WEBVTT - This Is What The Coronavirus Means For The Chinese Supply Chain 0:00:05.680 --> 0:00:09.440 Hello, Odd Lots listeners. Of course, normally we released new 0:00:09.520 --> 0:00:13.600 episodes on Monday, but today we're bringing you a special 0:00:13.840 --> 0:00:18.799 midweek episode. That's because it's very timely one. Obviously a 0:00:18.840 --> 0:00:22.520 lot of interest in the coronavirus and the effect that 0:00:22.680 --> 0:00:25.720 it's having on supply chains around the world, so we 0:00:25.760 --> 0:00:28.120 didn't want to wait. We didn't want to slot it 0:00:28.160 --> 0:00:30.440 in future in the schedule. We wanted to get it 0:00:30.480 --> 0:00:49.320 out now, and hopefully you've h Hello and welcome to 0:00:49.360 --> 0:00:53.320 another episode of the Odd Lots Podcast. I'm Joe Wisenthal. 0:00:53.840 --> 0:00:56.960 I'm Tray all Away, Tracy. You know, it's really struck 0:00:57.040 --> 0:00:59.880 me in the markets over the last several weeks. I 0:01:00.920 --> 0:01:07.200 go on, Well, obviously the crisis over the coronavirus continues 0:01:07.240 --> 0:01:12.600 to be this massive story for the global economy, for China, Asia, 0:01:13.240 --> 0:01:16.800 all kinds of different companies, and yet investors, in a 0:01:16.840 --> 0:01:21.440 weird way, outside of some specific names or specific currencies, 0:01:21.880 --> 0:01:27.080 still seem surprisingly or maybe not surprisingly, but generally not 0:01:27.160 --> 0:01:31.280 that worried. Right now. Yeah, um, I find this pretty amazing. 0:01:31.440 --> 0:01:34.560 So at the time that we're recording, I think the 0:01:34.680 --> 0:01:38.839 SMP five is still pretty close to its all time high, 0:01:39.080 --> 0:01:42.080 and what amazes me about that is we spent two 0:01:42.200 --> 0:01:46.360 years collectively worrying about how trade tensions between the U 0:01:46.440 --> 0:01:50.080 S and China we're going to affect global supply chains 0:01:50.160 --> 0:01:53.440 and economic growth and consumption, and we sort of followed 0:01:53.520 --> 0:01:55.760 every tiny in and out when it came to the 0:01:55.800 --> 0:02:00.520 trade negotiations. And now when you have something the ownavirus 0:02:00.600 --> 0:02:03.680 and the containment efforts underway in China, you have something 0:02:03.720 --> 0:02:09.320 that is guaranteed to impact production and consumption in the 0:02:09.320 --> 0:02:12.919 world's second biggest economy as well as disrupt a bunch 0:02:12.960 --> 0:02:17.480 of supply chains, and no one seems to care. Yeah, 0:02:17.520 --> 0:02:21.320 it's it's really odd, it's really surprising, it's counterintuitive. It's 0:02:21.320 --> 0:02:24.000 not what I would have guessed. Even this week, the 0:02:24.040 --> 0:02:28.119 week that we're recording it, we got um a warning 0:02:28.520 --> 0:02:32.280 from one of the sort of emblems of US China 0:02:32.520 --> 0:02:36.120 trade globalization, Apple, which is heavily exposed to China on 0:02:36.200 --> 0:02:39.840 the supply chain front and heavily exposed to China on 0:02:40.280 --> 0:02:43.320 the revenue front, saying, look, this quarter is going to 0:02:43.360 --> 0:02:48.120 be worse than we previously expected. Factories aren't opening up 0:02:48.440 --> 0:02:51.680 for our suppliers as fast as we had anticipated. A 0:02:51.720 --> 0:02:54.480 couple of weeks ago, we're not totally sure when things 0:02:54.480 --> 0:02:58.240 will be back to normal. Uh, not to mention the 0:02:58.280 --> 0:03:01.880 fact that people are outlets opping and uh, you know, 0:03:01.919 --> 0:03:05.840 the stock fell about two in the immediate wake of that, 0:03:05.919 --> 0:03:09.200 maybe because people figured this was the case already, And 0:03:09.200 --> 0:03:13.000 then the next day the stock immediately basically erased all 0:03:13.040 --> 0:03:18.600 of those losses. So even a company coming out and saying, um, no, 0:03:18.760 --> 0:03:21.600 this is a serious issue for us, even it's not 0:03:21.680 --> 0:03:23.800 having that much effect on them right now, I guess 0:03:23.840 --> 0:03:25.880 people are so confident that the effects will just be 0:03:26.160 --> 0:03:29.080 transitory