Speaker 1: Hello, Odd Lots listeners. Of course, normally we released new
Speaker 1: episodes on Monday, but today we're bringing you a special
Speaker 1: midweek episode. That's because it's very timely one. Obviously a
Speaker 1: lot of interest in the coronavirus and the effect that
Speaker 1: it's having on supply chains around the world, so we
Speaker 1: didn't want to wait. We didn't want to slot it
Speaker 1: in future in the schedule. We wanted to get it
Speaker 1: out now, and hopefully you've h Hello and welcome to
Speaker 1: another episode of the Odd Lots Podcast. I'm Joe Wisenthal.
Speaker 1: I'm Tray all Away, Tracy. You know, it's really struck
Speaker 1: me in the markets over the last several weeks. I
Speaker 1: go on, Well, obviously the crisis over the coronavirus continues
Speaker 1: to be this massive story for the global economy, for China, Asia,
Speaker 1: all kinds of different companies, and yet investors, in a
Speaker 1: weird way, outside of some specific names or specific currencies,
Speaker 1: still seem surprisingly or maybe not surprisingly, but generally not
Speaker 1: that worried. Right now. Yeah, um, I find this pretty amazing.
Speaker 1: So at the time that we're recording, I think the
Speaker 1: SMP five is still pretty close to its all time high,
Speaker 1: and what amazes me about that is we spent two
Speaker 1: years collectively worrying about how trade tensions between the U
Speaker 1: S and China we're going to affect global supply chains
Speaker 1: and economic growth and consumption, and we sort of followed
Speaker 1: every tiny in and out when it came to the
Speaker 1: trade negotiations. And now when you have something the ownavirus
Speaker 1: and the containment efforts underway in China, you have something
Speaker 1: that is guaranteed to impact production and consumption in the
Speaker 1: world's second biggest economy as well as disrupt a bunch
Speaker 1: of supply chains, and no one seems to care. Yeah,
Speaker 1: it's it's really odd, it's really surprising, it's counterintuitive. It's
Speaker 1: not what I would have guessed. Even this week, the
Speaker 1: week that we're recording it, we got um a warning
Speaker 1: from one of the sort of emblems of US China
Speaker 1: trade globalization, Apple, which is heavily exposed to China on
Speaker 1: the supply chain front and heavily exposed to China on
Speaker 1: the revenue front, saying, look, this quarter is going to
Speaker 1: be worse than we previously expected. Factories aren't opening up
Speaker 1: for our suppliers as fast as we had anticipated. A
Speaker 1: couple of weeks ago, we're not totally sure when things
Speaker 1: will be back to normal. Uh, not to mention the
Speaker 1: fact that people are outlets opping and uh, you know,
Speaker 1: the stock fell about two in the immediate wake of that,
Speaker 1: maybe because people figured this was the case already, And
Speaker 1: then the next day the stock immediately basically erased all
Speaker 1: of those losses. So even a company coming out and saying, um, no,
Speaker 1: this is a serious issue for us, even it's not
Speaker 1: having that much effect on them right now, I guess
Speaker 1: people are so confident that the effects will just be
Speaker 1: transitory and everyone will okay, but be back to be
Speaker 1: back to work eventually. Yeah, and our colleagues over at
Speaker 1: Bloomberg Intelligence actually counted up the number of companies that
Speaker 1: are talking about the coronavirus at the moment, and I
Speaker 1: think they counted something like nine trillion dollars worth or
Speaker 1: companies accounting for nine trillion dollars worth of market cap
Speaker 1: have mentioned the coronavirus. But so far we only really
Speaker 1: have a handful of them who are issuing, you know,
Speaker 1: the kind of warnings that we saw from Apple. Most
Speaker 1: of them are just talking about how it's too really
Speaker 1: to say that, you know, they'll get a direct hit
Speaker 1: but again, frankly, watching all of this uh go down
Speaker 1: in China and in Asia, I find it really difficult
Speaker 1: to see how global supply chains would not be impacted
Speaker 1: at this point. Right. So obviously, look, we don't know
Speaker 1: what the markets are going to do, and nobody does,
Speaker 1: and we'll just see what happens. But I do think,
Speaker 1: and I did think, in light of that Apple warning,
Speaker 1: we really need to dive deeper into the question of
Speaker 1: supply chaine because so much of the world, so much
Speaker 1: so many companies that manufacture anything are exposed to China
Speaker 1: or East Asia in some way, and getting some sort
Speaker 1: of handle on what the risks are is key, and
Speaker 1: what the risks of course to the China economy are
Speaker 1: going to be that's also key. Uh So that's what
Speaker 1: we're going to discuss today. Great, I think that's a good, good,
Speaker 1: good idea given the circumstances, let's do it all right.
