China’s “Made in China 2025” initiative, which aims for self-sufficiency in areas such as advanced manufacturing, has pitted the world’s two largest economies against each other with economic and political implications. Few would deny that the transgressions by the Chinese on the global scale, including the theft of intellectual property and the forced transfer of technology, are real. What is equally real is the force with which the Trump administration has taken action.
Rather in the same way the Trump administration vehemently argued the U.S. pays a disproportionate share of NATO budget to the EU’s benefit, the United States has taken an equally strident position against China. And rather than build a global consensus around unfair trade practices, the United States is going it alone, shouldering the burden by initiating a trade war with China, with American business and consumers footing the bill.
The administration had been more than transparent on its approach with China. However, the market seemed to shrug off the threat, with the hope that the two nations would come to an agreement. So here we are with the latest round of tariffs taking effect, with a follow-on round on January 1st bumping the tariff amount from 10% to 25%.
There certainly will be both micro- and macro- implications around this highly-charged political event. Inflation, a probable by-product, combined with rising oil prices may push the economy into recession. Some argue that this is a necessary risk to promote a fair market and the protection of intellectual property. Although it is hard to go that far, the interweaving of global economies presents complex dynamics.
DISRUPTING THE SUPPLY CHAIN
So what does this mean for the technology industry that is built on top of a complex web of global supply chains? If we track the build of a hard disk drive (HDD) used in a server, we can see just how complex the supply chain can be.
Tracking the build of a hard drive disk through the global supply chain is a complex task.
The HDD is built using components that are manufactured in different locations around the world. Imagine a certain HDD manufacturer that uses a servo motor controller integrated circuit (IC) manufactured by Texas Instruments, with the die originating from the United States. Imagine that the IC is shipped to China to be packaged in a resin casing and tested as a discrete IC chip, and then mounted on a circuit board and assembled into a hard drive. In these circumstances, the hardware conceivably may be taxed twice, as an IC shipping into China and as a HDD when imported into the United States for integration.
Albeit complex, the supply chain is inherently flexible and adaptable. In the scenario we just discussed, the most likely outcome is for the manufacturer to align manufacturing locations by region by moving final assembly for U.S. HDD demand to countries that are tariff free. This is similar to actions taken by Seagate, which after the first round of tariffs moved assembly of drives destined for the U.S. out of China for final assembly in Thailand.
PARSING THE TARIFFS
Despite mitigating the impact of the tariffs, increased complexity results in rising costs and an increased margin for error. In turn, this widens the chances of supply imbalances. It is also difficult to understand the logic behind the administration’s decision to assign tariffs to certain products but not others: DRAM and HDD are now tariffed while SSD, CPU and GPUs remain duty free.
List 1: https://ustr.gov/sites/default/files/enforcement/301Investigations/List%201.pdf
List 2: https://ustr.gov/sites/default/files/enforcement/301Investigations/List%202.pdf
List 3: https://ustr.gov/sites/default/files/301/2018-0026%20China%20FRN%207-10-2018_0.pdf
The overriding challenge lies in managing fixed capital costs when making supply chain changes against an uncertain future. Will the U.S. and China come to the bargaining table and hammer out a deal, or will it take an administration change to resolve this dispute? Or are we on a more pessimistic track? Jack Ma, the executive chairman of Alibaba, recently opined that this may be with us for the next 20 years.
However we look at it, supply chain management will play an increasingly important role in the successes of organizations.
THE POWER OF INNOVATION
Taking a long view, there are two things going on here. One is the obvious: the dispute over trade practices. The other is more of an ideological one, with China flexing its muscle through a raft of initiatives intended to advance its causes, such as the “Made in China 2025” program and its “Belt and Road” plan. The U.S. is taking a more provincial approach to the world, with President Trump making it very clear in speaking at the United Nations that he views this as a zero-sum game.
It’s true China has made great strides in the building of its technology base and will continue to push for leadership positions using whatever tactics are necessary. For its part, the United States is taking a stand to protect its technological assets.
However you look at it, this represents a critical time for nations. We are entering a paradigm shift of a similar magnitude to the industrial revolution. Trade war or no trade war, innovation—like history—moves on and does not take sides or care about winners and losers. Having your hands on the levers that move the information age economy will be the difference between success and failure for organizations and countries everywhere.
For further analysis on the storage market, read Stephen’s latest commentary.
The overriding challenge lies in managing fixed capital costs when making supply chain changes against an uncertain future. – Stephen Buckler, chief operating officer, Horizon Technology
