Chinese military strategist Sun Tzu liked to say: “Keep your friends close and your enemies closer.” Great advice and it cuts both ways.
Earlier this week, Australia joined the growing ranks of countries planning to investigate China over its handling of the novel coronavirus and its lack of transparency. Like many other countries, Australia wants an international investigation into the TRUE origins of the virus, how it spread so quickly and why it wasn’t contained.
Experts believe the virus originated late last year in a Chinese market selling wildlife in the central city of Wuhan. Since then it has spread at an alarming rate, infecting more than 2.3 million people worldwide and killing nearly 180,000 so far. While geographically close to China, Australia managed to get the epidemic under control before it strained its public health system. It has recorded less than 7,000 cases on only 71 deaths.
China is Australia’s most important trading partner, but relations between the two countries have deteriorated amid Australian accusations of Chinese meddling in domestic affairs and concern about what Australia sees as China’s growing, and undue, influence in the Pacific region.
Would U.S. companies ever have the courage to decouple from China?
Two of our clients—Blake Christian and Dr. Guy Baker—explained various scenarios recently in interviews with the national media. Here are excerpts:
Blake Christian, CPA, senior tax partner of HCVT, LLP in Park City, Utah pegs the odds of decoupling happening at about 70-percent. “Our companies are not going to pull out of China completely, but they’ll substantially reduce their reliance on any single country, not just China,” said Christian. “Nike is always going to look overseas for low-cost goods and manufacturing, but they’ll need a more diversified supply chain.”
Dr. Guy Baker, Ph.D, founder of Irvine, California-based Wealth Teams Alliance agreed. “The biggest reason China is such a large component of U.S. life is MONEY. Cheap labor has always driven economic decisions. Large companies have moved production offshore to gain a price advantage. ‘Made in China’ has been the label of low-cost goods, often shabby workmanship and usually unsafe raw goods.”
The next two three years will “frankly suck” as we adjust, but three to ten years from now, America is going to be a “powerhouse manufacturer,” observed Christian. “If I’m a U.S. business person right now, I want to be in logistics. I’m going to buy warehouses before I buy office buildings. I believe the sweet spot is to have 17 warehouses throughout the U.S. so everything is no more than one day away for your customers. Isn’t that better than shipping stuff back and forth across borders on a 12- to 14-day journey?”
“This experience has caused people to reassess this decision and how much of a slave
they have become to the economic master,” noted Baker. “The supply chain crisis has awakened the survival instincts of America and given pause to the reality that America is not in control of its future. Lip service to liberty is being replaced by the reality of slavery to a foreign authority.”
Of course, U.S. consumers will have to be willing to pay more for “Made in America goods” said Christian, “and that could trigger a big spike in inflation. Also, flights will cost more since airlines can’t sell the middle seat. Dining out will cost more since restaurants will only be able to serve has as many diners at one time than they used to,” he added.
Japan is already using $2.2 billion to help its manufacturers shift production out of China. Will this work long-term?
“Supply-and-demand is the foundation of capitalism,” noted Baker. “The free movement of goods and services seeks the most productive and cost-efficient levels. When outside forces interfere, then the natural laws of self-preservation take over. Alternative sources of production increase competition. When competition is competent and economic, then the laws of supply and demand will take over and reallocate resources efficiently. To the extent Japan can offer a viable alternative to China and other alternatives, Japan will thrive.”
Christian expects the U.S. to follow Japan’s lead and start offering domestic companies “generous employee credits and equipment credits” for moving overseas operations back to the U.S. “It’s good for U.S. workers and suppliers, and it will bring billions of dollars of badly needed tax revenue back to Treasury. For example, Apple has $100 billion offshore. If it was doing 50 percent of its manufacturing in the U.S., that big deferral wouldn’t be out there. Imagine if the U.S. becomes a manufacturing juggernaut again. Then all these other countries will be relying on us for production and we could be the one setting prices,” added Christian.
Like many observers, Christian believes armies of policymakers and risk management professionals will eventually be taken to task over their mishandling of the crisis. “But in the long run a lot of good things will come out of it. It has forced companies and governments to innovate on the fly and we’ll become a much healthier society,” said Christian.
Let’s hope and pray he is right.
#supply chain #China # Covid-19 #stock market #Guy Baker #Blake Christian