Licensing Faces an Existential Threat As Tensions Grow Between China and the West
By Gary Symons
TLL Editor in Chief
Main Takeaways
- COVID-19 pandemic and Russian Invasion of Ukraine have revealed fragility of global trade arrangements
- China’s aggression toward Taiwan—a US ally—is creating insecurity for companies relying on Chinese manufacturing
- Licensing companies now need to consider manufacturing location before entering into agreements with a licensee
- Western companies now focused on reshoring or nearshoring production to protect against a shutdown of trade with China
- Analysts say a conflict between Taiwan and China would result in blow to the economy many times worse than the Russian invasion of Ukraine
- TLL recommends companies take steps to deal with potential disruption in world trade
THE WEST IS PREPARING FOR A POTENTIAL CONFLICT WITH CHINA
There was a time, not long ago, when The Licensing Letter rarely wrote about the topics of manufacturing and global logistics.
But those times have changed.
Today, because of the triple whammy of the global COVID-19 pandemic, the War in Ukraine, and the current political crisis in Taiwan and China, faith in globalism and our just-in-time system of logistics has faltered. That impacts our readers, because licensing companies don’t earn revenue if their products don’t make it to store shelves in a timely fashion … and timely hasn’t been a thing since the WHO first announced a global pandemic in early 2020.
Fast forward two years, and things have gotten worse, not better. Even as the pandemic began to ease, the world economy suffered a seismic shock as the Putin regime in Russia ordered the brutal invasion of its neighbor Ukraine.
The war has roiled energy markets and sent inflation into overdrive, with several nations now falling into a recession.
But an even greater threat has emerged, as the Xi Jinping government in China has repeatedly threatened not only the invasion of its much smaller neighbor Taiwan, but has also falsely asserted its ownership of much of the South China Sea—a move that would put it into conflict with neighboring countries from Japan to the Philippines and the United States and Europe.
Throughout the world, Western governments are now taking steps to ensure the shipment of vital commodities and goods, including fuel, food, computer chips, and materials used in the production of batteries and solar panels. Among other things, the US government has passed the CHIPS Act to strengthen domestic semiconductor manufacturing, design and research, fortify the economy and national security, and reinforce America’s chip supply chains.
One reason is that the Biden administration recognized the security risk of producing too many semiconductors in foreign countries, particularly when China has threatened to invade Taiwan, the world’s largest supplier of advanced semiconductors.
Western corporations are following suit, as a study by the business publication Bloomberg has shown more CEOs are actively looking at reshoring their production than ever before.
Originally, many observers and many companies felt the conversation about reshoring was just a fad that would quickly fade as the pandemic began to recede. However, the COVID-19 virus has proven harder to defeat than expected, and has led to continuing and extremely costly logistics bottlenecks due to China’s Zero COVID strategy.
Rather than relying on vaccines to curb the spread of the disease, China has opted for ongoing lockdowns which, in many cases, have virtually paralyzed many of the largest ports and manufacturing centers for weeks at a time.
That’s bad, but it pales in comparison with what would happen if China invaded Taiwan—or even attempted a blockade of the country and the surrounding shipping lanes, which are the busiest in the world.
EVIDENCE OF RESHORING IN US AND EUROPE
Bloomberg studied the issue by examining transcripts of US companies’ earning calls and presentations for the past few years, and found that more companies are considering onshoring, reshoring, or nearshoring. That latter term refers to moving production from somewhere farther away, like China, to a closer country like Mexico or Canada.
As the Bloomberg data shows, reshoring wasn’t even a serious topic of conversation in Q1 of 2020 before the pronouncement of a pandemic, but it exploded in mid-2020 and remained an idea being seriously considered through the end of 2021. However, the idea of reshoring production really took off again when Russia invaded Ukraine after having signed an alliance with China, and then exploded during the growing Taiwan crisis.
And it’s not just talk.
Even in 2021, well before the invasion of Ukraine, a UBS survey of C-suite executives found 90% of respondents were either considering moving production out of China, or were already in the process of doing so. Roughly 80% said they were considering at least some of that production back to the United States.
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