and everyone will okay, but be back to be 0:03:29.120 --> 0:03:32.480 back to work eventually. Yeah, and our colleagues over at 0:03:32.600 --> 0:03:36.760 Bloomberg Intelligence actually counted up the number of companies that 0:03:36.800 --> 0:03:39.320 are talking about the coronavirus at the moment, and I 0:03:39.360 --> 0:03:43.920 think they counted something like nine trillion dollars worth or 0:03:44.040 --> 0:03:48.480 companies accounting for nine trillion dollars worth of market cap 0:03:48.560 --> 0:03:52.520 have mentioned the coronavirus. But so far we only really 0:03:52.520 --> 0:03:55.040 have a handful of them who are issuing, you know, 0:03:55.120 --> 0:03:57.440 the kind of warnings that we saw from Apple. Most 0:03:57.480 --> 0:04:00.320 of them are just talking about how it's too really 0:04:00.520 --> 0:04:03.480 to say that, you know, they'll get a direct hit 0:04:03.600 --> 0:04:07.360 but again, frankly, watching all of this uh go down 0:04:07.520 --> 0:04:11.080 in China and in Asia, I find it really difficult 0:04:11.120 --> 0:04:15.280 to see how global supply chains would not be impacted 0:04:15.320 --> 0:04:18.240 at this point. Right. So obviously, look, we don't know 0:04:18.279 --> 0:04:20.400 what the markets are going to do, and nobody does, 0:04:20.560 --> 0:04:23.320 and we'll just see what happens. But I do think, 0:04:23.360 --> 0:04:25.720 and I did think, in light of that Apple warning, 0:04:25.760 --> 0:04:29.000 we really need to dive deeper into the question of 0:04:29.080 --> 0:04:33.080 supply chaine because so much of the world, so much 0:04:33.240 --> 0:04:37.320 so many companies that manufacture anything are exposed to China 0:04:37.520 --> 0:04:40.200 or East Asia in some way, and getting some sort 0:04:40.240 --> 0:04:43.400 of handle on what the risks are is key, and 0:04:43.440 --> 0:04:45.840 what the risks of course to the China economy are 0:04:45.839 --> 0:04:49.800 going to be that's also key. Uh So that's what 0:04:49.839 --> 0:04:54.720 we're going to discuss today. Great, I think that's a good, good, 0:04:54.760 --> 0:04:57.400 good idea given the circumstances, let's do it all right. 0:04:57.440 --> 0:04:59.760 We have a really great guest. We've had him on 0:05:00.200 --> 0:05:03.520 podcast I think a couple of times before, at least once, 0:05:03.560 --> 0:05:07.080 but I'm pretty sure twice. He's Dan Wang. He's an 0:05:07.120 --> 0:05:10.960 analyst at gav coll dragon Omics. He's talking to us 0:05:11.000 --> 0:05:13.840 from Beijing. He's a tech analyst really knows a lot 0:05:13.880 --> 0:05:19.160 about Chinese manufacturing, Chinese supply chains, the interaction with global tech, 0:05:19.240 --> 0:05:22.159 and uh, he'll walk us through the risks posed by 0:05:22.200 --> 0:05:24.000 this virus, what we're seeing right now, as well as 0:05:24.080 --> 0:05:27.360 other risks that maybe people aren't even thinking about right 0:05:27.400 --> 0:05:29.960 now beyond the virus. So Dan, thank you very much 0:05:30.120 --> 0:05:33.120 for joining us. Thanks very much for having me on 0:05:33.160 --> 0:05:37.440 a gun. We've all seen the images of various cities 0:05:37.720 --> 0:05:41.920 across China, either quarantined or de facto quarantine, empty streets 0:05:41.920 --> 0:05:45.039 and so forth. We know that there are numerous factories 0:05:45.080 --> 0:05:48.240 that have yet to reopen, and the schedule for that 0:05:48.440 --> 0:05:52.360 is remains unclear. We got the warning this week from 0:05:52.360 --> 0:05:54.800 Apple that this is going to be a hit to 0:05:54.839 --> 0:05:58.960 their performance in the current quarter, So that's known. What 0:05:59.160 --> 0:06:02.040 to you, based on your work that you're doing looking 0:06:02.080 --> 0:06:07.000 at the industry, what you've seen, what really jumps out 0:06:07.000 --> 0:06:11.200 at you in terms of the coronavirus hit to China's 0:06:11.200 --> 0:06:15.920 industrial economy. So I think you've all lad by saying 0:06:16.320 --> 0:06:19.039 within a really good way, by saying that basically the 0:06:19.120 --> 0:06:22.479 market seems to be parting all of this off. I 0:06:22.520 --> 0:06:26.159 