COVID-19 effects on business: More state intervention in business strategies

This article was originally published in Forbes on 25 March 2020.

The pandemic is accelerating nationalist forces that have become catalysts for de-globalization and localization. It is also raising questions about how much of the economic self-interest of MNEs is in alignment with national security policies. This will put constraints on present-day corporate strategies.

First, there is a growing appetite to re-shore critical industries and supply chains back to the home country, as the public and private sectors acknowledge an over-reliance on China, both as a supplier and a manufacturing base.

From automotive parts to surgical masks, the offshoring model has backfired. Hospitals and healthcare providers around the world, for example, are realizing that 80 percent of the ingredients for the world’s prescription drugs come from China and India, and they are now in critical short supply.

Stateless MNEs

A case study of how MNEs have historically gamed the system involves Huawei, the Chinese telecommunications equipment company, which the US government placed on its restricted entity list in May 2019.

Huawei has responded to US technology export controls by “de-Americanizing” its supply chains. Consequently, Huawei claims to have replaced all US technology from its P30 Mate smart phone, as well from its next generation 5G base stations.

These US export controls have been bad for MNEs. Huawei alone purchased approximately $11 billion, worth of semiconductors from US firms in 2018, and its move to de-couple from American suppliers revealed an even bigger problem, for American MNEs:  more than 60 percent of Qualcomm’s revenue came from China in the first 4 months of 2018; for Micron, over 50 percent; for Broadcom about 45 percent.

To continue selling to Huawei — and other restricted Chinese tech companies — MNEs have been restructuring their global supply chains so that the content of American originating technology in finished products falls below the US government’s so-called de minimis thresholds of 25 percent and 10 percent.

To get below de minimis thresholds, for example, companies can transfer labour costs to their overseas plants, as well as redistribute the costs of overhead, IP, license fees and materials to other offshore locations. Once an item is classified below the 25 or 10 percent threshold, it is no longer “American” and does not require an export license.

This de minimis play is incentivizing companies to transfer more operations out of the US and has caused the federal government to consider reducing these thresholds or eliminate them all together.

Lobbying efforts by the US tech sector, however, have been successful in convincing the Feds not to mess with de minimis. So far, virtually all export license applications for sales to Huawei have been quietly approved.

The logic behind these approvals is simple enough: restricting sales to Chinese firms allows competitors to move in and substitute similar products, which not only deprives American MNEs of market share, it cuts off badly needed revenue for R&D activities.

But as COVID-19 puts the world’s major economies in their most precarious state since the second world war, government policies will increasingly seek to keep strategically important MNE operations at home — which will put constraints on their profits.

Systemic competition

It has taken an event like COVID-19 to demonstrate how effective the Chinese state is at mobilizing and executing large-scale initiatives.

To witness an army of synchronized machines in Wuhan, for example, moving earth and erecting two fully functioning field hospitals, in under two weeks — each with 30 intensive care units and thousands of beds — is to see the Chinese juggernaut on full display.

By contrast, COVID-19 has exposed the lack of preparedness within decentralized governments in the West as they struggle to react to the pandemic.

To watch the US government’s failure to coordinate a national response to the coronavirus is to reflect on the bigger question of America’s ability to compete, in the long-term — and at scale — with China’s state-centric model of capitalism.

At the very least, the primacy of the West’s laissez-faire system needs to be questioned. More specifically, the question about how much the economic self-interests of MNEs are in alignment with national security policies requires public debate.

The COVID-19 pandemic has ensured that these questions dominate policy making for years to come.

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