A Trump Trade War Starter Kit

190605 June Cover

 

“You can’t depend on your eyes when your imagination is out of focus.”  – Mark Twain, A Connecticut Yankee in King Arthur’s Court

 

It’s unclear why U.S. President Trump, in his latest trade volleys against China and Mexico, appears to have become a tariff hammer that sees every geopolitical problem as a nail. The Wall Street Journal itself has taken to calling Trump, “Tariff Man.”

What’s clear, says my colleague Kristin Bahnsen – a former U.S. Department of State political officer with two decades’ experience mapping the geopolitical risk landscape – is that the stakes are escalating dangerously. Whether or not you agree with Trump’s strategy and its stated rationale (fairness), the issue is that we’ve suddenly left behind the moderating guardrails of multilateralism and the narrative that commerce by its nature leads to collective net gain. Tapping a potent mix of voter nostalgia and fear, Trump has opened a trade war (and non-trade war in the case of Mexico) with a bilateral zero-sum stance. I win, you lose – a proverbial blowtorch on the powder keg of nationalism.

It’s in that context that Chinese President Xi Jinping on May 20th responded to Trump’s first wave of tariffs by announcing an economic “Long March,” a call by the Chinese government for its 1.3 billion citizens to set out on a 15-year path to unquestioned global technological and economic supremacy. The analogy was not subtle: the original Long March was the legendary two-year 12,000km journey of survival by Mao’s Red Army in 1934-36 at the outset of a 15-year civil war between the Chinese Communist Party and its Nationalist Party oppressors. Mao ultimately won of course, but the march itself left over 80% of his soldiers dead. We are in for a hard ride.

190605 June Graphic 1 Web

Most companies are responding in kind. A recent Bain & Company survey of more than 200 corporate executives indicates 42% will break reliance on China-sourced materials in the next year, and 25% said they were redirecting investments out of the country altogether. No doubt this number will increase. The question for many, in the face of Trump’s pop-up policy approach, is where and how far to go. For many, that answer until just two weeks ago would have been Mexico. Now ditch those carefully laid plans.

Keep calm

Or not. Daniel Kahneman, Nobel prize winning behavioral economist and the godfather of theories around decision making under uncertainty, would say don’t overreact and don’t overthink. He’s right. When variability is high, optimize for the short-term; focus on the facts we know and the events we can control, because the other variables may change again tomorrow. Supply chain leaders like Cisco, Intel, Colgate-Palmolive, GE Appliances (Haier), and Nike run cross-functional sales and operations planning (S&OP) processes precisely to that end.

Last March, sensing that the risk of a 25% U.S. tariff on Chinese goods was serious, Cisco’s operations team spearheaded a 90-day cross-functional sprint of targeted pricing adjustments and changes to ship-from locations for select component suppliers – on top of a quietly robust process for value chain risk management that Cisco has operated for the better part of a decade. On the company’s May 15th earnings call, Cisco CEO Chuck Robbins announced, “we actually have executed on everything we needed to do to deal with tariffs.” Stay poised, focus, and deliver.

Others like HP build in additional smart options to drive up flexibility, like modularization of product designs and inventory postponement. But the message is the same: staying the course on execution of core cross-functional operating processes is a sure path to sustained value delivery through the tweet storm.

Make room for 0-to-1 thinking 

At the same time, we must create a separate space for what Silicon Valley venture capitalist Peter Thiel calls “0-to-1” scenarios, where this trade war quite suddenly flips into the next Cold War. What if, for example, China next week makes good on its threat to cut off its rare earths supply (81% of global production), and Malaysia hasn’t quite ramped up alternate capacity? Or what if Trump really does ratchet up tariffs against Mexico to the full 25% rate and holds it there for a year or more? My own observation is that most companies struggle to make room for these sorts of edge-case discussions, because it all seems academic, until it’s not.

I called on Professor Blake Johnson, Stanford University’s supply chain risk management expert, to ask why. His answer, not surprisingly, “because it’s hard.” He continues, “As a supply chain leader, you’re essentially asking the board of directors to consider investing in redundant capability for a situation that they’ve never experienced. “Companies – and people – often don’t do a good job of disaster planning because humans learn on a short feedback loop.”  If we haven’t experienced it, we don’t learn.

Johnson reminded me though of an inspired exception: in the early 1980s, Japanese automotive companies like Honda and Toyota against all odds quietly broke away from their legendarily efficient local supplier networks (keiretsus) to set up assembly operations in the U.S. The trigger was strict U.S. import quotas on foreign cars – followed by an astonishing 4x relative decline in the value of the yen. Until the convergence of these immoveable geopolitical forces, the idea of shifting any part of car assembly overseas had seemed unthinkable to Japanese car manufacturers or for that matter the most forward-thinking industry pundits of the time. Today, over half (53%) of Japanese cars sold in the U.S. and 75% are built in North America. Hard to imagine a more radical transformation and a more prosperous end. But imagine we must.

Leverage the heck out of the network

In that sense, perhaps the only other crucial ingredient is perspective. Silos and nationalism have a lot in common in that they limit us to the here and now. As Mark Twain’s Huck Finn himself says: “Stars and shadows ain’t good to see by.”

So, the real winners in this multi-front trade war may be those who figure out how to invite the widest diversity of guests into the tent and listen.  In the technical lexicon, we call this “compounding.” More lenses on a problem leads to exponentially faster breakthroughs.

Who would you invite? In the age of Tariff Man, perhaps communities like this one really are part of the unlock. The power is the network. Shine the light.

 

Author Steve Hochman

More posts by Steve Hochman