think there could be an economics way of thinking about 0:06:26.240 --> 0:06:29.440 that in just uh, you know, if you assume that 0:06:29.560 --> 0:06:32.479 the virus is going to be mostly contained in this 0:06:32.600 --> 0:06:36.479 current quarter, and there's some evidence that that could be 0:06:36.560 --> 0:06:40.800 the case, um, and that's the Chinese economy while basically 0:06:40.800 --> 0:06:44.240 bounced back into the normal previous trend growth, that will 0:06:44.279 --> 0:06:47.200 be all expecting there will be some pent up demands 0:06:47.240 --> 0:06:49.840 that would be released later on, and you know that 0:06:50.320 --> 0:06:53.640 it will be a quite that quarter, but everything gets 0:06:53.680 --> 0:06:57.040 back to trend. I think that case could be made 0:06:57.480 --> 0:06:59.839 for the general macro economy, and that's why most people 0:06:59.880 --> 0:07:03.360 are not reacting very much. But in terms of electronics, 0:07:03.600 --> 0:07:06.440 I think that story would not be so simple, and 0:07:06.480 --> 0:07:11.520 that's because electronics manufacturing is uh some involves most some 0:07:11.560 --> 0:07:14.800 of the most complex supply chain ever. Um. You need 0:07:14.960 --> 0:07:18.080 basically a lot of different components in place in order 0:07:18.120 --> 0:07:21.640 to begin production. You need a thousand and one or 0:07:21.880 --> 0:07:24.480 movie even a dollient and one components all at the 0:07:24.560 --> 0:07:27.560 right place and all at the right time. And so 0:07:27.640 --> 0:07:32.240 if you have this delay, which hasn't really resolved itself yet, 0:07:32.720 --> 0:07:35.600 I think that can ripple on and cascade on throughout 0:07:35.600 --> 0:07:37.800 the supply chain all the way throughout the rest of 0:07:37.800 --> 0:07:41.400 the year. When it comes to basically the peak selling season, 0:07:41.480 --> 0:07:44.000 which is the Christmas season in the US. I think 0:07:44.000 --> 0:07:46.320 that will ripple on throughout the rest of the year. 0:07:47.080 --> 0:07:51.320 How much flexibility is there when it comes to altering 0:07:51.520 --> 0:07:55.160 global supply chains for electronics companies, because you know, during 0:07:55.440 --> 0:07:58.480 the trade tensions, we saw a lot of people talking about, well, 0:07:58.520 --> 0:08:01.680 they'll just move production from China to Vietnam or to 0:08:01.800 --> 0:08:06.520 wherever there was that option. But in the current situation, 0:08:06.640 --> 0:08:09.520 it seems like, first of all, you have to do 0:08:09.560 --> 0:08:13.760 it much much more quickly um And secondly, no one's 0:08:13.800 --> 0:08:15.600 really sure how the virus is going to play out, 0:08:15.640 --> 0:08:18.640 so you don't necessarily have the motivation to move production 0:08:18.960 --> 0:08:21.480 if you're thinking that it's going to end very very quickly. 0:08:21.560 --> 0:08:25.520 So how easy is it to to shift supply chains 0:08:25.520 --> 0:08:30.240 for electronics companies? It is all pretty difficult. And we 0:08:30.320 --> 0:08:35.280 have not seen a great deal of production move overseas 0:08:35.400 --> 0:08:39.120 um as a result of the US terristan Chinese production. 0:08:39.200 --> 0:08:42.040 We have that certainly seen. Some have seen a few 0:08:42.120 --> 0:08:47.599 marginal products something like servers and something like wearables move overseas, 0:08:47.800 --> 0:08:51.680 especially to Vietnam that's the most cited place, But in general, 0:08:51.720 --> 0:08:55.840 it hasn't been a wholesale movement of supply chains, and 0:08:55.920 --> 0:08:59.760 I think, um, you know, that's a pretty difficult thing 0:08:59.840 --> 0:09:03.440 for our companies to deal with on a short term. 0:09:03.440 --> 0:09:07.400 A manufacturer made a statement a while ago to say that, 0:09:08.000 --> 0:09:10.080 you know, the terrorists are something that we can deal with. 0:09:10.320 --> 0:09:13.080 That's a cost increase, and that's something you have to 0:09:13.240 --> 0:09:17.280 we're into, but that is a predictable and something that 0:09:17.360 --> 0:09:20.480 we are able to resolve. Where he as Um, if 0:09:20.520 --> 0:09:23.599 we do not have a lot of parts, as that 0:09:23.880 --> 0:09:27.200 coronavirus has threatened. Um, if we do not have workers 0:09:27.200 --> 0:09:30.240 in our factories because they just are not coming back, 0:09:30.360 --> 0:09:34.040 or we cannot pass these sanetary checks or quarantine checks 0:09:34.200 --> 0:09:37.960 uh imposed by the local government, then we don't even 0:09:38.000 --> 0:09:40.760 have the parts in place to engage in production. So 0:09:40.880 --> 0:09:44.360 this is like a much bigger deal. Talk to us 0:09:44.400 --> 0:09:48.520 a little bit more about modern electronics supply chains, and 0:09:48.559 --> 0:09:52.319 in a sense, uh, there are an absolute marvel because 0:09:52.360 --> 0:09:55.480 all these different companies come together and the logistics are 0:09:55.559 --> 0:09:59.760 such that companies can hold very little inventory, and and 0:09:59.800 --> 0:10:03.320 the key part arrives just in time for the other 0:10:03.640 --> 0:10:06.800 company or the other manufacturer to assemble it into something 0:10:06.840 --> 0:10:09.000 and then that goes into something else. And it's this 0:10:09.080 --> 0:10:13.360 sort of beautiful orchestra. Maybe when it's working, uh, when 0:10:13.360 --> 0:10:16.839 it's working, ideally, talk to us about what you said 0:10:17.000 --> 0:10:19.719 when you pointed out, look, it's not as simple as 0:10:19.800 --> 0:10:23.440 just restarting this because it's so complex. It's not just 0:10:23.480 --> 0:10:25.360 a matter of Okay, the switch goes off for a 0:10:25.360 --> 0:10:27.920 few weeks and then maybe you just turn it back on. 0:10:28.520 --> 0:10:30.960 What is that cast scading effect you're talking about? And 0:10:30.960 --> 0:10:32.800 why is it not so simple to get it going 0:10:32.840 --> 0:10:37.360 again once? Once? Uh, the you're ready to restart, Yeah, 0:10:37.400 --> 0:10:41.440 that's exactly right. So basically, to really get production going 0:10:41.679 --> 0:10:45.960 at the major manufacturer like fox Con, you need a 0:10:46.000 --> 0:10:49.040 lot of different components in place. So you need to 0:10:49.080 --> 0:10:51.680 have let's play something like the house and components in place. 0:10:52.160 --> 0:10:54.959 You need all of the labor in place. Also, to 0:10:55.040 --> 0:10:58.120 begin stacking, you need to make sure that all of 0:10:58.160 --> 0:11:03.600 the components are um aliving on a daily basis that um, 0:11:03.640 --> 0:11:06.520 there is a lot of flow. You need to make 0:11:06.520 --> 0:11:09.040 sure that the components are of pretty good quality and 0:11:09.160 --> 0:11:11.439 used to make sure that the labor is of good quality. 0:11:11.840 --> 0:11:14.720 And right now, basically none of those conditions are holding. 0:11:15.040 --> 0:11:19.800 So fox Con, it's not said, uh, very publicly very 0:11:19.840 --> 0:11:23.480 much about how many workers have been able to return UM. 0:11:23.600 --> 0:11:26.960 Our estimate is that something like half of China's UH 0:11:27.240 --> 0:11:31.959 migrant labor force has UH allied back into other factories. 0:11:32.400 --> 0:11:35.640 It's going to take up quite a while, probably in 0:11:35.760 --> 0:11:38.880 March or early April, for everyone to get back into 0:11:38.920 --> 0:11:42.200 their place. And so you know, I think that the 0:11:42.400 --> 0:11:45.959 larger manufacturers are probably able to deal with a lot 0:11:46.000 --> 0:11:49.680 of these problems. So fox Con, in spite of a 0:11:49.720 --> 0:11:52.480 lot of bad press that has received over the last decade, 0:11:52.800 --> 0:11:57.040 is still the best pain of the large manufacturers that 0:11:57.200 --> 0:12:00.360 has the best working conditions. UM it is just really large. 0:12:00.559 --> 0:12:03.560 It employees about a million people in China every year, 0:12:04.040 --> 0:12:07.240 and then the five other big contract manufacturers in Taiwan 0:12:07.480 --> 0:12:11.120 UM employee about collectively UH five thousand, so about one 0:12:11.120 --> 0:12:14.640 point five million people total working on UM, which is 0:12:14.800 --> 0:12:18.640 just directly on all types of electronics, but especially the smartphone. 