What is amazing is that some people at the highest levels of these companies, as well as in political circles, still think that the United States should continue to pretend that technological decoupling is not a done deal. Think about it. At a time when it’s nearly impossible to disentangle the military and civilian uses of high-end chips, do you still ship these products to your biggest strategic adversary?
Many of the complaints about Washington’s aggression and much of the continued reluctance to face the reality of the new trade paradigm have come from Europe. I can understand that. The UK and the EU are literally stuck between the two superpowers. It’s no surprise that they want to put off the choice between the two for as long as possible, at least when it comes to which tech ecosystem to choose.
But most Americans (and most Chinese for that matter) tend to prefer outspokenness to diplomatic kicks. US companies and chip industry personnel leave China. But many CEOs of US consumer brands that use chips are beginning to ask policymakers how far decoupling will go and how fast.
What exactly will American companies be able to sell in China?
The answer will depend on the porosity of the new rules and the number of exemptions granted. It will also depend on China’s next move, which could be to restrict certain exports of rare earth minerals, most of which it controls. These are used in the defense industry, as well as in electric vehicles.
The US military could cope, as it has been stockpiling for some time, and allies like Canada and Australia are also starting to mine more of these materials. The blow to the nascent electric vehicle industry, which the Biden administration is trying to encourage, would be harder, as they would be second in line for supply.
Additionally, according to Christopher Gopal, a veteran supply chain expert who teaches at the University of Southern California, the Chinese could restrict the export of low-end, domestically-made chips, which are used both in traditional automobiles and electric vehicles.
Even on the most accelerated schedule, it would take the United States, he estimated, at least two years to produce or acquire those of allies in bulk. This would mean that “car prices would increase and their functionality would decrease”. China could also reduce its exports of various electronic components, contributing to inflation of a wide variety of products.
The bottom line? Countries and companies need redundancy in supply. An obvious step would be to increase production of low-end chips and components in friendly countries such as India and parts of Eastern Europe. Leaders will also have to rethink the idea that inventory is bad, which is a big change from decades of just-in-time supply chain management.
Unit cost will no longer be the sole metric for any sound purchasing decision, whether public or private. There is now a risk calculation that must factor in the cost of higher inventory, the time and working capital required to build that inventory, and the price of distributing and restocking critical goods in new chain configurations. supply.
Policymakers must continue to refine their lists of the most critical supply chains, including not only chips, but also food, antibiotics and other key pharmaceuticals, energy, PPE and basic clothing. I would say that the Commerce Department should take the lead in this information gathering.
Is all this disturbing to contemplate? Yes. But the only thing worse than willful blindness is being unprepared for reality.