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Five Signs of the Coming Deglobalization

January 04, 2021

By Jeff Ferry, CPA Chief Economist

As 2021 begins, there are some encouraging signs of the coming deglobalization. Globalization in the economic sense is the process by which production moves from high-income nations to low-income nations, driving all nations towards a global mean, with a reduction in living standards for the richer nations, a rise in living standards for the poorer nations, and huge benefits for the multinational corporations that can produce in low-income nations and sell in the high-income.

The electorates in a growing number of high-income nations have begun to resist this process as they recognize that it is particularly the poorer half of those rich nations, the segments that are forced into the global competitive rat-race, that pay the highest price for globalization in terms of reduced living standards, higher unemployment, and even higher death rates.

But as 2021 dawns, there are five signs that deglobalization is underway and gathering force.

1. Brexit

In 2016, the British electorate voted 52%-48% to leave the European Union. Four and a half years and two prime ministers later, the UK government finally concluded—appropriately enough, on Christmas Eve—a trade deal with the EU that leaves zero tariffs in place between the UK and the 27-nation EU. This deal does exactly what globalists and Europhiles feared: It shows that voters will punish governments that use globalization to inflict hardship on large segments of a nation. In practical terms, it also serves as a message to other European Union nations that if a nation leaves, the EU won’t punish it because it can’t.  It is a message to EU bureaucrats not to impose too much deindustrialization on member states. Italian populist Matteo Salvini greeted Britain’s Christmas Eve gift on Twitter this way: “Brexit is now complete. Victory of democracy and citizens’ freedom of choice. With the League in government, there will be even closer ties between our peoples in friendship and mutual respect.” Other nations, including Portugal and Croatia, as they struggle with COVID and other disasters, are already asking themselves: what has the EU done for us? This message will be perceived as a warning here too, by Joe Biden and other globalists as they contemplate their future policies.

2. Peloton buys Precor

On Dec. 21st, home-fitness-and-bike-rental superstar Peloton announced a $420 million takeover of fitness equipment manufacturer Precor. The aim of the acquisition was for Peloton to gain access to Precor’s 625,000 square feet of manufacturing space in North Carolina and Washington state. In its last investor conference call, on Nov. 6th, Peloton executives said that despite revenue exploding by 232 percent, the hot home-fitness provider was “underperforming” due to lengthy delays in shipping from their Asian manufacturing operations. Those delays, said Peloton co-founder John Foley, showed no sign of improving. He offered a laundry list of causes for the delays, including “port congestion, periodic warehouse closures associated with COVID-19, west coast forest fires and hurricanes.”

The Precor acquisition shows that a leader in the US fitness industry now recognizes that manufacturing and supply chain resiliency is more important than getting the absolute lowest cost of production, especially when that low cost exposes a company to the risks of overconcentrating production in too few faraway locations. Significantly, Peloton’s stock price fell when it announced its earnings, including the severe delays in already long delivery times. But the stock price rose when Peloton announced its expansion into US manufacturing.

For the last six months, the impossibility of purchasing fitness equipment in the US has been a perennial shock to consumers and to would-be suppliers. The fundamental cause of these shortages is that fitness equipment is heavily dependent on iron and steel, industries that China has dominated for the last two decades, leading most fitness equipment makers to move production to China too. Today, a simple object like a cast iron kettlebell is impossible to obtain at any reasonable price in the US. In fact, it’s fair to say that a cast iron bell was easier to buy in Paris in the 12th century than in the US in 2020!

Peloton, by declaring it wants to control its own destiny, has rejected the conventional wisdom of the last three decades towards offshoring and outsourcing.

3. Showa triples capacity for medical glove-making in Alabama

The shortage of personal protective equipment (PPE) has been a long-running tragedy in the year of COVID. Whether it was face masks, gloves, ventilators, or surgical gowns, we’ve had to read awful stories of hospitals rationing supplies and patients who couldn’t get the support they needed, in this, the world’s most richly resourced health care system. But early in December, the sole US maker of nitrile surgical gloves, Showa of Fayette, Alabama, announced plans to triple production capacity from 200,000 units a day to 600,000. Fayette mayor Rod Northam, who has suffered from COVID himself, said of Showa: “They’re protecting people. They’re making gloves that are used in hospitals…To have a mission where you’re making life safer for others and you’re seeing the growth and expenditure and the expansion you’re seeing here in Fayette, I couldn’t ask for more.”

In a powerful article published back in September, Showa US president Richard Heppell said the US can and must break its dependence on the Asian PPE supply chain. Heppell pointed out that 60 percent of the US supply of surgical gloves is made in Malaysia, with almost all of the rest coming from Thailand and China. “When the entire world is in high demand for a product that is concentrated through the bottleneck of these east Asian countries, it puts nations like the U.S. in a severely disadvantageous position of paying for a low-supply (and at times low quality) product at a highly inflated cost,” Heppell wrote.

But it does not have to stay that way, he said. “The United States can disrupt the current supply-demand curve and ultimately dig itself out of economic imbalance.” That’s what Showa US is working towards right now, making the US self-sufficient in PPE. According to Showa’s website, there are 80 jobs to be filled. All of them feature health care plans and 401k retirement plans.