Speaker 1: We have a really great guest. We've had him on
Speaker 1: podcast I think a couple of times before, at least once,
Speaker 1: but I'm pretty sure twice. He's Dan Wang. He's an
Speaker 1: analyst at gav coll dragon Omics. He's talking to us
Speaker 1: from Beijing. He's a tech analyst really knows a lot
Speaker 1: about Chinese manufacturing, Chinese supply chains, the interaction with global tech,
Speaker 1: and uh, he'll walk us through the risks posed by
Speaker 1: this virus, what we're seeing right now, as well as
Speaker 1: other risks that maybe people aren't even thinking about right
Speaker 1: now beyond the virus. So Dan, thank you very much
Speaker 1: for joining us. Thanks very much for having me on
Speaker 1: a gun. We've all seen the images of various cities
Speaker 1: across China, either quarantined or de facto quarantine, empty streets
Speaker 1: and so forth. We know that there are numerous factories
Speaker 1: that have yet to reopen, and the schedule for that
Speaker 1: is remains unclear. We got the warning this week from
Speaker 1: Apple that this is going to be a hit to
Speaker 1: their performance in the current quarter, So that's known. What
Speaker 1: to you, based on your work that you're doing looking
Speaker 1: at the industry, what you've seen, what really jumps out
Speaker 1: at you in terms of the coronavirus hit to China's
Speaker 1: industrial economy. So I think you've all lad by saying
Speaker 1: within a really good way, by saying that basically the
Speaker 1: market seems to be parting all of this off. I
Speaker 1: think there could be an economics way of thinking about
Speaker 1: that in just uh, you know, if you assume that
Speaker 1: the virus is going to be mostly contained in this
Speaker 1: current quarter, and there's some evidence that that could be
Speaker 1: the case, um, and that's the Chinese economy while basically
Speaker 1: bounced back into the normal previous trend growth, that will
Speaker 1: be all expecting there will be some pent up demands
Speaker 1: that would be released later on, and you know that
Speaker 1: it will be a quite that quarter, but everything gets
Speaker 1: back to trend. I think that case could be made
Speaker 1: for the general macro economy, and that's why most people
Speaker 1: are not reacting very much. But in terms of electronics,
Speaker 1: I think that story would not be so simple, and
Speaker 1: that's because electronics manufacturing is uh some involves most some
Speaker 1: of the most complex supply chain ever. Um. You need
Speaker 1: basically a lot of different components in place in order
Speaker 1: to begin production. You need a thousand and one or
Speaker 1: movie even a dollient and one components all at the
Speaker 1: right place and all at the right time. And so
Speaker 1: if you have this delay, which hasn't really resolved itself yet,
Speaker 1: I think that can ripple on and cascade on throughout
Speaker 1: the supply chain all the way throughout the rest of
Speaker 1: the year. When it comes to basically the peak selling season,
Speaker 1: which is the Christmas season in the US. I think
Speaker 1: that will ripple on throughout the rest of the year.
Speaker 1: How much flexibility is there when it comes to altering
Speaker 1: global supply chains for electronics companies, because you know, during
Speaker 1: the trade tensions, we saw a lot of people talking about, well,
Speaker 1: they'll just move production from China to Vietnam or to
Speaker 1: wherever there was that option. But in the current situation,
Speaker 1: it seems like, first of all, you have to do
Speaker 1: it much much more quickly um And secondly, no one's
Speaker 1: really sure how the virus is going to play out,
Speaker 1: so you don't necessarily have the motivation to move production
Speaker 1: if you're thinking that it's going to end very very quickly.
Speaker 1: So how easy is it to to shift supply chains
Speaker 1: for electronics companies? It is all pretty difficult. And we
Speaker 1: have not seen a great deal of production move overseas
Speaker 1: um as a result of the US terristan Chinese production.
Speaker 1: We have that certainly seen. Some have seen a few
Speaker 1: marginal products something like servers and something like wearables move overseas,
Speaker 1: especially to Vietnam that's the most cited place, But in general,
Speaker 1: it hasn't been a wholesale movement of supply chains, and
Speaker 1: I think, um, you know, that's a pretty difficult thing
Speaker 1: for our companies to deal with on a short term.
Speaker 1: A manufacturer made a statement a while ago to say that,
Speaker 1: you know, the terrorists are something that we can deal with.
