AMERICA CURSED

The U.S. will lose its bullying war with China and Trump’s policies could boomerang and hurt America for decades.

President Trump is acting as if the U.S. was still the world’s preferred market, believing that every government and every company will abide by its rules. America’s market dominance may still be, looking at current absolute numbers, but the U.S. lead is declining so rapidly that, for any forward looking entity, its power and influence are actually much weaker than the President thinks.

• The U.S. GDP was 5.7 times larger than China’s in 2005. It is now only 1.5 times larger and will be matched before 2030.
• China was less than 5% of the world economy in 2005, when the U.S. was 27.5%. Those ratios are now 15% and 24% and closing rapidly.
• China became the world’s largest trading nation in 2010 and now accounts for 10% more in world trade than the U.S..
• In 2005, the U.S. exported $924 billion to the world against China’s $986 billion. In 2017, China exported $2.4 trillion, 60% more than the U.S..
• Imports are the current contentious issue as the U.S. is the largest importer of the world with 2017 imports totalling $2.3 trillion, up 8% from their 2008 level and 28% more than China. But China is the world’s second largest importer at $1.8 trillion and the growth of its imports, at +62% from 2008, is almost 8 times faster than that of the U.S..

America is currently the main market for any exporting country or global company. But not for long. Whatever gap remains in favor of the United States, it will be closed in very short order considering that:

• China has 18.5% of the world population (USA: 4.3%)
• China’s urban population is 838 million or 58% of its total population (USA: 273 million, or 83%).
• Americans are much richer than Chinese people with GDP per capita of $54,198 compared with $15,175 for China. But the gap is closing as China’s GDP per capita has grown 2.7 times since 2005 while that of the U.S. rose only 9.1%.
• Every 1% increase in Americans’ wealth (GDP per capita) translates into $177 billion in total buying power. Every 1% increase in the wealth of the average Chinese results in $215 billion additional buying power.
• Extrapolating to 2028 when both countries GDP will meet, China will see its buying power grow by $12 trillion, 2.5 times the U.S. at $4.7T.
• Most importantly, some 330 millenials (24-38 years old) live in China, more than the total U.S. population and 5 times more than the 66 million American millenials. This is the cohort of big spenders every marketer dutifully targets.
• Even more significant is that, adding India, Japan, Hong Kong, Korea and other Asean countries, KKR calculates that Asia in total houses 828 millenials, 6.6 times more than the USA and Europe combined. Asian millenials are much better educated, more technology savvy and bigger spenders than their parents. They are the preferred market looking forward.

Consider China’s unprecedented pace of adoptions of various technology platforms as per KKR research:

• It took Amazon 14 years to reach 50% user penetration in the U.S.. It took Taobao, Alibaba’s ecommerce platform, 9 years.
• Online shopping was 19.6% of retail sales in China in 2017. USA: 13.3%.
• AliPay, Alibaba’s mobile payment platform through Ant Financial, took only 4 years to reach 50% penetration by 2015. ApplePay is not there yet.
• Total online payments in China were $15.4 trillion, up 69% YoY. USA: $2 trillion.
• Online finance revenues are 12% of internet market revenues in China. USA: 5%.
• WeChat, Tencent’s mobile messaging app, needed 3 years to reach 50% penetration by 2013. Whatsapp is not there yet.
• 80% of WeChat’s 1 billion accounts are linked to a bank account. That is 800 million accounts!
• Didi, the #1 car hailing app in China, reached 50% penetration in 2014. Uber is not there yet.
• Iqiyi, an online video platform in China, needed 6 years to reach 50% of its market in 2014. Netflix is not there yet.

Sorry for all these numbers, but hard and true facts matter.

The reality is that China, and Asia as a whole, have become the real elephant in the room, an elephant that keeps growing and taking more and more space and which necessarily attracts all global manufacturers, traders and marketers. It may not be as pretty and elegant as Westerners would like, but it sure means big and rising revenues and profits and, as such, it merits attention, focus and business respect.

Success in China and/or Asia creates powerful companies and brands, able to fiercely compete with long established global companies and brands, often with lower costs and recent technology, and a deep understanding of the largest and fastest growing market in the world.

As such, old, established companies and brands from the U.S. and Europe, must step down from their pedestal and fight to keep their brands and costs current and competitive against all these “newcomers”. These Chinese companies have become or are on the verge of becoming big factors in the U.S. and Europe: Lenovo ($45B in revenues), Dalian Wanda ($35B) , Fosun ($13B) , Huawei ($92B) , Wanxiang ($2B), Alibaba ($40B), Xiaomi ($18B), Baidu ($13B) , Tencent ($37B), Haier ($23B), just to name a few of the larger ones.