What better holiday gift for the US economy could there be than high-quality jobs with benefits making a product that saves lives?

4. TSMC begins hiring blitz for new Arizona fab

On Dec. 23rd, Japanese business publisher Nikkei revealed that leading Taiwanese microchip manufacturer Taiwan Semiconductor Manufacturing (TSMC) has launched a recruiting blitz aimed at hiring 600 professionals to work in R&D, management, and manufacturing at its brand new $12 billion chip manufacturing facility (“fab” in the jargon) in North Phoenix, Arizona.

This investment comes at just the right time. Intel, the largest US maker of chips, is suffering from production delays and other missteps that have led large users of chips like Apple and Microsoft to begin designing their own chips, all of which will be made in Asia. US dependence on Asia for chips is growing at a time when it should be shrinking. However, over in Taiwan, the management of TSMC, along with the Taiwanese government, has watched carefully as China imposed bloody repression on Hong Kong. Located just 110 miles from the Chinese coast, Taiwan’s people and its leading companies want to have alternatives in case the worst happens.

TSMC is a great company and this injection of new talent and energy into our chipmaking industry should be healthy for the US tech industry, and even for TSMC’s competitors, who will be forced to up their game.

5. Furniture-maker Williams-Sonoma cuts China sourcing by 50 percent and boosts US manufacturing

On Nov. 19th, Williams-Sonoma CEO Laura Alber told investors that the company was on track to cut its China-based production by 50 percent by the end of 2020. Not all of the production is being re-shored to the US; but enough of it is coming back here to make a big difference. Williams-Sonoma owns not just the well-known kitchen-equipment retailer but furniture makers West Elm and Pottery Barn. It is one of the few US companies to be doing well out of the COVID crisis. In the midst of COVID-related closures, lockdowns, and the retail desert in most of America, Williams-Sonoma boosted revenue in the latest quarter by 22 percent to $1.7 billion, and profit by an amazing 152 percent. Further, so many products are backordered and delayed in arriving from Asia, that if all orders could have been met, revenue would have grown by an additional seven percentage points.

Williams-Sonoma is currently advertising 238 job vacancies, including vacancies at its growing US-based furniture manufacturing facilities, at Claremont, North Carolina and Tupelo, Mississippi. The secret of its success is a booming online business, up 49 percent in the quarter.  Trying to explain why Williams-Sonoma is doing so well in the midst of the worst health crisis in a century, CEO Alber said the huge shift to work-from-home has helped Williams-Sonoma because its mission is to “enhance the quality of people’s lives at home.” Focusing on employees is also key to their strategy. “We are proud to achieve these levels of profitability, while continuing to take care of our associates with heightened safety protocols such as PPE, frequent cleaning and COVID testing, as well as higher employment costs from providing pandemic bonuses for our store associates and increased hourly wages for our distribution center associates.”

Other retailers will be taking note of Williams-Sonoma’s success. Beyond Ms. Alber’s comments quoted above, I would highlight two key attributes: speed and being in control of one’s destiny. Williams-Sonoma reacted to the China tariffs quickly, with a strategic decision to cut radically its dependence on China—just as it reacted quickly to COVID by closing unprofitable retail locations and boosting its online presence and service capability. Williams-Sonoma also controls its own destiny: it designs the vast majority of its own products, and it wants to be in control of its own manufacturing and distribution as much as possible.

Conclusion

In a couple of weeks, Joe Biden will succeed President Trump. President Trump’s tariffs benefited many industries and prompted positive changes, such as those described above at Williams-Sonoma. However, they probably didn’t change many Americans’ minds. Partly because of an incessant campaign waged by the media and many in importing industries, ably supported by the economics profession which conjured up many fantastic and fictitious studies purporting to show tariffs caused prices to rise (they did not), most Americans probably still doubt the effectiveness of tariffs.

However, the COVID crisis has brought home to millions the inefficiency of depending on single sources for thousands of important products, including life-or-death health care supplies. On top of the issue of reliability of supply (“resiliency” in industrial jargon) are the issues of national security and economic growth. Do we really want to be reliant on China for the life-saving antibiotics our soldiers will need in the next conflict? The Taiwanese certainly do not.

Critics will point out that two of the companies I have cited are themselves Asian: TSMC is Taiwanese and Showa is a Japanese chemical maker. It is true that US public companies are themselves among the biggest obstacles to moving to deglobalization, in other words to an economic structure that allows economic growth to deliver broadly-based prosperity to the majority in nations that are above the global average in income. US public companies are still far too short-termist, focused on immediate profit at the expense of resiliency and long-term growth, and enamored of the idea of producing in a low-cost nation to sell to a high-wage nation—for as long as that nation remains high-wage, and then having impoverished that nation, they think they can move on.

But the world is changing. COVID is teaching us that there is no substitute for being in control of one’s own destiny. It is a lesson I hope President-Elect Biden and his team take to heart.

 

 

 

 


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