Speaker 1: That's a cost increase, and that's something you have to
Speaker 1: we're into, but that is a predictable and something that
Speaker 1: we are able to resolve. Where he as Um, if
Speaker 1: we do not have a lot of parts, as that
Speaker 1: coronavirus has threatened. Um, if we do not have workers
Speaker 1: in our factories because they just are not coming back,
Speaker 1: or we cannot pass these sanetary checks or quarantine checks
Speaker 1: uh imposed by the local government, then we don't even
Speaker 1: have the parts in place to engage in production. So
Speaker 1: this is like a much bigger deal. Talk to us
Speaker 1: a little bit more about modern electronics supply chains, and
Speaker 1: in a sense, uh, there are an absolute marvel because
Speaker 1: all these different companies come together and the logistics are
Speaker 1: such that companies can hold very little inventory, and and
Speaker 1: the key part arrives just in time for the other
Speaker 1: company or the other manufacturer to assemble it into something
Speaker 1: and then that goes into something else. And it's this
Speaker 1: sort of beautiful orchestra. Maybe when it's working, uh, when
Speaker 1: it's working, ideally, talk to us about what you said
Speaker 1: when you pointed out, look, it's not as simple as
Speaker 1: just restarting this because it's so complex. It's not just
Speaker 1: a matter of Okay, the switch goes off for a
Speaker 1: few weeks and then maybe you just turn it back on.
Speaker 1: What is that cast scading effect you're talking about? And
Speaker 1: why is it not so simple to get it going
Speaker 1: again once? Once? Uh, the you're ready to restart, Yeah,
Speaker 1: that's exactly right. So basically, to really get production going
Speaker 1: at the major manufacturer like fox Con, you need a
Speaker 1: lot of different components in place. So you need to
Speaker 1: have let's play something like the house and components in place.
Speaker 1: You need all of the labor in place. Also, to
Speaker 1: begin stacking, you need to make sure that all of
Speaker 1: the components are um aliving on a daily basis that um,
Speaker 1: there is a lot of flow. You need to make
Speaker 1: sure that the components are of pretty good quality and
Speaker 1: used to make sure that the labor is of good quality.
Speaker 1: And right now, basically none of those conditions are holding.
Speaker 1: So fox Con, it's not said, uh, very publicly very
Speaker 1: much about how many workers have been able to return UM.
Speaker 1: Our estimate is that something like half of China's UH
Speaker 1: migrant labor force has UH allied back into other factories.
Speaker 1: It's going to take up quite a while, probably in
Speaker 1: March or early April, for everyone to get back into
Speaker 1: their place. And so you know, I think that the
Speaker 1: larger manufacturers are probably able to deal with a lot
Speaker 1: of these problems. So fox Con, in spite of a
Speaker 1: lot of bad press that has received over the last decade,
Speaker 1: is still the best pain of the large manufacturers that
Speaker 1: has the best working conditions. UM it is just really large.
Speaker 1: It employees about a million people in China every year,
Speaker 1: and then the five other big contract manufacturers in Taiwan
Speaker 1: UM employee about collectively UH five thousand, so about one
Speaker 1: point five million people total working on UM, which is
Speaker 1: just directly on all types of electronics, but especially the smartphone.
Speaker 1: And so basically Apple needs a lot of people in
Speaker 1: place UM and it should be able to hire all
Speaker 1: of the people that it needs. But if fox Con
Speaker 1: is able to hire for everyone, because it is working
Speaker 1: for its largest customer, Apple, which has a lot of
Speaker 1: cash to throw at these problems, UM, it might suck
Speaker 1: away the labor from a lot of the sub assemblers,
Speaker 1: so the component makers that are supplying goods for Fox
Speaker 1: con to put onto lines of people to actually produce.
Speaker 1: So you know, again, I want to emphasize that it
Speaker 1: only takes a few missing parts for an entire supply
Speaker 1: chain not to be functional, and so there will be
Speaker 1: a lot of these gaps out there, even for Apple.
Speaker 1: Apple every year launches a new iPhone by Q four
Speaker 1: that is highly predictable. But even for Apple it is
Speaker 1: a pretty hot affair. The supply chains are pretty tight
Speaker 1: and every week counts towards Q four, and not very
Speaker 1: many firms have a few weeks of production to lose.