0:12:19.200 --> 0:12:22.120 And so basically Apple needs a lot of people in 0:12:22.200 --> 0:12:25.240 place UM and it should be able to hire all 0:12:25.280 --> 0:12:28.720 of the people that it needs. But if fox Con 0:12:28.880 --> 0:12:31.880 is able to hire for everyone, because it is working 0:12:31.880 --> 0:12:34.200 for its largest customer, Apple, which has a lot of 0:12:34.240 --> 0:12:37.199 cash to throw at these problems, UM, it might suck 0:12:37.240 --> 0:12:40.600 away the labor from a lot of the sub assemblers, 0:12:40.880 --> 0:12:44.679 so the component makers that are supplying goods for Fox 0:12:44.760 --> 0:12:48.160 con to put onto lines of people to actually produce. 0:12:48.679 --> 0:12:52.000 So you know, again, I want to emphasize that it 0:12:52.080 --> 0:12:55.640 only takes a few missing parts for an entire supply 0:12:55.720 --> 0:12:57.920 chain not to be functional, and so there will be 0:12:57.960 --> 0:13:01.720 a lot of these gaps out there, even for Apple. 0:13:02.080 --> 0:13:05.720 Apple every year launches a new iPhone by Q four 0:13:05.840 --> 0:13:09.160 that is highly predictable. But even for Apple it is 0:13:09.360 --> 0:13:13.160 a pretty hot affair. The supply chains are pretty tight 0:13:13.440 --> 0:13:17.600 and every week counts towards Q four, and not very 0:13:17.600 --> 0:13:20.600 many firms have a few weeks of production to lose. 0:13:21.160 --> 0:13:25.000 So my thought here is that even though large manufacturers 0:13:25.320 --> 0:13:29.200 working for large consumer electronics companies like Apple are able 0:13:29.240 --> 0:13:32.080 to get through this, many smaller companies are going to 0:13:32.120 --> 0:13:35.640 have a lot more problems. Q one is typically the 0:13:35.679 --> 0:13:39.600 time of the year where many consumer electronics companies um 0:13:39.760 --> 0:13:45.200 engage in prototyping and developments with the UH with the manufacturers, 0:13:45.280 --> 0:13:48.920 and if the manufacturers just are have persistent labor shortages 0:13:48.960 --> 0:13:51.920 and supply shortages, are going to be dedicating all of 0:13:51.920 --> 0:13:54.960 their people to their large customers like Apple, and I 0:13:55.000 --> 0:13:57.520 think the the the case would be here that this 0:13:57.600 --> 0:14:01.080 year that consumer electronics will be pretty that a lot 0:14:01.120 --> 0:14:03.560 of smaller companies won't even be able to launch the 0:14:03.559 --> 0:14:06.240 products they had hope to launch by the Christmas season. 0:14:06.360 --> 0:14:09.080 It's if that's already probably the case, and it's going 0:14:09.120 --> 0:14:21.920 to be a stretch even for Apple. Could you talk 0:14:21.960 --> 0:14:25.360 to us a little bit more about the labor shortage 0:14:25.440 --> 0:14:29.920 idea and how the containment efforts that we've seen rolled 0:14:30.200 --> 0:14:34.200 out across China at this point, how those actually impact 0:14:34.600 --> 0:14:38.440 the way the labor market functions. So China today has 0:14:38.600 --> 0:14:41.920 a lot of restrictions in place in who can go where. 0:14:42.360 --> 0:14:44.640 When I leave my apartment in Beijing, I have to 0:14:44.680 --> 0:14:48.240 have flash this little card at these doormen who have 0:14:48.840 --> 0:14:52.960 are newly set up to exit and enter the building. Um. 0:14:53.120 --> 0:14:57.080 Every uh three blocks I go, there is someone um 0:14:57.080 --> 0:14:59.960 taking my temperature to make sure that I'm all right. 0:15:00.680 --> 0:15:04.680 One thing that I'm struck by now is that the 0:15:04.680 --> 0:15:08.200 amount of state capacity that China has brought to bear 0:15:08.240 --> 0:15:14.000 on this problem is impressive and also frightening. That China 0:15:14.320 --> 0:15:18.360 has been able to quarantine about sixteen million people around 0:15:18.360 --> 0:15:21.680 the population of Italy and the span of around twelve hours. 0:15:22.680 --> 0:15:25.600 My thought here is that China can mobilize it, that 0:15:25.760 --> 0:15:28.920 isn't more quickly than many countries can mobilize their armies, 0:15:29.480 --> 0:15:33.920 and so it is imposing many sorts of restrictions on labor. 