an implicit loss. This is just not a move most companies, focused on making profits, will undertake easily.
Couple that with the investment that needs to be made in other countries to create production facilities there, and you will see that this is not a light decision for many. Companies need to fund such an investment, and it is no small sum. Not many companies have that kind of reserves to draw on, nor that kind of credibility for them to borrow from banks. Especially if they are already trying to pay back a previous loan from an existing investment in China.
And then there is the labor force issue. To shift production to another country, that country needs to have sufficient surplus labor for such an increase in production. You are either looking at a country with high unemployment, which may imply poor infrastructure and other conditions not conducive to investments, or you will need to throw in further capital investments to improve workforce productivity. This, again, boils down to more money.
There is also the time factor. It takes time to build a factory, it takes time to build the machinery for that factory, it takes time to recruit people to work in that factory, it takes time to apply for the required permits. You are not looking at something that can be done in a month or two. Unless companies already have plans in the works, trying to start this endeavor anew is going to take time. Lots of time. Time which companies may not be willing to spend, since they have the choice of allocating those same resources to catch up on production after their Chinese factories resume work.
So while there are people who speculate that manufacturing will leave China, it may not be on a scale as large as they expect, and it may even be something that has already been part of the plan before the coronavirus hit. As for the long-term impact on the CCP from this outflow? Well, given that the CCP has been trying to shift its industry focus away from a manufacturing-bias toward production higher up the technology and value chain, speculations about the impact to Xi's regime may be exaggerated. Only time will tell.
But remember, it is not easy to find a replacement for an economy with a workforce of several hundred million people and the infrastructure to support being a global manufacturing hub.
As for the voices of dissent? In a population of more than a billion people, there will be people who feel differently. We need to ask ourselves, are the voices of dissent that we hear the voices of the majority? Or are these people the vocal minority? Do they really represent a general lack of support for Xi and the CCP? Or are we just hearing them, even though they are but a minority, because their voices fit our existing mindsets and are the voices we hope to hear, want to hear?
Are these voices like those of the gun supporters in the U.S.? Where the majority actually wants gun control, but that small vocal minority has hijacked the entire conversation such that the majority gets ignored? Are we listening to the voices of a small minority whose dissent we want to hear, at the expense of ignoring the vast majority who actually have nothing against Xi and the CCP? Are we ignoring facts for feelings?
If we backtrack a bit to 2019, the Hong Kong protests, I think the early protests really had the CCP worried. Because the majority of the Hong Kong people really were against CCP interference in Hong Kong's legal system. But when a small minority hijacked the protests for their own political objective, and turned the protests into increasingly violent riots, and made demands beyond the initial extradition law? Well, people at first continued to stand together since that was the best way to get things done. But eventually, the majority drifted away, since those "extra" political terms were not something they felt strongly about.
Today, if we look at the facts, I don't think Xi and the CCP are as worried about the political impact of the coronavirus as Western writers speculate them to be. Compared to the U.S. and Japan, China has shown that it is willing to move quickly to contain a threat. The epicenter of the disease is in China, but China has shown that it is able to act swiftly and decisively. Contrast that with the slow actions of Japan, where Abe is only recently starting to take firmer actions to contain the spread. Yet it seems that the disease has already spread further in Japan than Abe wants to admit. And the U.S. is showing that same trend, with more and more cases of community infection, but also more and more denial from the Trump administration.
Companies are not stupid. Like the majority of the Hong Kong people, who know when their cause is being hijacked by a minority for other political aims, companies can see the responses of countries, the results, and they will make their production decisions based on what they see. After all, it is through decisions based on facts that we can operate a tighter and faster OODA loop than our competitors. Those who base decisions on feelings end up in an OODA loop that is increasingly removed from reality, until they become obsolete.
Wow. This post has become a very long rambling of thoughts. Guess I am going to stop here before I really go off tangent.
It is true that once supply chains have adjusted away from an existing supplier, they rarely shift back. But the issue is not a simple one. For one, production facilities are capital investments that are expected to run for a certain period of time in order to pay off that initial investment. Shifting away from an existing facility means writing off a previous investment, and even if it is just a portion of that initial investment, still represents an implicit loss. This is just not a move most companies, focused on making profits, will undertake easily.
