“Many of the companies that are now concerned about Trump Administration efforts to fend off Chinese intellectual property theft and address other national security concerns are undoubtedly worried because of the all eggs in one basket approach they adopted toward China.”
The Wall Street Journal is reporting that U.S. companies that see their fortunes tied to China are raising concerns with the White House over a Trump Administration Executive Order that would ban WeChat from the United States. U.S. companies, including Apple, Ford, Walmart, Walt Disney, Procter & Gamble and Intel “are concerned the administration’s action could effectively cut them off from access to the lucrative China market, for example by ending their ability to accept payments or advertise on WeChat.”
Market Potential Mirage
These U.S. companies that want to do business with China at all costs see a huge country with enormous market potential. They cannot fathom being banned from such a target rich environment. They act as if the Chinese marketplace is fair and open, which is simply not the case despite China going to great effort to paint a different picture for the West over the last decade.
These U.S. companies are focused on China because of the more than 1.4 billion people that make up the Chinese population, and the 109 million that have wealth of between $50,000 and $500,000 – a relatively high standard of living – in China. McKinsey predicts that by 2022 the Chinese middle-class will reach a staggering 550 million. If the Chinese market were fair and open, that would mean a great potential for users and subscribers, and a marketplace that dwarfs the United States.
But how does this potential user base allow executives in the C-suite to convince themselves to ignore the very real risks that exist both to U.S. national security and to the long-term security and viability of the very companies that choose to do business in China? They may, and likely would, make money initially, before Chinese partners swoop in to take control and cut them out. Is the short-term gain really worth the long-term loss?
The ‘Greener Pastures’ Mentality
The Silicon Valley giants in particular are driven by C-suite executives who make decisions based on stock price rather than the long-term sustainability and viability of the company. They are unlikely to be in the C-suite of the company they are with today for more than a few years at most before they are on to bigger, better, greener pastures somewhere else, whether that be in another C-suite at another company or eventually when they retire with a golden parachute. With few long-term, single company C-suite executives anymore, why should it be surprising that they think and act to maximize over the short-term? And given that the acquisition of subscribers and customers is such an important factor for the stock market, and stock price is such a critical piece of compensation for C-suite executives, decisions that maximize the stock price are an easy way to keep shareholders happy and to become fabulously rich. Just days ago, Apple CEO Tim Cook became a billionaire.
The stock must always rise mentality causes tech companies to do whatever they can to exploit new markets, gain subscribers and grow a user base. In a desperate search for dot com bubble stock pricing, C-suite executives are not happy with or rewarded for competently running a strong, sustaining company that is securely set up for long-term growth, with reasonable profitability and happy employees. So, they take great risks with their IP and businesses at large, and today that means doing business in China, even knowing that their crown technology jewels are being stolen and it is only a matter of time before their Chinese partner companies take over, or otherwise start to compete against them globally.
All Apples in One Basket
Many of the companies that are now concerned about Trump Administration efforts to fend off Chinese intellectual property theft and address other national security concerns are undoubtedly worried because of the all eggs in one basket approach they adopted toward China. Tech companies, like Apple, have dramatically over-exposed themselves to the Chinese economy as China seemingly opened up.
In January 2019, patent attorney and Apple expert John Kheit wrote an article highly critical of Apple CEO Tim Cook, explaining that as China moves forward with attempts to strengthen its patent system, Apple could find itself “one patent injunction away from not being able to manufacture any iPhones.”
As has become evident during the COVID-19 pandemic, those leveraged on China for manufacturing have additional worries not tied to patent injunctions. Still, Kheit’s conclusion is quite accurate today.
“In the 8 or so years since Cook has been CEO, he should have formulated—and implemented—a real Plan B, C and D for iPhone production,” Kheit wrote 18-months ago. “Apple has all the money… There is no excuse for not trying to advance manufacturing at home.”
Now that there is growing friction between the U.S. and Chinese governments, the long-term lack of a diversification is looking rather short-sighted. Of course, to be fair, some companies were growing tired of China’s intellectual property theft, rising labor costs as the middle class grew, and growing political instability as the country more firmly moved toward a functional dictatorship with President Xi Jinping to remain in power for life after the removal of term limits. But the fragility of the supply chain that was exposed practically overnight due to the COVID-19 pandemic, coupled with Trump Administration Executive Orders, show the price of complacency and difficulty in pivoting after all eggs have been placed in one basket for so long.
The Final Straw
Where will manufacturing go? Will it leave China? Obviously, China has the advantage of a highly educated work force with much experience in the precise manufacturing these companies need, making the lack of a Plan B diversification strategy all the more negligent. Still, according to the Washington Post, Japan has set aside $2.2 billion to attract companies, President Trump is making his pitch to have U.S. companies bring manufacturing home, and Mexico is now pitching U.S. companies about its advantages and proximity to the U.S. market.
Ironically, it seems the many years of intellectual property theft did little to incentivize companies to leave China. Safeguarding IP assets has been of peculiarly low priority, which is strange given the rise of Chinese companies now competing against U.S. companies with stolen technology and innovation. But the interruption of supply chains and the Trump Administration saying we cannot tolerate the national security risks any longer may be the final straw.
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