Speaker 1: So my thought here is that even though large manufacturers
Speaker 1: working for large consumer electronics companies like Apple are able
Speaker 1: to get through this, many smaller companies are going to
Speaker 1: have a lot more problems. Q one is typically the
Speaker 1: time of the year where many consumer electronics companies um
Speaker 1: engage in prototyping and developments with the UH with the manufacturers,
Speaker 1: and if the manufacturers just are have persistent labor shortages
Speaker 1: and supply shortages, are going to be dedicating all of
Speaker 1: their people to their large customers like Apple, and I
Speaker 1: think the the the case would be here that this
Speaker 1: year that consumer electronics will be pretty that a lot
Speaker 1: of smaller companies won't even be able to launch the
Speaker 1: products they had hope to launch by the Christmas season.
Speaker 1: It's if that's already probably the case, and it's going
Speaker 1: to be a stretch even for Apple. Could you talk
Speaker 1: to us a little bit more about the labor shortage
Speaker 1: idea and how the containment efforts that we've seen rolled
Speaker 1: out across China at this point, how those actually impact
Speaker 1: the way the labor market functions. So China today has
Speaker 1: a lot of restrictions in place in who can go where.
Speaker 1: When I leave my apartment in Beijing, I have to
Speaker 1: have flash this little card at these doormen who have
Speaker 1: are newly set up to exit and enter the building. Um.
Speaker 1: Every uh three blocks I go, there is someone um
Speaker 1: taking my temperature to make sure that I'm all right.
Speaker 1: One thing that I'm struck by now is that the
Speaker 1: amount of state capacity that China has brought to bear
Speaker 1: on this problem is impressive and also frightening. That China
Speaker 1: has been able to quarantine about sixteen million people around
Speaker 1: the population of Italy and the span of around twelve hours.
Speaker 1: My thought here is that China can mobilize it, that
Speaker 1: isn't more quickly than many countries can mobilize their armies,
Speaker 1: and so it is imposing many sorts of restrictions on labor.
Speaker 1: Even today, many UH migrants are not able to enter
Speaker 1: the large cities to actually begin a production. So a
Speaker 1: lot of the public transportation in terms of trains are shut,
Speaker 1: a lot of roads are a lot of cars are
Speaker 1: not able to go on the road, and this is
Speaker 1: creating a lot of problems for factories that really needed labor.
Speaker 1: And I think the biggest issue here is that there's
Speaker 1: considerable and certainty about when this virus could be declared
Speaker 1: eradicated and for everybody to feel faced to go back
Speaker 1: to other jobs. So these travel restrictions could evaporate, um
Speaker 1: let's say next week. Um there are tap could take
Speaker 1: something longer, um let's say a month, But it will
Speaker 1: take probably even longer for all of the flights to
Speaker 1: resume and for all of the people to feel that
Speaker 1: they can safely travel about in China, and that will
Speaker 1: create a lot of uncertainties. There is just a lot
Speaker 1: of human contacts feel required for to engage in production. Yeah.
Speaker 1: And one of the things that we've seen anecdotally as
Speaker 1: well is this notion of a sort of patchwork of
Speaker 1: local and national rules. So, for instance, in order to
Speaker 1: open up a factory, you know, local officials will require
Speaker 1: the factory owner to give face masks to all of
Speaker 1: its workers. But of course there's a giant face masks shortage,
Speaker 1: and so there are an able to do that. And
Speaker 1: we've seen a lot of chaos, let's say, in confusion
Speaker 1: when it comes to what the rules are and what
Speaker 1: they are not when it comes to work environments, right
Speaker 1: can trying to deal with that right around the holiday
Speaker 1: and uh, you know, the huge moves extraordinary, Dan. Is
Speaker 1: there a compounding effect of the delays such that okay,
Speaker 1: uh you know, I know that at one point the
Speaker 1: goal was okay, reopened by February tenth. That didn't happen
Speaker 1: in many cases. But is there a sort of nonlinearity
Speaker 1: where a week of delays does not just mean a
Speaker 1: week of problems and each week the situation uh sort
Speaker 1: of snowballs and grows, uh you know, compounds or grows exponentially. Yes,
Speaker 1: there is that risk that there is a lot nonlinear
Speaker 1: aspect of this. UM. If you were expecting basically a
Speaker 1: lot of components to rise and a few don't, then UM,
Speaker 1: a lot of manufacturers could be quite stuck. And for
Speaker 1: the manufacturer like Fox cons who are at the end
Speaker 1: of a supply chain basically waiting for everybody to send
Speaker 1: everything through, UM, they don't necessarily have great visibility into
Speaker 1: which little part they require. That just doesn't necessarily make
Speaker 1: it so UM. Every time there's an earthquake in Japan,
Speaker 1: UM reminds us. The reminds the world about how dependent
Speaker 1: the entire world is on perhaps a particular factory making
Speaker 1: a particular widget, and so UM, these things can be
Speaker 1: a little bit unpredictable. But I think the the I
Speaker 1: think the large companies like Apple realize that at this point,
Speaker 1: and I think everybody is going to be in a
Speaker 1: scramble in the coming weeks to really understand how deep
Speaker 1: the supply chains are. Another issue for Apple right now
Speaker 1: is that Apple sends a lot of engineers from its
Speaker 1: headquarters in Cupertino to come over to China and then
Speaker 1: actually monitor a station. These engineers and monitor the progress
Speaker 1: of these component makers. Have quality assurance and product development purposes.