Couple that with the investment that needs to be made in other countries to create production facilities there, and you will see that this is not a light decision for many. Companies need to fund such an investment, and it is no small sum. Not many companies have that kind of reserves to draw on, nor that kind of credibility for them to borrow from banks. Especially if they are already trying to pay back a previous loan from an existing investment in China.
And then there is the labor force issue. To shift production to another country, that country needs to have sufficient surplus labor for such an increase in production. You are either looking at a country with high unemployment, which may imply poor infrastructure and other conditions not conducive to investments, or you will need to throw in further capital investments to improve workforce productivity. This, again, boils down to more money.
There is also the time factor. It takes time to build a factory, it takes time to build the machinery for that factory, it takes time to recruit people to work in that factory, it takes time to apply for the required permits. You are not looking at something that can be done in a month or two. Unless companies already have plans in the works, trying to start this endeavor anew is going to take time. Lots of time. Time which companies may not be willing to spend, since they have the choice of allocating those same resources to catch up on production after their Chinese factories resume work.
So while there are people who speculate that manufacturing will leave China, it may not be on a scale as large as they expect, and it may even be something that has already been part of the plan before the coronavirus hit. As for the long-term impact on the CCP from this outflow? Well, given that the CCP has been trying to shift its industry focus away from a manufacturing-bias toward production higher up the technology and value chain, speculations about the impact to Xi's regime may be exaggerated. Only time will tell.
But remember, it is not easy to find a replacement for an economy with a workforce of several hundred million people and the infrastructure to support being a global manufacturing hub.
As for the voices of dissent? In a population of more than a billion people, there will be people who feel differently. We need to ask ourselves, are the voices of dissent that we hear the voices of the majority? Or are these people the vocal minority? Do they really represent a general lack of support for Xi and the CCP? Or are we just hearing them, even though they are but a minority, because their voices fit our existing mindsets and are the voices we hope to hear, want to hear?
Are these voices like those of the gun supporters in the U.S.? Where the majority actually wants gun control, but that small vocal minority has hijacked the entire conversation such that the majority gets ignored? Are we listening to the voices of a small minority whose dissent we want to hear, at the expense of ignoring the vast majority who actually have nothing against Xi and the CCP? Are we ignoring facts for feelings?
If we backtrack a bit to 2019, the Hong Kong protests, I think the early protests really had the CCP worried. Because the majority of the Hong Kong people really were against CCP interference in Hong Kong's legal system. But when a small minority hijacked the protests for their own political objective, and turned the protests into increasingly violent riots, and made demands beyond the initial extradition law? Well, people at first continued to stand together since that was the best way to get things done. But eventually, the majority drifted away, since those "extra" political terms were not something they felt strongly about.
Today, if we look at the facts, I don't think Xi and the CCP are as worried about the political impact of the coronavirus as Western writers speculate them to be. Compared to the U.S. and Japan, China has shown that it is willing to move quickly to contain a threat. The epicenter of the disease is in China, but China has shown that it is able to act swiftly and decisively. Contrast that with the slow actions of Japan, where Abe is only recently starting to take firmer actions to contain the spread. Yet it seems that the disease has already spread further in Japan than Abe wants to admit. And the U.S. is showing that same trend, with more and more cases of community infection, but also more and more denial from the Trump administration.
Companies are not stupid. Like the majority of the Hong Kong people, who know when their cause is being hijacked by a minority for other political aims, companies can see the responses of countries, the results, and they will make their production decisions based on what they see. After all, it is through decisions based on facts that we can operate a tighter and faster OODA loop than our competitors. Those who base decisions on feelings end up in an OODA loop that is increasingly removed from reality, until they become obsolete.
Wow. This post has become a very long rambling of thoughts. Guess I am going to stop here before I really go off tangent.
1 comment:
The coronavirus could hit the U.S. harder than other wealthy countries
Instead of worrying about the impact to China, I guess the U.S. should start working on how to handle COVID-19. Because the same speculations by Western writers about the potential impact to China can easily affect the U.S. as well. And given the current political climate in the U.S., any outbreak of COVID-19 may have a more lasting impact due to the issues with healthcare, political division, and lack of trust in institutions.
Post a Comment