InTech Series: The World, Post-Corona | Part- 2
The spread of COVID-19 across the world has been called a Black Swan that has disrupted the economic, social, political, and technological normal. This series aims to capture the nature of the fundamental shifts that are occurring, project possible trajectories that could shape up, and provide strategic insights on the opportunities and challenges that could lie ahead. Read Part-1 here.
The Emerging Economic and Technopolitical Disorder
In the first part of this series, we laid out how the Great Global Fracture between the US and China has become global, with the liberal-institutional order, US leadership capacity, and economic globalisation coming under question. The fracture between China and the US is now way beyond the trade and tech war we wrote about earlier. Calls for greater accountability from China for COVID-19 are growing louder and states are sounding the war horns of reshoring and economic nationalism to decrease dependency on Chinese manufacturing. In this piece, we discuss three cracks that are pertinent to this widening fissure. These are:
3. Why MNC’s may favour Resilience over reducing Redundancy
4. China Attempts to go Shopping while the World Burns
5. The Covid Crisis has exacerbated Technopolitical Fissures between China and the Western World
Crack 3: Firms will favour Resilence over reducing Redundancy
In the last few decades, production processes have centered around Global Value Chains (GVCs) the heart of which is one state- China. Global Value Chains is a phenomenon where production is vertically sliced into smaller tasks that are carried out across different countries. According to the World Economic Forum, China is at the core as a primary manufacturer of high-value products and components, a large customer of global products and commodities, and as a major consumer marketplace. China also produces many intermediate inputs and is responsible for processing and assembly operations.
GVC’s are largely driven by Trans-National Corporations (TNCs) in advanced economies which continuously restructure their businesses and relocate their operations for competitive advantage. This phenomenon has been hit hard by COVID-19, as China’s industrial production fell by 13.5% in January-February 2020 alone.
The pandemic has severe implications for international production networks and may alter them for decades .In such a scenario, firms are unlikely to go back to having a global single point of failure in supply chains. Two months of frozen supply chains has made TNC’s question the dogma of reducing “redundancy” and favor resilience and diversification over cost optimised production with a single point of failure.
Many believe that the dependency on China has reached a point of no return and things would return to status quo once the pandemic passes. However, some firms in the US, Europe, and Japan are beginning to move production away to South-East Asia, Korea, Vietnam, and possibly India. Giants like Microsoft, Google, and Apple are looking at shifting a part of their manufacturing out of china. While this might not be easy as it involves a significant investment in capacity building, a China+1 strategy might just be worth it given the risk of a single point of failure and the rising US tariffs on China.
Will the move away from China be a move towards India? That depends on how favorable India makes itself in terms of policy, stable regulatory frameworks and ease of business for foreign investment to roll in. It must provide security by diversifying away from its own China- centric supply chains.
Much depends on state-level policies. Some states like Uttar Pradesh have already begun courting MNC’s. While the long-term effects are hard to predict, two trends that may be anticipated are vertical integration of supply chains and geographical diversification of production.
The Boston Consulting Group’s 2019 Global Manufacturing Cost Competitiveness Index states that a regional strategic approach can provide flexibility in operations in the move away from China.
Crack 4: China Attempts to go Bargain Shopping while the World Burns
Many countries are gearing up to join the US and Australia to start an international inquiry even at the risk of economic repercussions from China. Trust in China is at an all-time low, which dents its support in international fora. At this time, China’s drive to increase its investments and push big-ticket projects across the world makes it look like an irresponsible state shopping in times of a global crisis.
The People’s Bank of China’s buying a 1.01% stake in India’s HDFC bank this year has raised eyebrows in India. According to ET, China-backed funds have an eye on financial assets in India. At least two big-ticket funds — Industrial and Commercial Bank of China (ICBC) and China Investment Corporation (CIC) are scouting for investment opportunities in the financial services sector in India.
Chinese companies with strong links to the state dominate India’s startup ecosystem as well. Chinese investors have a major stake in 18 out of 30 Indian unicorns. According to a report by Gateway House:
“ TikTok, owned by ByteDance, is already one of the most popular apps in India, overtaking YouTube; Xiaomi handsets are bigger than Samsung smartphones; Huawei routers are widely used. These are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance and Tencent which have funded 92 Indian start-ups, including unicorns such as Paytm, Byju’s, Oyo and Ola. China is embedded in Indian society, the economy, and the technology ecosystem that influences it.”
India has responded by tightening FDI norms requiring government approval for Chinese investments. Chinese FDI has seen pushback from Europe as well with the European Union passing regulation for tighter scrutiny of Chinese FDI that allows countries to block takeover bids. The European Union Competition Commissioner has asked European countries to buy stakes in their companies to fend off fire sales to China.
Crack 5: Widening Techno-Political Fissures between the US and China
The Great Fracture, began as a trade-turned-tech war. The questions of technology today, as in the case of 5G, are geopolitical dilemmas tied to strategic investment, digital transformations, and national security.
China’s approach to handling the crisis at home has been looked at with grudging admiration.
In short, China’s state-monitored surveillance and a dash of authoritarianism have begun to sound more attractive to countries given the rapidly altered circumstances of the COVID world. Chinese state-led capitalism with an almost mercantilist synergy between the state and corporations has enabled tighter coordination and a faster bounceback. This is happening at a time when most Western democracies seem to be caught off-guard both from a disease-containment and an economic perspective. Which country wouldn’t look at the flattening of China’s curve and not have a dash of admiration?
Added to this is the competitive advantage in technological innovation that China has systematically build over the years makes it a force to reckon with.The US’ answer to China’s actions has focussed on technology innovation and nationalising knowledge.
According to a Brookings report, the Chinese Communist Party uses three tools to incorporate foreign technical information that escapes Western intelligence: scholarships for Chinese doctoral students abroad, technology innovation contests, and FDI and acquisitions made by Chinese technology companies. A big threat to American Universities comes from Chinese influence. To defend against this transfer of knowledge, the US is turning to protect its bases and keep innovation fuelling at home. It is learning to look beyond China’s Thousand Talents plan(which was the vehicle through which China paid the chairman of Harvard’s chemistry department $50,000 per month, plus living expenses, from 2012-2017) and gather more data, along with coordinating investment screening procedures. US universities are already cutting out Chinese students this year, and joint ventures with scientists and companies from China are being given the cold shoulder.
Simply put, the US is trying to cut china out of High Tech- with several developments in the last three months alone. The Commerce Department in 2019 restricted American companies from selling components and other technology to Huawei which the Trump administration has labeled as posing a national security threat. These actions have restricted Huawei’s access to Google’s services and cut-off chips made by Qualcomm and Intel and its other American suppliers.
Meanwhile, China is gearing to set international standards in production, exchange, and consumption of goods. China’s way is to create long-term grand strategies that pay off in the long-run. Beijing is about to launch China Standards 2035, a plan to write international rules. China Standards 2035 is the successor to Made in China 2025. Horizon Advisory, in its analysis of the report states that:
“ it has instructions to ‘seize the opportunity’ that COVID-19 creates by proliferating China’s authoritarian information regime; to co-opt global industry by capturing the industrial Internet of Things; to define the next generation of information technology and biotechnology infrastructures; to export the social credit system — and Beijing’s larger litany of incentive-shaping platforms.”
In what Ian Bremmer calls “the Great Decoupling”, economic and technological interdependence between the United States and China is giving way to the creation of two separate systems, that are often in competition with each other in the future.
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