Speaker 1: A lot of those flights are canceled, and I expect
Speaker 1: that Apple is only able to send a trickle of
Speaker 1: staff over to China to actually monitor all of that production.
Speaker 1: So there are a lot of these worsts out there.
Speaker 1: Dan talk to us a little bit about I guess
Speaker 1: the big picture, long term impact when it comes to
Speaker 1: China's technology ambition. So I think the first time we
Speaker 1: had you on this podcast was to talk about the
Speaker 1: MAIDE in China initiative, where China is really trying to
Speaker 1: bulk up its own technology expertise. Would you expect something
Speaker 1: like the coronavirus outbreak to have a long term impact
Speaker 1: on those efforts? Certainly, I think it will push greater
Speaker 1: geographic diversity. I think that um, the the the events
Speaker 1: of the last two years have shown that companies are
Speaker 1: highly dependent on China for our produc ships. I think
Speaker 1: many companies are thinking more deeply about what geographic diversity
Speaker 1: actually means. So previously we we thought that geographic diversity,
Speaker 1: um you know, it's important in case there's a flood
Speaker 1: or an earthquake, which are fairly localized events, and so
Speaker 1: if you want to basically have a more robust supply chain,
Speaker 1: you should locate a lot of your factories just geographically
Speaker 1: quite far away from each other. And I think the
Speaker 1: events at least of the last year have shown that
Speaker 1: when President Trump has imposed tariffs on Chinese goods, but
Speaker 1: there is a political element, So even if you produced
Speaker 1: in northern China and then southeastern China, you may necessarily
Speaker 1: you might still be hit by a lot of these
Speaker 1: name risks. Now whether and how it impacts China's technology development,
Speaker 1: I think it is going to make it a little
Speaker 1: bit more difficult for China to do everything that I
Speaker 1: would like. Um, at the very least, it is turning
Speaker 1: on some foreigners and ex pats out off the idea
Speaker 1: of living for most of the time in places like Baching,
Speaker 1: China Hi, and I think that will be at least
Speaker 1: a loss of potential talents that Chinese firms are able
Speaker 1: to hire. Dan I think, uh, that's a great opportunity
Speaker 1: to sort of segue into another another risk factor facing
Speaker 1: Chinese manufacturing, Chinese supply chain, because it was just a
Speaker 1: few months ago that there was this thought that Okay,
Speaker 1: the big risk was just on the trade front. That
Speaker 1: seems to have cleared up. They got the Phase one deal.
Speaker 1: Now suddenly there's this which is uh, you know, as
Speaker 1: your point, could potentially change everything, or at least change
Speaker 1: really changed the way companies around the world think about
Speaker 1: their exposure to China. But as you point out, and
Speaker 1: as you've been writing, the coronavirus is really not the
Speaker 1: only major threat to UH Chinese supply, Chaine Chinese manufacturing,
Speaker 1: and that there's an another thing lurking out there that
Speaker 1: people need to pay attention to. So what is that?
Speaker 1: So that is the um the current US policy on
Speaker 1: how to restrict technology flows to China, and so they're
Speaker 1: as part of the trade war. There has also been
Speaker 1: a bit of a tech war hovering in the background
Speaker 1: in terms of US policy action. I think the first
Speaker 1: major shot of that was last year or or or
Speaker 1: almost a year and a half ago now when President
Speaker 1: Trump administration designated ETE to something called the Denied Person's List,
Speaker 1: which more or less cut off vts entire ability to
Speaker 1: procure from American technology, especially semiconductors, And so that has
Speaker 1: brought the firm to its kneed, almost the virtual bankruptcy
Speaker 1: until Presidency and Trump reached a political solution to save
Speaker 1: the company. There has been this element covering the background
Speaker 1: of the US exercising investment restriction on the ability of
Speaker 1: foreigners to invest in US firms, especially technology firms. There
Speaker 1: has been a process initiated by the Department of Justice
Speaker 1: to scrutinize Chinese actions much more closely in terms of
Speaker 1: treats ecretments, appropriation, but also Chinese activities, and say university
Speaker 1: is working with certain professors, and then it US also
Speaker 1: manifested in specifically this issue of AWE becoming a large
Speaker 1: player in the tech world. And then the administration is
Speaker 1: thinking much more carefully now about how to deny products
Speaker 1: American products to a firm that it considers a national
Speaker 1: security threat. What would be the impact on China's tech
Speaker 1: industry if the US does actually go through UM with
Speaker 1: a lot of the things that it's threatening, and what
Speaker 1: options does China have to offset the impact of those curves.
