This post is by Om Malik from On my Om
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America is at war with China. Instead of guns, bombs, and bullets, the war is being fought in the business arena. The media calls it a trade war. And like all wars, there will be those who end up paying the price for it — namely, everyday Americans. As Brad Feld, partner with The Foundry Group, wrote on his blog about the tariffs imposed on Chinese goods, “Many BigCos are simply treating the tariff like a tax and passing it on, either directly or indirectly, to the consumer.”
The New York Times points out that many companies are looking to figure out how to become less reliant on China, including finding second sources for their products. While many industries can find ways around China, the technology sector is going to be very messy. For example, there is very little manufacturing capability in the US when it comes to semiconductors, as many of the production lines have been outsourced to China and other parts of Asia.
The Economist put it best when it noted, “The supply chain is so complex that it more closely resembles the interconnected global financial system before the crisis of 2007-08. Tech hardware firms around the world, which mostly depend on production in China, have a total market value of $5trn. Apple, which makes a fifth of its profits in China, could find itself banned or its products boycotted; its cash-rich balance-sheet could survive the shock, but its shares would slump.”
Apple might be the most obvious example, but the entire semiconductor sector is at risk. Chips are at the core of our tech ecosystem, and any disruption could become a nagging migraine for companies big and small. China has started to take a threatening stance on the rare earth metals, the key to modern technological innovations.
“Tariffs will have a negative impact on the overall supply chain as the cost of component parts, materials and equipment increase, forcing companies to absorb the higher costs or pass it on to customers,” Jim Feldhan, president of Semico Research, told a trade publication. “From a macroeconomic viewpoint, consumers have a finite amount of disposable income. If prices rise, consumer purchasing power falls. Smartphone sales are already slowing. If prices rise, phone sales could be reduced even further.”
There is a lot of confusion in the market and a general unease, which is causing a slow down in activity. That should be a worry for one and for all. Today, many of the big technology companies are living off the general optimism around technology products. Whether it is entertainment subscription services such as Netflix, on-demand ride services like Uber, or business software-as-a-service, everyone is spending a lot of money to attract revenues. Google, Facebook, and Amazon are benefitting the most.
Many of us lived through the 2008-2010 period when the entire sector experienced a slowdown leading to the onset of conservatism. And that is why I worry about what might happen. Any decline in the fortunes of tech giants could mean slumping stock market valuations and an overall erosion in the optimism around technology, one part of the US economy that has been a growth engine and a reflection of the country’s scientific and technological leadership.
Even the most optimistic amongst us will have to live with the realization that the enmeshed supply chains will have to undergo significant transitions. That means higher costs, disruptions, and change in what has been business as usual. Let’s get ready for a future where things aren’t going to keep getting cheaper.
This first appeared on my June 2, 2019, weekly newsletter. If you like to get this delivered to your inbox, just sign-up here, and I will take care of the rest.