Managers check the production of medicines in a workshop of Youcare Pharmaceutical Group in Beijing … [+]
Zhang Yuwei/Xinhua via Getty Images
For decades, multinational enterprises (MNEs) have leveraged global value chains to operate as “stateless” entities, often beyond the reach of the tax collector and the regulator.
COVID-19, however, is changing how MNEs can do business. The pandemic is accelerating nationalist forces that have become catalysts for de-globalization and localization, which will put constraints on present-day corporate strategists.
First, there is a growing appetite to re-shore critical industries and supply chains back to the home country, as the public and private sectors acknowledge an over-reliance on China, both as a supplier and a manufacturing base.
From automotive parts to surgical masks, the off-shoring model has backfired. Hospitals and healthcare providers around the world, for example, are realizing that 80% of the ingredients for the world’s prescription drugs come from China and India, and they are now in critical short supply.
Second, the phenomenon of techno-nationalism is accelerating. The COVID-19 pandemic has magnified the U.S.-China geopolitical rivalry, revealing how deeply industrial policy is entrenched in Beijing’s larger agenda, especially regarding its ambitions in the technology sector.
In Wuhan, for example, at the height of the coronavirus outbreak—and despite the virtual lockdown of manufacturing operations in the automotive and consumer electronics sectors—Chinese chipmakers such as Yangtze Memory Technologies were ordered to bypass strict quarantine requirements and continue operations.
The semiconductor sector, therefore, which is at the heart the U.S.-China technology war, is going to become a showcase for the rapid evolution of nationalist policies aimed at technology companies.
A case study of how MNES have historically gamed the system involves Huawei, the Chinese telecommunications equipment company, which the U.S. government placed on its restricted entity list in May of 2019.
Huawei has responded to U.S. technology export controls by “de-Americanizing” its supply chains. Consequently, Huawei claims to have replaced all U.S. technology from its P30 Mate smart phone, as well from its next generation 5G base stations.
U.S. export controls have been bad for MNEs. Huawei, alone, purchased approximately $11 billion worth of semiconductors from U.S. firms in 2018, and its move to de-couple from American suppliers revealed an even bigger problem for American MNEs: more than 60% of Qualcomm’s revenue came from China in the first 4 months of 2018; for Micron, over 50%; for Broadcom about 45%.
To continue selling to Huawei—and other restricted Chinese tech companies—MNEs have been restructuring their global supply chains so that the content of American originating technology in a finished products falls below the U.S. government’s so-called de minimis thresholds of 25% and 10%.
To get below de minimis thresholds, for example, companies can transfer labor costs to their overseas plants, as well as redistribute the costs of overhead, IP, license fees and materials to other offshore locations. Once an item is classified below the 25% or 10% threshold, it is no longer “American” and does not require an export license.
This de minimis play is incentivizing companies to transfer more operations out of the U.S. and has caused the federal government to consider reducing these thresholds or eliminate them all together.
Lobbying efforts by the U.S. tech sector, however, have been successful in convincing the Feds not to mess with de minimis. So far, virtually all export license applications for sales to Huawei have been quietly approved.
The logic behind approvals is simple enough: Restricting sales to Chinese firms allows competitors to move in and substitute similar products, which not only deprives American MNEs of market share, it cuts off badly needed revenue for R&D activities.
But as COVID-19 puts the world’s major economies in their most precarious state since the second world war, governmental policies will increasingly be at odds with MNE global profit objectives.
Builders rush to complete a field hospital in Wuhan in central China’s Hubei province on January 24, … [+]
Feature China/Barcroft Media via Getty Images
It has taken an event like COVID-19 to demonstrate how effective the Chinese state is at mobilizing and executing large-scale initiatives.
To witness an army of synchronized machines in Wuhan, for example, moving earth and erecting two fully functioning field hospitals, in under two weeks—each with 30 intensive care units and thousands of beds—is to see the Chinese juggernaut on full display.
By contrast, COVID-19 has exposed the lack of preparedness within decentralized governments in the West as they struggle to react to the pandemic.
To watch the U.S. government’s failure to coordinate a national response to the coronavirus is to reflect on the bigger question of America’s ability to compete, in the long term—and at scale—with China’s state-centric model of capitalism.
At the very least, the primacy of the West’s laissez-faire economic system needs to be questioned. More specifically, the question about how much the economic interests of MNEs are in alignment with national policies will be at the heart of public debate.
The COVID-19 pandemic has ensured that these questions will dominate policy making for years to come.