Speaker 1: I think the issue right now for China is to
Speaker 1: figure out how to be Americanized supply chain. So UM again,
Speaker 1: this is sort of a supply chain story in which
Speaker 1: the lack of a few components can really defeat system.
Speaker 1: So if you take a look at your smartphone and
Speaker 1: has something like fifteen hundred different components in it, and
Speaker 1: if you lack even through your four different components, the
Speaker 1: whole system might be defeated. So your phone needs, for example,
Speaker 1: a battery, it needs a process or needs memory chips,
Speaker 1: and it needs a screen. And if you don't have these,
Speaker 1: then you don't really have a phone. And given that
Speaker 1: the US has figured out that it is almost a
Speaker 1: monopolis on very important technologies, especially the semiconductor and by
Speaker 1: denying U S semiconductors to particular firms of previously EPs
Speaker 1: figured out, it can really cripple China technology advancement. Now
Speaker 1: I take the view that over the long term, China,
Speaker 1: now that has realized it is very dependent on US technologies,
Speaker 1: it should be able to figure out a lot of
Speaker 1: long technologies. UM. In turn, so UM, it's difficult to
Speaker 1: name in history a country that has monopolized the key
Speaker 1: technology over the long term. So in the eighteenth century,
Speaker 1: when the UK was the leading industrial power at the time,
Speaker 1: and when they tried to export control certain textile mills
Speaker 1: and enginery to the US rising power, certain people just
Speaker 1: memorize a bunch of mill design gone into a ship
Speaker 1: and then went to the US. So one of these
Speaker 1: people is Samuel Slater, who's known in the UK as
Speaker 1: later the Treator and states side as the father of
Speaker 1: the US Industrial Revolution. A lot of knowledge just consists
Speaker 1: in people's heads, uh, and transfers. I used to working
Speaker 1: Silicon Valley. The same that we had there was that
Speaker 1: knowledge travels that has bit of beer beer copy bit
Speaker 1: for poison. And so long as you can just talk
Speaker 1: through these sort of ing um and a lot of
Speaker 1: technology is able to travel. The Chinese don't have to
Speaker 1: invent anything to novo um. They only have to replicate
Speaker 1: existing processes. But that is still a pretty big chal um.
Speaker 1: The US is basically a monopolist and very many key
Speaker 1: semic cocceptor of technologies, including the capital equipment to actually
Speaker 1: advocate the sety conductors and also in things like aviation
Speaker 1: engines in which China is also kind of catch up.
Speaker 1: And so this is why there has been a pretty
Speaker 1: active debate in the White House on how to actually
Speaker 1: restrict a lot more technologies to China while also being
Speaker 1: able to protect the ability of US firms to sell
Speaker 1: goods to their largest markets and then also generate the
Speaker 1: revenue for greater R and D. It's so interesting, uh,
Speaker 1: just sort of thinking about the symmetry or the asymmetry
Speaker 1: or I guess it's the symmetry of the needs and
Speaker 1: priorities of China when it comes to trade, and the
Speaker 1: needs and priorities of the U S when it comes
Speaker 1: to trade. Obviously, we know President Trump feels that they
Speaker 1: he would like to bring back jobs from China, and
Speaker 1: though maybe you know, it's debatable whether anything that's been
Speaker 1: done so far I would really accomplish that. Obviously that
Speaker 1: was a key driving aspect of his campaign and his
Speaker 1: message and so forth. And then you have the Chinese
Speaker 1: economy and the Chinese priorities that you've talked to us
Speaker 1: on the podcast before, and it's not about jobs per se.
