Part 2: The Looming War Over Taiwan and What Businesses Need to Know

Transcript

OK. Hello everyone, and thank
you for joining today.
My name is Nazak Nikakhtar, and I'm the chair
of Wiley's National Security practice;
also, a trade lawyer and an economist,
and former Assistant Secretary for
Industry and Analysis and Under
Secretary for Export Controls of
the US Department of Commerce.
This is part two of our follow up
discussion on the looming war over Taiwan.
I'm pleased to be joined again by our
distinguished speakers who have highly
relevant expertise in this field.
Dan Harris, managing partner at
Harris Bricken and Isaac Stonefish,
founder and CEO at Strategy Risks.
And I also want to introduce our
newest speaker, a dear friend,
Mary Kissel,
Executive Vice President and
senior policy adviser at Stevens,
who also served as Secretary
Pompeo's Senior Advisor.
Before we get started,
I want to note our legal disclaimer.
This webinar is intended to provide
general news about legal developments
and should not be construed as
providing legal advice or legal opinion.
You should consult an attorney
for any specific legal questions.
The session is also intended for a
private audience and comments are
not for publication in the media
or any other public outlet.
The discussion we're having today
represents our personal views
on the subject matter and is not
intended to represent the views of
our firms or its clients.
Time permitting,
we will answer questions at
the end of this presentation,
so please do submit your
questions through the webinar.
The agenda for today's discussion will
begin with each of us presenting our
views informed by our professional
experiences on the current political
and economic relations between the
United States, China and Taiwan.
Lots going on these days, Europe,
UK, Canada,
Japan and Australia as key US
allies will be relevant,
very relevant to this discussion as well.
So, with that,
I'd like to kick it off to Mary for
your introductory remarks, remarks.
Mary, over to you.
Thank
you, Nazak. I appreciate your
invitation to appear on the call
today with such a distinguished panel,
both of whom I know from my
time living in Hong Kong.
So it's nice to be reunited
with Isaac and with Dan.
I think before we get into specifics,
I want to say broadly that I have
been really struck by the number of
investors who I talked to who are really
grappling with geopolitical risk in
a way that they never had to before.
We had largely stable policy
environment until very recently.
And as you said, Nazak, it's,
it's quite an extraordinary time for
us to be addressing this topic.
And I think I should say just a
few things about China, Taiwan,
the United States,
but also the nature of what we're facing,
give you a framework for how I
think about it and then I look
forward to our discussion.
In terms of China,
I think for many years we ignored in a kind
of blissful ignorance for many of us or,
or, a knowing disregard for some of us,
of the nature of the
regime that we were facing,
and I think with the protests this week,
you're, you're seeing what the
Chinese people think of it and
you're seeing the naked face of it.
These protests are not a one-off.
China has in fact had many decades of
significant protests from the Democracy
Wall Movement to Tiananmen Square,
the Charter 08 protests,
the Hong Kong protests.
And now these protests are different
because many protests that happen,
you never hear about: they're local.
But these these protests are
national in scale and they concern
a national policy that's directly
linked to the General Secretary,
Xi Jinping, and as such they
present a real risk to to the regime.
We don't know which way this is going to go.
China has many more tools at its disposal
today than they did in 1989 to suppress it,
but from a business and an
investment point of view,
it is,
if it wasn't clear before,
it has to be clear now that the risk profile
that that businesses and investors face
in China is immensely complex.
It is a threat to your, your reputation,
you,
you have no legal recourse.
Look at what's just happened in Hong Kong,
where they're about to outlaw
foreign barristers from courts
that just came down this week.
And that you will be forced to make
decisions that you would never be
forced to make another jurisdictions and
compromises as a C-Suite and the board that
you would never be asked to make
elsewhere and I think that there is,
I'm,
I don't buy into the idea of a decoupling.
I think we've, we've got too
many sunk costs and too many
complex supply chains there.
But I do think that in the near
term this movement that we're seeing
with our clients of nearshoring
and friend-shoring will continue
in the private side and on
the public side.
