Big, Sudden Changes in China

Editor’s note: Portions of the conversation were edited for brevity Recent events in China have put a spotlight on the world’s most populous country. The significance of recent multi-city protests and the subsequent end to the Zero Covid policy marks a historic moment for the nation. The lukewarm G20 meeting between Biden and Xi and the opening of the TSMC chip plant in Arizona added additional pressure on the strained U.S.-China relations. These factors are forcing businesses to question China’s ability to maintain manufacturing and supply chain operations in the future. In the second installment of Sand Hill Road podcast, host Scott McGrew invited Eclipse Partner Aidan Madigan-Curtis back to share her predictions about China’s economic and public health landscape and the resulting impact on already heightened tensions between the U.S. and China. Below are a few highlights from their conversation. Scott McGrew (SHR): The founder of the Taiwanese chip giant, TSMC, was in Arizona recently with President Biden, celebrating the opening of a chip plant and said, “Globalization and free trade are almost dead and unlikely to come back.” What’s your reaction to that?Aidan: I would have to disagree. I don’t think that globalization and free trade are dead. I do think we’re entering a different era, one where the interdependencies of supply chains have been extremely highlighted. We’ve been talking about geopolitical risk between countries. I think there are some interesting domestic political risks. Scott McGrew (SHR): Widespread and sometimes violent protests rocked China as Chinese citizens objected to the CCP’s draconian COVID policies. And then the strangest thing happened. The government relented. Since we last talked, the zero COVID policy in China — which then turned into just tremendous demonstrations that we haven’t seen in many, many years — wasn’t on our radars. China has since reversed itself. I think they’re calling it “the new situation”. But the new situation comes after big protests, which to me, if I’m watching from within China, says, “Hey, protests work.” Is there some sort of sea change there that people can say, “Hey, you know what we did? That worked and the government listened.”Aidan: Yes, it’s one of the most shocking and intriguing things to happen in the world in the last couple of decades. China simply doesn’t have these types of widespread protests. The thing that was really fascinating about it was that it was not highly organized but semi-organized. People were getting the word out, and whether it was via telegram or dating apps, or VPNs, they found a way to organize and coordinate. One of the most interesting concepts was the blank sheet of paper. I read that some people were singing the national anthem, which has a line in there about not being slaves. And you know what they actually mean. But then again, you can’t arrest people for singing the national anthem. We’ve not seen a China where the party doesn’t have that kind of ultimate control, where protest is used as an effective tool and can be intensified to force changes – that creates a lot of unrest and disruption to a system that has been fairly predictable historically. If you are a business owner thinking about doing business in China, can you count on the economic policies and societal structures that you’ve been able to rely on in the past to build your factories and have them run in a certain way? Can you rely on the relationships you’ve built with the government to continue to help you build your business in a productive way? Scott McGrew (SHR): You were at Apple working on manufacturing in China, so as you answer this question, people should understand you’re not speaking for Apple, but you’re speaking with the experience of Apple. What am I to read into Apple saying that it’s going to source more of its chips from places like the new fabs in Arizona once they’re built? Is that a response to the “America First” movement? Is that a message sent to the Chinese or is it a strategic move?Aidan: Apple, like any company, has an interest in pursuing its targets as a company, including bringing more profit back to its shareholders. Apple also set some aggressive ESG, sustainability, and climate targets: everything from their recycling program to how they think about their overall carbon footprint. Insofar as they can source key components and parts from onshore or nearshore, that’s going to be helpful to their bottom line – provided that the technology being used is actually advanced in such a way that they’re able to get more throughput. Less input from more output. And insofar as it’s close enough that it can also be carbon reductive. When you think about how much carbon is generated by the materials and then the parts and then the sub-assemblies, all flying and moving around the world, it doesn’t make a ton of sense unless it’s just the way things have been. I see why there’s a real strategic interest in Apple doing that. I also think COVID and the corresponding risks that have popped up in the last couple of years have shown us that when you don’t have supply chain redundancy, you really do face a stack of risks to your revenue that are unwise for companies to allow. And I think in the first experience of COVID and those shock waves, no one could really blame companies for not having reduced those supply chain risks. But in a “fool me once, shame on you, fool me twice, shame on me” mentality; it would seem almost either incredibly naive or almost neglectful not to be thinking through supply chain strategies today and how to diversify those risks. For the full episode, listenhere. To hear the first installment of the Sand Hill Road podcast “China, America and Our Shared Future”, listen here.Follow Eclipse on LinkedIn and Twitter for the latest on the Industrial Evolution.