Speaker 1: It's about the over alliance and uh, you know, winning
Speaker 1: back the tech tech war against uh, the US. So
Speaker 1: it's really sort of the same thing in a sense
Speaker 1: of both just wanting to not need the other. Yeah,
Speaker 1: that's right. So both countries are clients to reach the
Speaker 1: purpose serves the technology, which is right now mostly an
Speaker 1: American affair, and the Chinese also wanting many of the
Speaker 1: same things. So I guess then the question is, you know,
Speaker 1: I've see on the first half of the conversation you
Speaker 1: were talking about Okay, US companies are going to think
Speaker 1: about geographic diversity for manufacturing. And of course during the
Speaker 1: trade war, we heard a lot about Vietnam. But there's
Speaker 1: really no country immediately that can just suddenly absorb a
Speaker 1: huge influx of new demand for manufacturing. I mean, there's
Speaker 1: just all kinds of things that need to go into that.
Speaker 1: It's not like you just build a fox Con in
Speaker 1: Vietnam overnight, or a fox Con in Brazil overnight or
Speaker 1: anything like that. Who into the race, Like, how long,
Speaker 1: UH say, will it take for China to accomplish what
Speaker 1: it needs on sort of, you know, being able to
Speaker 1: design some of its own semiconductors so that it can
Speaker 1: wean itself off of US tech. That's a great question
Speaker 1: thinking about it in terms of a race, and I
Speaker 1: tend to think that the US has the advantage here.
Speaker 1: It is a lot more straightforward for uh Apple to
Speaker 1: move most of its supply chain out of China uh
Speaker 1: and into let's say, a mix of places that include India, Brazil,
Speaker 1: in Vietnam. Then it is for China to figure out semiconductors,
Speaker 1: which are the most complex technologies in the world. When
Speaker 1: I think of something like a semi conductor manufacturing equipment
Speaker 1: from a firm like an smel. Basically, these pieces of
Speaker 1: machinery are about as large as buses. Each machine costs
Speaker 1: about two hundred million US dollars UM and you're really
Speaker 1: playing with light and physics and math at that point.
Speaker 1: It's almost like a pure science affair, and the Chinese
Speaker 1: just have not had enough experience really doing a lot
Speaker 1: of these things. Now they're the The question that becomes
Speaker 1: when the US exercises these ex core control actions on China,
Speaker 1: does it accelerate Chinese technology development or does it are
Speaker 1: really crippled? Right? I think odd all over the long
Speaker 1: term it should still the accelerating China technology development. So
Speaker 1: UM right now, the you know, the Chinese have always
Speaker 1: had a program to replace its own internal uh, the
Speaker 1: technologies that it uses with Chinese made equipment. Part of
Speaker 1: that has that has always been a program and has
Speaker 1: somewhat accelerated UM in after the sting revelations of UM
Speaker 1: different spying, and I think the Chinese now are m
Speaker 1: This is the difference in the last two years is
Speaker 1: that this is no longer a whimsical government effort which
Speaker 1: has never really been terribly successful in the past. Now
Speaker 1: this has led much more by private companies, by firms
Speaker 1: like um Ali Baba or ten Signs or High Division
Speaker 1: or sell Me that are asking themselves, can I depend
Speaker 1: on American supply such that I'm willing to build off
Speaker 1: my build my technology off in American stack for the
Speaker 1: next ten years and UM, they are becoming a little
Speaker 1: bit more hesitant to do something like that. UM, and
Speaker 1: so they are taking the lead and trying to develop
Speaker 1: it's there more homeground, more politically dependable components. Uh. So, Dan,
Speaker 1: just to sum it all up, I'm kind of curious
Speaker 1: to get some of your personal observations about the situation
Speaker 1: at the moment. What has surprised you about how the
Speaker 1: coronavirus or the containment efforts around the coronavirus have impacted
Speaker 1: either the tech industry or the electronics industry. What was
Speaker 1: most surprising. I think the speed and scale of the
Speaker 1: payment effort. I think after Woohim was quarantined, um first
Speaker 1: of all, they quarantined Wolhi really quickly, and basically there
Speaker 1: has been a really enormous demonstration of state uh power
Speaker 1: here and state compa sit here, and I think are
Speaker 1: now trying to figure out given that there are some
Speaker 1: encouraging signs that the virus is abating. Um. The number
Speaker 1: of infections x Hube has been in the double digits
Speaker 1: I think for the last three days, meaning that the
Speaker 1: epidemic seems to be mostly contained in in Hube and Wolheim.
Speaker 1: And as a question now is really how to restart
Speaker 1: the economy. So they have been really good at making
Speaker 1: sure that people are in their place and that these
Speaker 1: states has the ability to quarantine very many people. UM.