You know the steps that were
taken in the prior administration to
start to use government incentives
in a more creative and expansive way,
because we realized that our trade was
inextricably linked to our national security,
that those measures have been somewhat
expanded by this administration and, I know
Nazak knows much more about that than I do,
so I'll leave the details to her.
But that's a trend that is just
going to continue in my view.
And we're in a new era.
This is not a 9/11-era anymore.
This is an era where we're seeing the
world divide back up into blocks.
Last thing I'll say,
just address Taiwan briefly.
I think we again ,because I'm--I'm
coming from a private financial
services firm here perspective,
I think we're very used to
thinking about bilateral relations.
US-Taiwan, US-China.
We don't think very much that
other people's actions might drive
the dynamic that somehow we have
control over what might happen next.
And in China's case, as regards Taiwan,
I don't think that's true.
I think Xi Jinping is committed
to retake the island. He says it.
And I shouldn't say retaking.
The Communist Party never ran it.
But he says it all the time to his people.
Isaac will probably have more to say
about that. And we should believe him.
And we, in fact, we can try to deter.
I don't think we've done enough
deterrence and I think that that
has increased the risk profile.
But China has a say here too.
And I think that this sort of
strategic narcissism, as I call it,
that we've used to think about the
stability of that part of the world,
something that needs to be rethought.
And we need to listen more closely
to what the other side is saying
and to look more clearly.
That's the nature of their regimes
and what their real intent is,
maybe. With that, I'll throw it
back to you, Nazak.
All right. Thanks very much, Mary.
Everything's just so true.
Isaac, over to you.
Thank you, Nazak.
Mary, that was fantastic.
Nazak and Dan, great to see you.
My name is Isaac Stonefish.
I run a firm called Strategy Risks.
We help companies manage and
reduce their China risk.
And we're just talking amongst ourselves,
the panelists before this started.
This has been such a momentous week in China,
and the timing of this is
incredibly important because.
The Taiwan risk and the political risk
are the biggest risk that companies
face when they're looking at China.
So I'm going to talk a little bit about
where we are situationally and then
talk specifically about the questions
that foreign companies in China
need to be addressing immediately.
And Dan is very,
very savvy on these things.
And sure, we'll talk about them as well.
But from a situational perspective,
the death of Jiang Zemin
who on the one hand,
was not a very popular leader and
is not terribly popular today;
on the other hand, [this] is very different
from Xi Jinping and there's a very
long Chinese tradition of using
the death of former leaders to
criticize or protest current leaders.
We saw that in 1976 with the
death of Zhou Enlai.
We saw that in 1989 with the
death of General Secretary
Hu Yaobang in the
lead up to the June 4th massacre,
and we may or may not see that
with the death of Zemin,
who's a very exuberant,
outgoing, to some Chinese, embarrassing leader,
but who was less of a Marxist,
less of a communist,
less the left of Xi Jinping
today and presided over China.
That was a lot more optimistic
than what we're seeing.
So investors,
businesses need to be very attuned
to the protests that we saw spring
up last weekend and who Mary rightly
pointed out, are unprecedented in the decades.
Following the protests around 89,
there were big protests with
Falun Gong protesters,
but that was very very
curtailed,
and it was also a much smaller
cross section of Chinese society.
It's really hard to know how much
support the protesters have,
but it seems to be a much more
diverse group of protesters.
So what do businesses need to do first?
They need to be very aware of the line.
They need to walk between supporting
their staff in China and not
endangering their staff in China,
and at the same time being mindful
of the very real, regulatory and PR risks
that they face in the United States.
So you're a very large consumer business,
you have thousands of employees in China
some of them are protesting.
You don't want to have your
employees be arrested for protesting.
You don't want to suppress them
from protesting.
You certainly don't want anyone
in Congress to think that you're
suppressing the freedom of expression
that your protesters have.
But you also need to be mindful that Beijing
would love to make an example of
a foreign company,
would love to be able to say you
are the
hostile foreign force
that's ginning up protests.
So the solution to that is very good
intelligence about what your people
in China are doing and really making
sure that you are not coming down
too hard on one side or the other.
We're going to see this a lot as
tensions increase with Taiwan.