0:15:34.400 --> 0:15:38.160 Even today, many UH migrants are not able to enter 0:15:38.240 --> 0:15:42.040 the large cities to actually begin a production. So a 0:15:42.040 --> 0:15:45.800 lot of the public transportation in terms of trains are shut, 0:15:46.440 --> 0:15:49.200 a lot of roads are a lot of cars are 0:15:49.240 --> 0:15:52.600 not able to go on the road, and this is 0:15:52.600 --> 0:15:56.240 creating a lot of problems for factories that really needed labor. 0:15:56.360 --> 0:15:59.240 And I think the biggest issue here is that there's 0:15:59.280 --> 0:16:04.120 considerable and certainty about when this virus could be declared 0:16:04.120 --> 0:16:07.360 eradicated and for everybody to feel faced to go back 0:16:07.760 --> 0:16:12.840 to other jobs. So these travel restrictions could evaporate, um 0:16:13.080 --> 0:16:15.480 let's say next week. Um there are tap could take 0:16:15.800 --> 0:16:19.080 something longer, um let's say a month, But it will 0:16:19.120 --> 0:16:22.920 take probably even longer for all of the flights to 0:16:23.000 --> 0:16:26.040 resume and for all of the people to feel that 0:16:26.120 --> 0:16:29.920 they can safely travel about in China, and that will 0:16:29.920 --> 0:16:32.360 create a lot of uncertainties. There is just a lot 0:16:32.360 --> 0:16:37.400 of human contacts feel required for to engage in production. Yeah. 0:16:37.480 --> 0:16:40.160 And one of the things that we've seen anecdotally as 0:16:40.200 --> 0:16:43.800 well is this notion of a sort of patchwork of 0:16:44.120 --> 0:16:48.320 local and national rules. So, for instance, in order to 0:16:48.360 --> 0:16:51.880 open up a factory, you know, local officials will require 0:16:52.400 --> 0:16:55.560 the factory owner to give face masks to all of 0:16:55.560 --> 0:16:58.600 its workers. But of course there's a giant face masks shortage, 0:16:58.640 --> 0:17:00.920 and so there are an able to do that. And 0:17:00.960 --> 0:17:04.879 we've seen a lot of chaos, let's say, in confusion 0:17:05.200 --> 0:17:07.879 when it comes to what the rules are and what 0:17:08.000 --> 0:17:11.680 they are not when it comes to work environments, right 0:17:11.840 --> 0:17:16.480 can trying to deal with that right around the holiday 0:17:16.520 --> 0:17:19.679 and uh, you know, the huge moves extraordinary, Dan. Is 0:17:19.760 --> 0:17:23.800 there a compounding effect of the delays such that okay, 0:17:24.040 --> 0:17:25.720 uh you know, I know that at one point the 0:17:25.760 --> 0:17:28.680 goal was okay, reopened by February tenth. That didn't happen 0:17:28.720 --> 0:17:31.320 in many cases. But is there a sort of nonlinearity 0:17:31.480 --> 0:17:35.479 where a week of delays does not just mean a 0:17:35.480 --> 0:17:40.280 week of problems and each week the situation uh sort 0:17:40.280 --> 0:17:45.040 of snowballs and grows, uh you know, compounds or grows exponentially. Yes, 0:17:45.119 --> 0:17:48.200 there is that risk that there is a lot nonlinear 0:17:48.280 --> 0:17:51.520 aspect of this. UM. If you were expecting basically a 0:17:51.520 --> 0:17:55.120 lot of components to rise and a few don't, then UM, 0:17:55.560 --> 0:17:58.560 a lot of manufacturers could be quite stuck. And for 0:17:59.320 --> 0:18:01.800 the manufacturer like Fox cons who are at the end 0:18:01.920 --> 0:18:05.760 of a supply chain basically waiting for everybody to send 0:18:05.840 --> 0:18:10.159 everything through, UM, they don't necessarily have great visibility into 0:18:10.320 --> 0:18:14.160 which little part they require. That just doesn't necessarily make 0:18:14.200 --> 0:18:17.959 it so UM. Every time there's an earthquake in Japan, 0:18:18.320 --> 0:18:23.760 UM reminds us. The reminds the world about how dependent 0:18:24.200 --> 0:18:27.760 the entire world is on perhaps a particular factory making 0:18:27.800 --> 0:18:31.399 a particular widget, and so UM, these things can be 0:18:31.600 --> 0:18:35.000 a little bit unpredictable. But I think the the I 0:18:35.040 --> 0:18:39.879 think the large companies like Apple realize that at this point, 0:18:39.920 --> 0:18:41.520 and I think everybody is going to be in a 0:18:41.640 --> 0:18:44.720 scramble in the coming weeks to really understand how deep 0:18:44.800 --> 0:18:48.280 the supply chains are. Another issue for Apple right now 0:18:48.480 --> 0:18:51.560 is that Apple sends a lot of engineers from its 0:18:52.119 --> 0:18:55.400 headquarters in Cupertino to come over to China and then 0:18:55.440 --> 0:18:59.360 actually monitor a station. These engineers and monitor the progress 0:18:59.359 --> 0:19:03.760 of these component makers. Have quality assurance and product development purposes. 