When President Trump seeks to implement “America First” policies, taxing imported goods and literally bullying global manufacturers into producing in America for Americans, he is making a very strong point that cannot be lost inside global corporations’ boardrooms: the strategy of global sourcing logistics must now make way for local manufacturing. In other words, Trump’s protectionist policies are compelling corporations to rethink their strategies, de-emphasize costs and aim at securing tariff-free access to the key markets.

Obviously, manufacturers cannot and will not produce in every country they sell into but they will strongly consider establishing manufacturing and distribution facilities in the largest markets, namely the USA, Europe and, most importantly, China.

What the Trump doctrine misses is that if local manufacturing becomes the norm, Asia and China in particular will be the poles of attraction by their sheer size and their highly visible growth over the next decades.

It also misses the fact that, absent efficient global procurement logistics, the cost of manufacturing within the U.S. will be much higher than that in most Asian countries. As a result, operating costs and selling prices will be higher in the U.S., hurting the competitiveness of American exporters and Americans’ standard of living by the same token.

As the relative cost of living in the U.S. rises, the economy will suffer and the U.S. dollar will decline.

The automobile industry provides the best example of what’s about to occur in manufacturing

China automobile market reached 28.9 million cars in 2017, 37% of all cars sold worldwide and 70% more than in the U.S.. The Chinese car market has mushroomed by 52% since 2012, that is about 10 million incremental vehicles or 2 million per year on average which represents two thirds of all incremental sales world wide of the last 3 years.

By comparison, total vehicle sales in the U.S. have plateaued at the 17.7 million range since 2015 in spite of a favorable labor and financing environment.

On July 6, 2018, China, retaliating to another round of Trump tariffs, imposed 40% tariffs on auto imports from the U.S.. Concurrently, China announced that it will phase out rules requiring foreign makers to manufacture cars with Chinese partners. It did not take long for the industry to react.

Tesla, which had been exporting to China from its unique California plant, announced plans to build a plant in China to produce 500,000 vehicles per year. IHS Markit forecasts that sales of electric vehicles in China, helped by government policy, will jump to 3.5 million cars in 2022, from 580,000 last year. Meanwhile, the Trump administration has withdrawn from the Paris accord and is easing regulations on fuel efficiency in a country where low-efficiency large vehicles accounted for a record 63% of overall new car sales in 2017. This when everybody concurs that the future belongs to electric vehicles.

Last year, German auto makers produced 804,200 vehicles at their American plants, but less than half were sold in the U.S.. Actually, around two-thirds of the 300,000 Mercedes made in Tuscaloosa, Alabama are exported around the world. Half of Volvo’s 150,000 cars built in its Charleston, S.C. plant opened in 2018 are built for exports.

On July 13, 2018, Chinese Premier Li Keqiang said that BMW could become the first foreign company to be allowed majority control of an auto-sector joint venture in China, BMW’s biggest single market, accounting for nearly 20% of its sales. BMW’s largest plant in the world is in Spartanburg, North Carolina with a production capacity of 450,000 vehicles and 10,000 employees. Actually, about 1 in 5 BMWs produced worldwide comes out of South Carolina. In 2017, the $9 billion Spartanburg plant exported 73% of its production making BMW the largest exporter of U.S. built passenger vehicles with 15.4% of U.S. export value in 2017. Nearly 40% of these BMWs were exported to China and 35% of those exports were the BMW X3. According to Evercore ISI, BMW this year quietly stopped exporting the X3 from the United States to China, moving the X3 production to a plant in Rosslyn, South Africa and another in Shenyang, China.

In June 2018, BMW announced that it will invest an additional $600 million in the Spartanburg plant from 2018 through 2021 to support manufacturing infrastructure for future generations of X models, creating an additional 1,000 jobs. In July, after the USA engaged China in the tit-for-tat trade war, BMW spokesman Kenn Sparks said “tariffs could cause cars shipped to China to cost more, but it remains to be seen whether demand will fall significantly enough for the company to change its production plans in Spartanburg.” Who is willing to bet that 40% tariffs won’t hurt demand significantly. Actually, “in a recent letter to U.S. Commerce Secretary Wilbur Ross, BMW said tariffs would raise its cost of doing business in the United States and could risk cutting production and jobs at its Spartanburg plant. The company said the tariffs could hike manufacturing costs and jeopardize 45,000 jobs in the Upstate — 10,000 at the Spartanburg plant and 35,000 at BMW suppliers — that are dependent on the company’s local operations.”

Evercore ISI estimates that BMW faces a $965 million impact from tariffs (Daimler $765 million).

On July 9, the Associated Press reported that BMW and China-based Great Wall Motor announced a partnership to build the electric MINI vehicles in China, setting a goal for annual production at 160,000 units. And according to Bloomberg, BMW plans to produce the electric version of the X3, the iX3, exclusively in China to export around the world starting in two years.