One of the biggest issues that companies
are gonna face is how do we protect our
employees and our partners in China.
And it's going to be well,
we're a big U.S. company.
We are in a somewhat
sensitive space in China.
If China invades Taiwan,
not only do we have to worry about
our businesses being nationalized and
not only do we have to worry about the
potential that there will be a blockade,
which will prevent us from importing
from China or exporting to China,
but we have to worry about the Chinese
Communist Party seeing the employees
that we have as American agents and
American spies and rounding them up,
arresting them,
harassing them, or worse.
So businesses really need to have a plan.
This is not something that I'm saying get
on your soapbox and talk about publicly,
but make sure that you know what you're
going to do internally with your Chinese
staff, with your Americans in China
if this happens.
I'll end on a brief conversation
on how looming is the potential
of a war over Taiwan.
Wars are incredibly difficult to predict.
There's a lot of silliness in the
discourse about China won't be
ready to invade Taiwan until 2027.
China is not looking to do it
until this point or that point.
That's not the way humans work.
It's certainly not the way the
Chinese Communist Party work.
It's not going to be that a certain year,
a certain date rolls around,
they decide they're ready and
then they invade.
They would lose such a
huge element of surprise.
It makes the party seem
a lot more predictable.
It's much less 5 year plan and much more
crossing the river by feeling the stones,
which is a very common expression
used to describe how the party and how
some other entities in China operate.
That's one piece.
The second piece is that Xi Jinping
and other Chinese officials have
been explicit enough about their
willingness and desire to take Taiwan.
It's really hard to know the
percentage chance of that happening.
I put it at 10 to 20%,
but these are just guesses.
However,
because this is a very clear
risk that we can see.
Businesses need to understand
that if China invades Taiwan
and you have not been prepared,
you are going to be dealing with a
lot of very unpleasant implications
of that ranging from shareholder
lawsuits to increased regulatory
scrutiny to frankly you know,
getting hauled up in front of your
board and having to explain why your
stock price went down 30% overnight
because you weren't prepared.
So all things to think about,
all things that will discuss
throughout this webinar and others.
And back to you, Nazak. Thank you.
Excellent points, Isaac.
Thank you very much.
And then now, Dan, over to you.
Thank you. Losing my voice already.
Thank you, Nazak. My name is Dan Harris
and it was so interesting listening
to Isaac and Mary talk because
they're dealing with issues,
they raised, issues that I've been
dealing with already these last few days.
And yesterday I was talking with
a client who's a longtime client,
longtime friend,
and he asked about this webinar and he said,
'why are you talking about Taiwan now?'
You know, he he said I'm dealing
with these COVID issues that I don't
know how that's going to turn out.
I don't know what's going to
happen in the streets of China,
that that's the immediate issue.
And I said because we planned this
about at least a month ago.
But that's one of the things with China.
Before we were on here,
we were all talking about how what a long,
strange week it's been.
But I feel like every time
I speak about China,
the topic that's been planned has to
be modified at least slightly because
things are constantly happening and
things are going to keep happening.
And today, we're obviously going
to address Taiwan,
but we're also going to touch on
other things which arguably are tied
in with Taiwan, things like COVID,
things like what will be China's
policies on business,
what will be its policies
on foreign businesses,
what will be its policies on foreigners
and more importantly, what will,
how will all these things impact how your
business functions in or with China?
And Isaac talked about not knowing,
not being able to predict whether
there will be a war in Taiwan,
whether there might be a blockade of Taiwan.
And when that's going to happen,
and I cannot tell you how many
times clients have asked me those
questions as if I have an answer.
Anyone who claims they can pick
a war or a blockade to a date,
I mean they're,
they're completely winging it.
It's, it's not possible.
And now I'm getting questions regarding
the likelihood of revolution in China.
And I actually enjoy that question
because when I was in college,
a long,
long time ago,
my freshman seminar was on revolutions
and my thesis was on how do you predict
if there's going to be a revolution.
I came up with like 11 factors and
and they're, they're not that bad.
But in the end it is impossible
to predict because the example
I give is Tunisia.