0:19:04.160 --> 0:19:06.800 A lot of those flights are canceled, and I expect 0:19:06.880 --> 0:19:09.679 that Apple is only able to send a trickle of 0:19:09.760 --> 0:19:13.920 staff over to China to actually monitor all of that production. 0:19:14.280 --> 0:19:16.400 So there are a lot of these worsts out there. 0:19:17.840 --> 0:19:20.960 Dan talk to us a little bit about I guess 0:19:21.040 --> 0:19:24.359 the big picture, long term impact when it comes to 0:19:24.600 --> 0:19:28.520 China's technology ambition. So I think the first time we 0:19:28.600 --> 0:19:30.720 had you on this podcast was to talk about the 0:19:30.760 --> 0:19:34.720 MAIDE in China initiative, where China is really trying to 0:19:34.760 --> 0:19:39.639 bulk up its own technology expertise. Would you expect something 0:19:39.720 --> 0:19:43.560 like the coronavirus outbreak to have a long term impact 0:19:43.640 --> 0:19:48.919 on those efforts? Certainly, I think it will push greater 0:19:49.280 --> 0:19:54.760 geographic diversity. I think that um, the the the events 0:19:54.840 --> 0:19:57.880 of the last two years have shown that companies are 0:19:57.960 --> 0:20:01.080 highly dependent on China for our produc ships. I think 0:20:01.119 --> 0:20:05.240 many companies are thinking more deeply about what geographic diversity 0:20:05.240 --> 0:20:09.080 actually means. So previously we we thought that geographic diversity, 0:20:09.320 --> 0:20:11.560 um you know, it's important in case there's a flood 0:20:11.760 --> 0:20:15.000 or an earthquake, which are fairly localized events, and so 0:20:15.080 --> 0:20:18.680 if you want to basically have a more robust supply chain, 0:20:18.760 --> 0:20:22.320 you should locate a lot of your factories just geographically 0:20:22.400 --> 0:20:25.360 quite far away from each other. And I think the 0:20:25.440 --> 0:20:28.680 events at least of the last year have shown that 0:20:29.119 --> 0:20:33.240 when President Trump has imposed tariffs on Chinese goods, but 0:20:33.320 --> 0:20:36.000 there is a political element, So even if you produced 0:20:36.080 --> 0:20:40.200 in northern China and then southeastern China, you may necessarily 0:20:40.280 --> 0:20:42.560 you might still be hit by a lot of these 0:20:42.600 --> 0:20:47.720 name risks. Now whether and how it impacts China's technology development, 0:20:48.320 --> 0:20:50.120 I think it is going to make it a little 0:20:50.119 --> 0:20:52.920 bit more difficult for China to do everything that I 0:20:52.960 --> 0:20:55.560 would like. Um, at the very least, it is turning 0:20:56.080 --> 0:20:59.840 on some foreigners and ex pats out off the idea 0:21:00.080 --> 0:21:04.760 of living for most of the time in places like Baching, 0:21:04.920 --> 0:21:08.080 China Hi, and I think that will be at least 0:21:08.160 --> 0:21:12.680 a loss of potential talents that Chinese firms are able 0:21:12.720 --> 0:21:17.360 to hire. Dan I think, uh, that's a great opportunity 0:21:17.640 --> 0:21:23.000 to sort of segue into another another risk factor facing 0:21:23.480 --> 0:21:26.879 Chinese manufacturing, Chinese supply chain, because it was just a 0:21:26.880 --> 0:21:30.000 few months ago that there was this thought that Okay, 0:21:30.200 --> 0:21:32.879 the big risk was just on the trade front. That 0:21:33.040 --> 0:21:36.000 seems to have cleared up. They got the Phase one deal. 0:21:36.480 --> 0:21:39.720 Now suddenly there's this which is uh, you know, as 0:21:39.760 --> 0:21:43.439 your point, could potentially change everything, or at least change 0:21:43.680 --> 0:21:46.800 really