Autonews also reports that “in an attempt to reduce the general risks from unused fixed capacity, Mercedes is transforming its production network from churning out either front- or rear-wheel-drive vehicles to both in the future. These “full-flex” plants could theoretically build almost any kind of Mercedes model, from compact crossovers to electric sedans, on the same line.” That means plants strictly dedicated to local markets.

The U.S. consumed 17.6 million or 19.3% of all 91 million cars sold in the world in 2017 while Chinese consumers bought 29 million cars, 32% of the total. There are approximately 265 million passenger vehicles in the U.S., 0.82 per capita. China’s car ownership is estimated at 200 million, 0.14 per capita. If China car ownership rises to only 0.4 per capita, that would mean nearly 400 million additional vehicles, almost twice the current U.S. market. And this takes no account of other ASEAN countries that could potentially be supplied by China-based manufacturers.

According to Wards Automotive, foreign makers will, in 2018, for the first time produce the same number of vehicles in the U.S. as American companies. U.S. based manufacturers export 2 million passenger vehicles annually, split about equally between American and foreign companies. In effect, foreign manufacturers have built plants in the USA partly to supply the American market but also for the export market, benefitting from “several factors, such as high productivity and a favorable investment climate” as the U.S. Department of Commerce wrote in 2015 study of U.S. vehicle exports.

Deutsche Bank Research estimates that 57% of light vehicle sales in the U.S. in 2017 were manufactured in America with another 23% fabricated in Mexico and Canada under NAFTA, mainly by American companies. The whole North American automotive supply chain, which supports over 7.3 million jobs, is organized to service this 80% of U.S. car consumption at the lowest cost possible. Disrupting this network would raise manufacturing costs and prices for the whole U.S. population.

The electric vehicle market will also rapidly shift in favor of China. Reducing air pollution and oil imports are top objectives for Chinese leaders. In 2016, China ratified the Paris climate accord and Beijing has put electric vehicles at the forefront of its strategy. The U.S. is moving in the opposite direction which will hamper the U.S. industry’s competitiveness as EV take a larger share of world demand and technological advances are achieved outside the USA.

On July 7, 2018, The Guardian reported that “Contemporary Amperex Technology, one of the largest manufacturers of lithium-ion batteries in China and a major beneficiary of its government’s efforts to steer this industry towards world leadership, signed a €1bn deal with BMW, with the intention of building its own factory in Europe to satisfy soaring demand for its batteries. Daimler is now reportedly considering placing a similar order.”

Clearly, the writing is on the wall (pun intended) but someone in America cannot read it.

The “build where you sell” strategy promulgated by the Trump administration could well be adopted by many industries as they realize that it carries a lot less business risk. Corporate officers and directors are learning that structuring a global corporation on the basis of trade accords that can be unilaterally reneged or modified at the stroke of a pen without Congressional or Parliament consultations and approval is not prudent.

Political risks now dictate to put free access to markets ahead of costs considerations. The drive to minimize costs through complex global procurement and fabrication logistics, a global focus that sustained 25 years of disinflation in the world, will be supplanted by the necessity to secure local market access, fabricating closer to customers even if this means higher costs and prices. Since all competitors will need to do the same, consumers will necessarily foot the larger bills.

“A Harley-Davidson should never be built in another country-never!”

A Trump tweet after American icon Milwaukee-based Harley-Davidson said it will move production of motorcycles currently exported to the European Union from the United States to its international facilities to avoid EU tariffs introduced as a counter to Trump’s tariffs on some EU-produced metals. Harley estimates that the tariffs would cost the company $90 million to $100 million a year.

The tweet continued with

If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!

On August 12, Trump tweeted that he would support a boycott of Harley-Davidson if it moved production overseas.

Harley-Davidson simply adopted the Trump doctrine of producing where it sells, maintaining U.S. production for its American customers and moving its exported production to Europe and Asia in order to remain competitive. Why and how the company would be “taxed like never before” has yet to be tweeted.

Also not tweeted yet are similar words for Tesla, for example, following the announcements of its plans for China, and why the likes of Mercedes and Toyota should build any cars outside their home country.

The smartphone market is another good example of what might be coming.

Apple, the icon of American consumer technology, derives about $45 billion, 20% of its revenues, from China, its second biggest market, where it sold some 41 million iPhones in 2017. Tim Cook’s recent optimistic comments sound more like a prayer than a forecast:

My own view is that China and the U.S. have this unavoidable mutuality where China only wins if the U.S. wins and the U.S. only wins if China wins and the world only wins if China and the U.S. win. And so I think there’s lots of things that bind the countries together and I’m actually very optimistic. I think history shows us that countries that embrace openness and diversity do much, much better than the ones that are closed.