No one would have predicted
there'd be a revolution in Tunisia.
So I think you can come up with twenty
factors that lead to a revolution,
but the key factor is one that's
impossible to predict and that's
what I call the the spark.
And in Tunisia,
the spark was a fruit vendor or
maybe it wasn't a fruit vendor,
a food vendor setting himself on fire.
You, you often times need that
and without that, that's it.
A revolution that might have
happened might not happen.
And with China,
there are two things that I always
tell people in terms of will there
be a change in the government?
And the first one is do not --
and Isaac, I gave him kudos on
this because he talked about
it on LinkedIn the other day --
do not assume that everybody loves
the government simply because
they're being quiet about it.
And Mary
hinted at that as well,
we don't really know the extent
of what is happening in China
and we certainly don't know how
everyone feels about the government.
But the second thing that should not
be underrated is the fact that it is
an extremely powerful government.
And so even if 60, 70, 80% of the
people would like to see it overthrown,
that doesn't mean it's going to happen.
If you read about how China
monitors its citizens,
you'll realize, it's
incredible the depth of it so,
probably a bad way to turn
it back over to Nazak,
but on a lot of the key issues it's
that they're impossible to predict.
And yet as a business you have
to make some predictions and you
certainly have to make preparations.
Thanks so much, Dan.
And you know what's really remarkable
is that all of us kind of sit and
look at this issue from you know very
different vantage points and the fact
that we're all pretty much consistent
in our conclusions and our assessments,
this speaks volumes.
What I wanted to do and for
in a few minutes is kind of
a pivot from a different direction
and kind of make the case about
why China's ambitions,
what China's ambitions have been,
why they are,
why they are the way they are,
how China fits in,
and then obviously the business implications.
So, you know, I was on the front
lines of this several decades ago
right when China entered the WTO and
we really started opening up trade.
Even back then it was abundantly evident that
China's goal was to hollow out US industries,
and this has been happening over time and
we've seen now through supply chain crisis,
right, that we've lost industry
after industry, critical ones.
Obviously,
China's strategic goal has been to
displace the United States from
the rest of the world by acquiring,
through tech transfer,
tech misappropriations,
its own technology to build.
If it waits for the technology
to organically grow,
it takes too long, right?
So IP theft,
tech misappropriations,
and then the predatory economic
tactics of when it acquires
the technology to then weaken
industries of the rest of the world,
and then leverage its belt and road
activities to exert its arm and reach
and control over the rest of the world.
And then what I've seen down the
horizon too short, in short order is
the rollout of the digital currency
takes again displace the United States,
Western countries and then create
its ecosystem of its own trading
partners and allies and ultimately,
sort of start swallowing up
the rest of the countries.
So from the starting point,
right,
China's intentions are not to be a good,
responsible actor in the
global economic system, right?
Its goal is to acquire
economic and military hegemony,
which also then goes to why
Taiwan's more very important.
Taiwan is strategic to China's ambitions.
The semiconductor capabilities
that that exist in Taiwan,
if China is successfully able to
acquire that, gives China enormous
leverage over the rest of the world
because Taiwan truly is the world's
semiconductor manufacturer and these
aren't manufacturing facilities
that you can just build up over
time or, I'm sorry, overnight.
It takes years and years and so
and China's upstream control
over the supply chains
that go into making semiconductors makes
it even harder for us to build at home.
And then, of course,
the Taiwan strategic importance
is its geography.
When China gets access to Taiwan's
territorial waters, right,
it has a straight shot into the
Western [inaudible] of the United States
and actually, pun intended.
And so there's enormous amounts
of danger there.
Now,
as Mary said and as Isaac and Diana
have all agreed,
like China's consolidation of
economic and political power,
it's just not going to back down,
and Taiwan is so important to this.
And this kind of goes in with the
next point about the protests.
The protests that are happening in
China right now are confirming to
President Xi and CCP leaders that
they need to tighten their grip more.
Leaders don't just give up and leave power.
President Xi has been haunted by
the Soviet Union's collapse attributes,
it to the weakening of the belief system
of the Soviet rulers at the time,
and he wants to make sure that
that doesn't happen again.