Speaker 1: Now I think the interesting a lot points to watch
Speaker 1: is how quickly they can reverse a lot of these
Speaker 1: restrictions to uh, well everyone's fears and then really restart
Speaker 1: the economy because a lot of things are just halted. Now. Well, Dan,
Speaker 1: really appreciate you joining us. Always love chatting with you,
Speaker 1: and we should probably you know, do one again, maybe
Speaker 1: in three months or six month and just sort of
Speaker 1: reassess where things are on the supply chain and the
Speaker 1: degree to which the industrial economy has been able to
Speaker 1: come back. But Dan, thank you, and hope everything returns
Speaker 1: to some semblance of normalcy fairly soon. Thanks very much,
Speaker 1: Thanks so much. Dan, that's really good. So Joe, I
Speaker 1: found that conversation really really interesting. It's nice to dig
Speaker 1: deep into the supply chain issue. And I do think
Speaker 1: there seems to be a sense out there that they
Speaker 1: can be very flexible and they can be reoriented as needed.
Speaker 1: But as Dan pointed out, they they're actually quite complex
Speaker 1: and it takes time to move these things. Now. There
Speaker 1: are so many things that he pointed out that I
Speaker 1: hadn't seen anyone discuss before thinking about. So, for example, okay,
Speaker 1: Christmas shopping or holiday electronics sales, that seems like a
Speaker 1: long time from now. But if the basic prototyping of
Speaker 1: the next generation of any products is Q one and
Speaker 1: QN is looking like for sure a total disaster, then okay,
Speaker 1: even if there is a big economic rebound in Q two,
Speaker 1: which we don't know for sure yet, but even if
Speaker 1: there is, there will be inevitably this cascading effect that
Speaker 1: last at least through the year, and that to some
Speaker 1: extent there's no getting back this lost time. Yeah, And
Speaker 1: the other thing I've been thinking about is we you know,
Speaker 1: we were just speaking about the production side of things,
Speaker 1: but you would think that the coronavirus outbreak is going
Speaker 1: to end up having a very very large impact on
Speaker 1: consumption as well. So China is basically in for both
Speaker 1: a supply and demand shock to its economy, And I
Speaker 1: also wonder when it comes to the consumption decline, how
Speaker 1: long is that going to last and is it going
Speaker 1: to be similar like supply chains and that it takes
Speaker 1: a while to get back to normal. You know, the
Speaker 1: Chinese government has spent so long, uh telling people that
Speaker 1: they really need to make efforts to contain the virus,
Speaker 1: they have to stay at home. Is it going to
Speaker 1: be easy for them to lift those and suddenly tell everyone, Oh,
Speaker 1: everything is back to normal, you don't need to worry anymore.
Speaker 1: To Dan's point in the last question, yeah, totally. Because
Speaker 1: you know, there's obviously there's no cure. There's no vaccine
Speaker 1: that we have or anything like that yet. So to
Speaker 1: declare victory over the virus or to declare that it's
Speaker 1: been eradicated seems like an extremely difficult thing. And even
Speaker 1: after you know, people start coming back to work, it
Speaker 1: seems plausible that fear of a new outbreak, or fear
Speaker 1: just one person having it and spreading into a new
Speaker 1: super spreader situation could really change how people behave at
Speaker 1: least for quite some time after, you know, after whatever
Speaker 1: that the idea of any sort of imminent resume, resumption
Speaker 1: of normal life, it kind of seems implausible. There's so
Speaker 1: much going on. It's such an interesting story and really
Speaker 1: sort of unprecedented in many ways. So what a fascinating
Speaker 1: topic to talk about. Hearing Dan talk about how there's
Speaker 1: someone who checks um checks his temperature literally every three
Speaker 1: blocks and as he pointed out, the state capacity required
Speaker 1: simply to set that up. I mean, it's just extraordinary
Speaker 1: to think about what they what has been done already. Yeah,
Speaker 1: they're doing it in Hong Kong as well, though not
Speaker 1: quite on that scale, but certainly to get into the
Speaker 1: major office buildings at the moment, you have to get
Speaker 1: your temperature taken, so it's a big change. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracey Alloway.
Speaker 1: You can follow me on Twitter at Chase the Alloway,
Speaker 1: and I'm Joe Wisenthal. You can follow me on Twitter
Speaker 1: at the Stalwart. And you should follow our producer on Twitter,
Speaker 1: Laura Carlson. She's at Laura M. Carlson, as well as
Speaker 1: the Bloomberg head of podcast, Francesca Levie at Francesca Today
Speaker 1: and check out all of the Bloomberg Podcasts, under the
Speaker 1: handle at podcast, Thanks for listening.