And so I’m a big believer that the two countries together can both win and grow the pie, not just allocate it differently. And so that’s our focus, and I’m optimistic that – I don’t know every play by play that will happen, but over time, I think that view will prevail.

China is crucial to Apple given its size and growth. The Apple brand is a status symbol among affluent Chinese but these are not where the next growth wave will come from. Were Apple to get into the crossfire in a trade war, its market share in China could rapidly fall, potentially dooming the company to slow decay. Apple’s iPhones are assembled in China but its successful penetration of the Chinese market was significantly supported by China’s telecom operators, all of them being controlled by the State.

Apple’s IOS operating system is said to have about a 52% share of the U.S. smartphone market against Android’s 47% and 68% of the Japanese market but its worldwide market share is only 20% owing to low penetrations in Europe (24%), China (21%), South America (10%), Africa (7%), Indonesia (5%) and India (3%) according to Statcounter. While exact country stats are debatable, they reflect the reality that Apple is weak where the industry’s future growth will come from.

There are only 2 Chinese companies among the world’s top five smartphone makers but China takes 4 of the next 5 spots to end with 6 of the top 10. Having gained clout in their home market, Chinese phone makers are going global with cheaper and quality Android phones further extending the Android ecosystem. While the U.S. market is clearly appealing to all manufacturers, free access to Asian countries is more crucial looking decades ahead.

Cloud computing is also disrupted.

Alibaba Cloud was launched in 2009, initially to support Alibaba’s ecommerce business and its Ant Financial fintech subsidiary which together now boast more than 500 million users. In 2015, Alibaba got serious with Cloud and expanded it throughout Asia, in the Middle East, Europe and the U.S. to offer cloud capabilities to Chinese companies expanding globally. It now markets itself as a large and highly efficient cloud services company providing best access for Western companies operating in China and South-East Asia.

Bolloré Group, one of France’s most important conglomerates, with activities spanning paper, energy and logistics businesses, entered a deal with Chinese technology giant Alibaba. Bolloré is hoping to use Alibaba’s sprawling cloud-computing empire across its operations, including in its battery-making division. (The Guardian)

Bolloré Group was founded in 1822 and is one of the 500 largest companies in the world with 81,000 employees and equity of 31 billion euros. It chose to partner with Alibaba Cloud rather than world leaders Amazon Web Services (35% market share in 2017), Microsoft (15%), IBM (8%) or Google (5%), all iconic American companies, presumably because of Alibaba Cloud’s dominance in China and South East Asia. According to Synergy Research Group, Alibaba surpassed IBM during the first half of 2018 to become the world’s fourth-biggest provider of cloud infrastructure and related services behind Amazon, Microsoft and Google.

America First?

Time will tell if Trump’s strategies will be successful or totally backfire on the United States but they are based on an egocentric vision totally oblivious of the reality facing global businesses. In The Art of the Deal, Trump says:

I try to learn from the past, but I plan for the future by focusing exclusively on the present. (…) I don’t hire a lot of number-crunchers, and I don’t trust fancy marketing surveys. I do my own surveys and draw my own conclusions. (…) listen to your gut, no matter how good something sounds on paper.

Hence the President’s gutsy moves, against most rational advice and historical evidence. Planning for the future “by focusing exclusively on the present”. You can’t make that up. If someone made a reality show with such a character, viewers would dismiss it as totally unrealistic.

If this President is wrong and fails, he could eventually be seen as the chief architect of the decline of the American empire.

Trump’s big bang on the tariffs is scheduled to hit in September, a few weeks away, and China is showing no signs of backing off.

Trump has warned that if the Chinese decide to counter the tariffs on $200 billion worth of goods, a fourth round of restrictions will hit another $200 billion worth of Chinese goods. In the event all threats are realised, Trump will have hit just over 80% of all Chinese exports to the US with tariffs. (Business Insider)

It is sound judgment to put on a bold face and play your hand for a hundred times what it is worth; forty-nine times out of fifty nobody dares to call it, and you roll in the chips. (Mark Twain)

I’ve read hundreds of books about China over the decades. I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind. (Donald J. Trump, The Art of the Deal)

If you pretend that you know what you are doing, a large group of people will blindly follow you. (A.J. Mendez Brooks)

Crucial bluff with his people’s money!

From Sun Tzu’s The Art of War:

The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.

The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.

The hardest tumble a man can take is to fall over his own bluff. (Ambrose Bierce)

Perhaps the coming mid-term elections will incite Trump to ease off and/or delay the next steps if polls are difficult to GOP candidates. But much reputational damage has been done in the last 2 years. Business people have certainly taken note that laws, rules and regulations can be changed overnight by presidential tweets.