So, whatever we might be saying about Taiwan,
whatever you know,
is happening internally in China,
he's very much trying to keep this mindset
of not letting any of these events shake it,
tightening his grips, and then
continue to execute what he's always
believed is China's ultimate destiny,
which is, in his words,
reunification of Taiwan,
and obviously when that happens,
displacement,
much more aggressive moves to displace
the United States, our allies,
from the rest of the world.
The new UK Prime Minister kind of
said it beautifully the other day.
The Golden era of open trade
when it comes to with China,
 is absolutely
over; and I now want to kind of use
a boxing analogy in a way to
kind of describe
where the United States is.
You know, China,
the United States were warming
up before getting into the ring.
We, you know,
we had opened up China to the
global trading system. China was
strategically, you know,
trying to figure out what it was going to do.
And the US was watching and we were
hoping that China would integrate.
Now, we're in the ring.
China's flexing its muscles and
the United [States] and the rest of the
world are responding.
We're all taking punches at each other.
And the reason that all of this is
important is because it's from businesses.
You're going to see more countries
by the United States and more
enhanced export controls,
more aggressive measures of
forced labor will be forthcoming.
Additional trade restrictions,
Section 301 tariffs aren't going to be
rolled back, may be more forthcoming.
There's no turning back, in other words,
in terms of the struggles right
now between the United States,
China and then, you know,
the strategic value of Taiwan and
us wanting to protect Taiwan.
So, you know, finally,
what am I hearing from clients?
Enormous anxiety about supply chain
vulnerabilities in China right now.
And then, of course, then,
you know, how do I-
What do I do about my supply chain?
And there's two pillars that are
the answers to that determine your
supply chains all the way upstream,
identify vulnerabilities not just in
China but across the Indo-Pacific region,
because if there is some type of
conflict and China has been signaling
certainly that that's the intent,
access to the Indo-Pacific region is
pretty much going to be off limits.
And then #2 is work on diversifying
your supply chains. Be--use
the first mover advantage,
those supply chains ex-China don't
readily exist all over the world,
and if they do, they're limited.
So start moving supply chains now
before you're caught in the bottleneck.
And without question,
we're moving toward the US
and allied retreat from doing
business with China and in a way,
a containment of China.
And the final thing I would
say for businesses is don't
wait for the government to act.
But this is one of those instances
where the government isn't
going to draw the red line.
It'll use these sort of trade tools to
try to discipline China a little bit more,
but it's really going to be
incumbent on businesses to retreat
because there's going to be no
clear signal from the government
that this is the way to go.
And with that I wanted to turn it
over to maybe a question to to our
panelists to kick off maybe inspiring
some questions by the audience.
And I want to post this to everybody.
It was very interesting in
the G20 summit, President
Xi's toned down approach
when it came to Europe and
I'm hoping most people don't misconstrue
this as a reversal of Chinese policies.
They kind of just see this
as a political play.
But from where your perspectives,
how are you interpreting this and
then what are you also hearing
from the business community?
Gonna dive in with that one.
I think it's really important for
everyone to know how quickly things
are changing in China and signals that
Chairman XI sent even weeks ago or
frankly days ago and he's been pretty
quiet over the last couple of days.
But we need to know that things
can and probably will change on
a dime and that the signals,
that's one point the unpredictability
and the very quick evolution of
where things to be it's a
very unstable place.
Not unstable in the sense that,
oh, it's a House of Cards,
everything's going to fall apart,
but unstable in the sense that
things are changing rapidly
and where something is one
day it might not be the next.
The second thing is to know that there's
a lot of signals coming out of Beijing.
It's what Xi says,
it's what Xi says in Chinese,
which is often very different
from this message in English.
It's where other top leaders say,
it's what provincial leaders say,
it's how businesses operate.
We just found out there's a really
good story in the Financial Times
that Jack Ma had been living in Tokyo
for most of the last six months.
That's a very important signal about
consumer and business confidence
and what tech leaders feel about
the direction China is going in.
So keeping an eye on all of these
signals is incredibly important.