changed the way companies around the world think about 0:21:47.080 --> 0:21:51.240 their exposure to China. But as you point out, and 0:21:51.280 --> 0:21:54.320 as you've been writing, the coronavirus is really not the 0:21:54.400 --> 0:21:59.480 only major threat to UH Chinese supply, Chaine Chinese manufacturing, 0:21:59.480 --> 0:22:03.080 and that there's an another thing lurking out there that 0:22:03.440 --> 0:22:05.880 people need to pay attention to. So what is that? 0:22:06.920 --> 0:22:12.000 So that is the um the current US policy on 0:22:12.119 --> 0:22:17.360 how to restrict technology flows to China, and so they're 0:22:17.440 --> 0:22:19.920 as part of the trade war. There has also been 0:22:19.960 --> 0:22:22.240 a bit of a tech war hovering in the background 0:22:22.640 --> 0:22:26.680 in terms of US policy action. I think the first 0:22:26.720 --> 0:22:30.159 major shot of that was last year or or or 0:22:30.600 --> 0:22:33.880 almost a year and a half ago now when President 0:22:33.880 --> 0:22:39.720 Trump administration designated ETE to something called the Denied Person's List, 0:22:40.320 --> 0:22:44.280 which more or less cut off vts entire ability to 0:22:44.480 --> 0:22:49.960 procure from American technology, especially semiconductors, And so that has 0:22:50.320 --> 0:22:53.320 brought the firm to its kneed, almost the virtual bankruptcy 0:22:53.359 --> 0:22:57.240 until Presidency and Trump reached a political solution to save 0:22:57.320 --> 0:23:00.639 the company. There has been this element covering the background 0:23:00.800 --> 0:23:06.480 of the US exercising investment restriction on the ability of 0:23:06.560 --> 0:23:11.400 foreigners to invest in US firms, especially technology firms. There 0:23:11.400 --> 0:23:14.960 has been a process initiated by the Department of Justice 0:23:15.040 --> 0:23:18.720 to scrutinize Chinese actions much more closely in terms of 0:23:19.080 --> 0:23:23.880 treats ecretments, appropriation, but also Chinese activities, and say university 0:23:24.000 --> 0:23:26.840 is working with certain professors, and then it US also 0:23:26.920 --> 0:23:32.199 manifested in specifically this issue of AWE becoming a large 0:23:32.359 --> 0:23:36.000 player in the tech world. And then the administration is 0:23:36.240 --> 0:23:40.359 thinking much more carefully now about how to deny products 0:23:40.440 --> 0:23:43.800 American products to a firm that it considers a national 0:23:43.800 --> 0:23:48.560 security threat. What would be the impact on China's tech 0:23:48.640 --> 0:23:52.960 industry if the US does actually go through UM with 0:23:53.040 --> 0:23:54.960 a lot of the things that it's threatening, and what 0:23:55.119 --> 0:24:00.000 options does China have to offset the impact of those curves. 0:24:01.640 --> 0:24:04.919 I think the issue right now for China is to 0:24:04.960 --> 0:24:09.560 figure out how to be Americanized supply chain. So UM again, 0:24:09.600 --> 0:24:12.680 this is sort of a supply chain story in which 0:24:12.800 --> 0:24:15.919 the lack of a few components can really defeat system. 0:24:15.960 --> 0:24:17.520 So if you take a look at your smartphone and 0:24:17.640 --> 0:24:20.360 has something like fifteen hundred different components in it, and 0:24:20.520 --> 0:24:23.879 if you lack even through your four different components, the 0:24:23.920 --> 0:24:27.920 whole system might be defeated. So your phone needs, for example, 0:24:27.960 --> 0:24:30.919 a battery, it needs a process or needs memory chips, 0:24:31.200 --> 0:24:33.840 and it needs a screen. And if you don't have these, 0:24:34.040 --> 0:24:37.480 then you don't really have a phone. And given that 0:24:38.119 --> 0:24:41.479 the US has figured out that it is almost a 0:24:41.520 --> 0:24:46.600 monopolis on very important technologies, especially the semiconductor and by 0:24:46.680 --> 0:24:51.560 denying U S semiconductors to particular firms of previously EPs 0:24:51.600 --> 0:24:56.720 figured out, it can really cripple China technology advancement. Now 0:24:56.760 --> 0:24:59.800 I take the view that over the long term, China, 0:25:00.080 --> 0:25:04.120