The goal of a trade war is to increase access to some other countries markets. However, we can simplify the logic by reducing down from a country scale to an individual business scale.
At the single company scale, Company A withholds a key product or increases price on that product because they want something from Company B, perhaps increased sales effort of some key line. At some point the cost becomes too much for one or both of the parties and a settlement is reached. Regardless of what Company B agrees to, it will try to reduce its dependency on Company A. It can do that by:
- finding a “second source” for the key material(s) that Company A withheld
- vertically integrate by either buying or building the capacity to manufacture the key component(s) that Company A withheld
- increase sales of other products to reduce the strangle hold Company A has on Company B
- exit the market by selling the effected product line to a third company
There are thousands of high profile examples of such actions. In the 1970’s one of most transformative was Texas Instruments (TI) vs Commodore. Commodore started repairing then manufacturing typewriters after World War II but in the 1970’s expanded into hand held calculators that were dependent on TI manufactured chips.
“(In 1975) The Chip manufacturers themselves enter the lucrative electronic calculator market, including Texas Instruments. Their calculators retail for less than commodore can assemble them and are stuck with a massive inventory. Commodore went from $60 million in sales to $5 million in losses.
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What did Commodore do? In 1976 the bought a small chip ‘fab’ named MOS Technologies which quickly went on to design and produce the worlds first personal computer, the Commodore PET.
In today’s world Apple refuses to be held hostage by Qualcomm or Intel and after many public battles is now working hard to follow Commodore’s model (again!) by vertically integrating. Apple is spending billions of dollars to produce their own chips.
“Apple’s internal iPhone chip development gained steam after it picked up P.A. Semi in 2008. In 2013, Apple bought Passif Semiconductor, which provided wireless technology used in the AirPods earphones.
Apple is sitting on a pile of cash, and it makes sense to invest in critical hardware technologies like a 5G modem, said Benjamin Dunbar, an investment group leader who specializes in tech at Gerber Kawasaki Wealth & Investment Management.
Although chip development will not generate revenue, it impacts the capabilities and sales of devices, which affects long-term cash flow, Dunbar said.
“They’re paying out over a billion [dollars] a year now just with licensing deals and so on. Apple has a couple hundred billion [dollars] to spend,” Dunbar said.
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International trade wars have the same effect and that included the United States vs China. However with China there will be a difference. Much like Apple, China is a Juggernaut with only an upwards trajectory for the last 15 years. Both Apple and China have:
- enormous confidence
- enormous pride
- enormous skill sets
- enormous cash reserves
This company and this country are not to be poked at without a strategy. Both will weather and then overcome limitations imposed from outside.
China has considered it’s options and chose to:
- vertically integrate to eliminate the need for foreign components
- expand into its own vastly untapped domestic markets
Watch this recent short speech from Chinese President Xi in which he says during peacetime China must prepare the country through innovation.
A timely example of this technological advancement is Huawei.
President Trump’s banning of Huawei is seen in the West as a reasonable response to an unknown threat but in China it is seen as the equivalent of banning a tech icon like Bell Telephone or Microsoft. Huawei has the full faith and backing of the Chinese government and people.
It already produces many of it’s own chips and is well down the road to developing the remaining core components.
Provocative actions by the American will serve to provoke a protectionist response. More than most countries, China has learned from watching the world in the last 200 years that both hot and cold wars are detrimental. China will seek a third solution which is to simply produce everything itself thereby avoiding much of the dependency on other countries.
You might think that China needs the United States to consume its exported goods but in our article ‘Why China Is Like The US In The 1950’s and No Longer Needs Exports To America‘ we explain that:
- US exports make up on 3.5% of China’s economy
- China knows that US exports will not ‘go to zero’ even over the next decade
- China can easily replace 300 million American consumers with 1 Billion Chinese consumers not yet in the middle class
The US will likely be successful in squeezing China into opening its market to American products but that will be of little value if, in ten years, China does’t need American products.
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