Yeah, I might just jump in if I may,
Nazak. I think you know,
a historical context is important here.
What was Xi brought in to do?
You know, he was brought in essentially
to curb the kleptocracy and the
corruption of the Hu Jintao era.
He was brought in to reassert the
parties control over the Chinese people,
over the economy, over the military,
to reinstall ideological.
Discipline to restore it
to a position of power.
And that's that's what he's done.
And I, I get a lot of calls from clients
wishing and hoping that some signal
or some handshake in Bali means that
the world has changed and, you know,
he's decided to take a better stance,
a more conciliatory stance toward
toward the rest of the world.
But again, you can't read his mind,
but you can look at his actions and he
has spent, you know, the last 10 years
developing a system, as Nazak
just laid out so well, you know,
to steal intellectual property and
bolster domestic chains industries.
He's got the dual-circulation strategy,
which is essentially meant to
pull in foreign businesses,
copy and use all their stuff,
develop a domestic industry and
then kick the foreigners out.
He wants to make China self-sufficient.
So,
you know,
one meeting in Bali doesn't change that.
And I just want to address a couple
of really interesting points that
Nazak made on the semiconductor industry.
You know,
I wouldn't be so sure that China could
run those semiconductor factories or
that the Taiwanese wouldn't just blow
them up in the event of an invasion.
We have to take that as a possibility.
You know, could we have a Russia
type situation in China?
Yeah,
we could.
Not saying it's likely, like
Isaac said, I don't know what the
probability is but you know as a
—if you're in the C-Suite or on
the board or a significant investor,
you know these are the these are the kinds
of scenarios that you have to consider.
In other words, go back to basics.
I remember Dan and I used to,
talk to you way back when you were in Asia.
You know, I would,
I would ask, you know,
some of your legal colleagues who
had businesses in Beijing, I'd say,
you know, you're making money and they go,
yeah, nobody makes money in China,
but we really have to be in China.
Yeah, they're copying all our stuff,
but we really have to be in China.
Yeah, our people get harassed,
but we really have to be there.
And I just think that that
mindset has changed.
I think it's changed irrevocably.
And for sophisticated companies and for those
who really care about their fiduciary duties,
people are saying,
alright,
are we making a profit?
Can we count on the rule of law?
Golly,
if they can,
you know,
lock up a bunch of Taiwanese
and Hong Kong and,
you know, Americans and China,
could they do that?
To my people, these are the questions
that that that we have to answer.
You've got to get back to basics.
And as Nazak said, realize that,
you know, the US government,
I think, doesn't matter if
it's Republican or Democrat,
they're on a mission
to identify our critical strategic
industries and to insulate
them from Chinese influence and
Chinese control and I don't
think that's gonna change.
And actually that's, that's
—I'm sorry Dan, go for it.
And then I have a follow up question.
OK. Yeah, the mindset of
businesses absolutely has changed.
Now the calls are not.
We need to get into China.
How do we do it?
The calls are we need to get
out of China as fast as we can.
It's incredibly difficult.
How do we do it?
Something Nazak said that
was really interesting,
which is that China since day one under
Xi and even before that has always
had the goal of self-sufficiency.
And I remember when China came out
with its 'Made-in-China' 2025 plan and
I don't remember what year it was,
but the world got very angry because
reading between the lines the plan
essentially said we're going to
take over this industry, and we're
going to take over that industry, and
push out foreign companies, et cetera.
And I would be out talking about
that in the context of intellectual
property protection.
And people would say, well,
they withdrew that plan essentially.
They said, you know,
they didn't really mean it.
And I would say, well, yeah,
because they withdrew it because they
saw what the world's reaction was.
They essentially just said,
we're just kidding,
but do you really believe that this plan,
which had been worked on for
years and years and years,
is just going to be thrown out?
And that's what I think about what what
I thought about when Xi Jinping was
playing nice with the EU the other day.
He's really, that's the just joking part.
That's not part of the plan.
It's if anything,
it's a reaction to the fact.
that China's economy is not
doing well right now.
In fact,
every indicator I see says that
it's doing incredibly badly.
I don't understand how economists are saying
that it's it's flat or whatever
because from what I can tell is
it's doing a lot worse than flat.
But the point is that the US has
been putting pressure on China
in terms of—
I don't know whether to call
them sanctions or not—in terms of
making adding to the requirements
for for American businesses.
And the US is also right now trying to
get the EU to join in on those things.
And so what Xi Jinping was doing
was essentially lobbying the
EU at a critical time.
I don't think it's necessarily going to work.
I know there are
countries in the EU that want to move
a lot slower in terms of decoupling
from China than the United States does,
but I think the EU is
definitely going to be
enacting certain laws that
are in fact, they already are,
of course similar to those
in the United States.
And I'm gonna end my portion
by asking Mary a question.
I just used the word decoupling.
Mary used the word decoupling.
She said she didn't believe in decoupling.
I thought,
I think decoupling is going to happen,
but I don't know what we
mean exactly by decoupling,
meaning I wouldn't say that decoupling
is happening, and it may be.
You mean it more like a Cold War
where there's a complete decoupling.
Dan, it's such a great point.
And in fact there's a great question
that just came into the inbox from a
viewer who said essentially, you know,
how do you gauge the vulnerability of working
with Chinese companies outside of China?
In other words, is this risk just
working with Chinese companies in China?
It's such an interesting question
and I I'm curious to hear all of
your responses to this, I think.
No, I don't think it reduces your
risk because every Chinese company is
answerable to the party back in Beijing.
So it doesn't matter if they're sitting
in Mexico, if they're sitting in Belgium,
it doesn't really matter.
So I just wanted to make sure to,
to answer that question in
terms of decoupling, you know,
Dan, great, great point.
Can Apple really decouple from China?
Is Caterpillar a fully American company?
We have so many American companies
that are so leveraged to China
and have so many sunk costs.
In China, they can't afford to pull out.
At least they can't afford to pull out now.
And many of them may never want to.
I mean,
does it matter if we sell Mars bars to China,
versus selling
dual-use drone technology to China.
I think we're seeing the beginning
of a long process where we're not
going to go from zero to 100,
we're going to go from zero to 15.
And the first industries that will be
forced to quote, unquote, decouple entirely,
meaning no American investment,
no American people,
there are the ones that are so obviously
you know functioning for the the CCP.
And you know that semiconductor,
AI, drones, mapping technology,
those are the industries that
are gonna go first.
Second industries are gonna
be pharma products, you know,
certain kinds of chemical
or materials products.
This is a new world we're living in.
One last comment,
Evan Feigenbaum at Carnegie did a
great talk recently where he said,
you know, he said in the 50s it was U.S.
government that created the innovations that
then were moved into the private sector.
So you could really kind of separate, well,
this is government led and then, you know,
this is the private application, he said.
Now it's flipped.
You have private industry developing
products that are then used for military
applications and this intertwining of,
you know,
our economic side of our
economy and the military
is blurring and that's very confusing for
businesses to navigate that they're asking
or are we going to be caught up in that?
You know,
it's something that we're just
at the beginning of,
you know,
understanding and learning
how to think about
very hard.
Those are–that's that's a great point.
And then I kind of wanted to
move to something related
that we're all talking about.
So fundamentally, the the Chinese market,
and I do think that we're going to
be getting to gradual decoupling
with the key strategic sectors.
Mary, as you said, moving 1st and I
think that there's just going to
be whether it's full decoupling
or just a creation of an ex-China
robust economic market.
I think we're definitely going to
go in that direction and as what
you see every single day in the
news and it is really undeniable now.
The Chinese market does not run
on fundamentals.
It runs based on the CCP,
the President Xi, Chinese Communist
Party wins, whatever they decide,
that's how it's going to go.
And so with that lack of
predictability that we're going
to see more and more new stories
of companies being disadvantaged.
And then, of course, company leaderships
really need to understand or take
into account this is not the market I
thought it was—do I need an trying to
exit strategy or a better ex-China
strategy to diversify my revenue stream
so when it hits the fan in China,
I have a fall back, and I wanted
to ask everybody for their comments
on what was remarkable is with
the Foxconn plant and the COVID,
you know outbreak and and then the
lack of productions and the impact on Apple,
are we going to see more and
more instances like this,
where really major companies, where
their China supply chain was
foundational to their operating structure,
their business structure and
their revenue stream.
Now we're seeing stories about
Apple potentially losing 8,000,000
new iPhones this year and so
it, to me, it underscores more increased
chaos within China and business uncertainty,
but I certainly wanted
everybody's perspectives on that.
I can dive in with that one.
I just went and bought a new iPhone
the other day because I was worried
about the possibility of having
to wait weeks or maybe months.
And it's going to be a lot of
products that that impacts,
especially if there's any sort
of blockade in Taiwan or China.
And folks may be surprised to hear us
using this very 20th century war language,
but we we have not escaped history and
all of these things are incredibly
possible. And I think Nazak,
you're very right to point
out the unpredictability.
I'm going to get back to the supply
chain tracing question as well.
We do a lot of supply chain tracing
and analysis and oftentimes folks
will think working with Taiwanese
companies because Taiwan is on the
quote, unquote,
other side of China, are safe.
There [are] a huge amount of ties between
Taiwanese companies and the mainland
Taiwanese companies in Xinjiang,
Taiwanese companies in the PLA and folks
need to have a really good understanding
of their Taiwanese supply chains,
because the risk is not just
tensions with China working with
the Taiwanese company that might
be offensive to a Chinese partner,
the risk is also the ways that these
Taiwanese companies are exposed to,
and in some cases proxies
for mainland interests.
So those links are definitely
worth probing deeply into.
Yeah, what I find
fascinating about Nazak's question is
the way people tend to look at
risk. That's what popped into my head
when Nazak asked that question,
meaning, Nazak asked, you know,
should people be worried about supply chains?
I find that companies tend to have
trouble understanding their risks, we all do.
And one of the issues they
face is the fact that
they think they're diverse.
They see what happens
to happen on one region in China and
assume that it'll be different in
their region for whatever reason.
Or they know 10 companies
that haven't had any problems.
And I think a lot of that has
to do with the fact that
these supply chain risks are
incredibly unpredictable and I see
that because we have clients who
have almost escaped any sort of
COVID issues in China so far.
They they really haven't had
major supply chain disruptions.
And then we have some clients,
we have one client that had two facilities,
one in Vietnam, one in China and
they were a relatively small company in an
industry with a lot of big companies.
And there are two factories [that] basically said,
look, we're overwhelmed,
we're not getting enough people
coming in because of COVID,
COVID risks, et cetera,
so we're just not going to supply
you with a single widget again.
And so this company that was
doing really well literally was
cut off from their entire supply,
and they thought that they were diversified.
And so these risks can be huge and
it's interesting because I'm right now
working with a client who had because of
COVID, had their products
delivered a month late.
Well,
the kind of business they're in,
having it delivered a month late,
It made their products unsellable and
we've been brought in by the insurance
coverage lawyers because they want
us to find out whether we can argue
that Chinese laws cause the problem,
not COVID.
Because for there to be coverage,
it has to be some sort of legal
edict that caused it and it's just,
that's a risk that nobody
would have ever seen.
You know, even the the fact that
this insurance company is saying
that it has to be a legal risk and
our client initially thought, well
of course it was a legal issue,
people were not allowed to
go to work, etcetera.
But it's not so clear, and
these are the sorts of complicated
and hard to predict issues businesses
are facing these days that have
their supply chain in China.
These are excellent points.
So unfortunately,
we're at the end of our session time.
But Dan, Isaac, Mary, tremendous points.
Thank you so much for sharing your
expertise with the audience today.
Honored to be a part of the
panel with you guys and to the
audience of folks who are still on,
this was our second session
because there was an
enormous amount of demand for it.
And so, please continue to provide feedback,
and if there are further questions,
we're certainly happy to answer them.
And if there's greater demand,
we will plan another session as well
to give everybody updates on what's
happening with respect to all things China.
But with that, everyone thank
you and we'll see you next time.
Thank you.