Prior to World War II many of our best and brightest corporate managers were making mistakes that would only be understood once the war started. At the beginning of the war, it became obvious that they had been too short-term focused and had lost sight of the proper balance between short-term and long-term objectives. We must hope that today this admonition from Hegel will not come true.
“What experience and history teaches us is that people and governments have never learned anything from history or acted on principles deduced from it.”
Georg Wilhelm Friedrich Hegel (1770-1831)
Lately, every time we turn on television to one of the business channels there is always a debate concerning business and China. The key questions and discussion usually center around:
- Should we do business with China, and if so, how much?
- Which companies in the free world are most dependent on business with China?
These and other questions are rightly being asked as President Biden and his cabinet do their best Neville Chamberlain impressions with every Chinese provocation. The conversations around such issues as Taiwan, Japan, and Australia need to wait for a different discussion since we want to focus on the business aspect of the relationship with this discussion. But the President is doing just enough to try and avoid conflict through appeasement and soft rhetoric. The latest “Balloon Gate” incident tells us all we need to know on that front.
“Sī vīs pācem, parā bellum [If you want peace, prepare for war!]”
Publius Flavius Vegetius Renatus
Everyone from the President to the local barber has a consistent, universal opinion that China is stealing our intellectual property and using that technology in violation of patent law. They have targeted key industries for insourcing (outsourcing for others) that they know make other nations dependent on them for commerce, and more importantly current and future war materials.
The Chinese are masters at the long game, where one sets themselves up for long-term success, even if it means short-term sacrifices. In totalitarian societies short-term actions are always viewed as shared sacrifices for the “greater good,” but often the burden falls to those lacking power. Our corporations and society are geared to a short term focus where quarterly reporting drives management actions. Shareholders need to expect a longer-term view of profits and voice these concerns to management.
Leading up to World War II there were plenty of signs that Adolph Hitler was playing games with England and much of Europe. While the British worked on appeasement, Hitler and Nazi Germany worked on building a war machine. In those days wars were fought with soldiers, spies, bullets, guns, tanks, and other machines of war. Many believe that the best and most advanced technologies in use were the Enigma Machine, radar, and early rocketry.
Today is a very different era with technology playing a front-line role in any war. Cyber-attacks, EMP’s, power grid interruption, hypersonic missiles, satellites, suicide drones, ICBMs with multiple warheads, laser weapons, rail guns, and tactical nuclear weapons are all shared concerns. It is a different world, with very different capabilities, technologies, and challenges. Today a country that steals your technology endangers your sovereignty and the world. Reliance on adversaries for key technological components on any product is illogical and not in our national interest, but it will take a massive effort to move key technologies back to the U.S.
We only need to observe the War in Ukraine to realize that future ground wars will likely take on some aspect of guerilla warfare. In this world soldiers can die or be made so fearful or uncomfortable that there is no safety. The use of drones of all sizes and shapes, bombs and bomblets, coupled with satellite communication and surveillance, seems to leave no one safe anytime, anywhere. The War in Ukraine has also shown that corporations can be forced to shutter or abandon assets once war is declared. Since the beginning of the Ukraine War AMD, Intel, Apple, Google, Amazon, Cisco, Dell, HP, IBM, SAP, Oracle, have all been forced to walk away from doing business in Russia. Shareholders have had no real voice in these decisions other than to vote through proxies or sell their stocks.
Key questions for us center around national security and the willingness of our corporations to settle for short-term profits, while sacrificing long-term gains and corporate stability. In essence, which companies are playing a “short game” and turning a blind eye to national security for profit. This is not misplaced nationalism, it is a serious question of survival of our Constitutional way of life, patriotism.
It does not have to be this way unless we continue to lose our self-sufficiency. Of major importance is a balance within corporate profits, where we begin to reduce our dependence on China and refocus on growing our corporations with markets in the free world. Europe, Australia, Africa, and Asia (outside of China and North Korea) are all areas where growth does not threaten our sovereignty.
The list of companies that played the short-term profit game at the start of World War II is well known, and although those responsible have died out, many of the companies are still around and are now repeating history. Corporations, management, shareholders, and customers have a way of forgetting and forgiving misdeeds over time, even those that are as egregious as the Holocaust.
We are ardent capitalist, but we are also patriots and believe that Country must come before profit, always. All the talk about worldwide supply chains, global economies, outsourcing, and self-sufficiency needs to be viewed through a lens that is anything but rose colored. Without this balance between national importance and short-term profit, there is no long-game for us or any other nation. The current energy situation in Europe should serve as a warning to us all, and closer to home we must demand that our strategic oil reserves not be used for political purposes.
Anyone who has ever read a history book knows that the history of the world is not long periods of peace interrupted by occasional wars. The history of the world is constant conflict at some level, in some region, with occasional brief periods of peace. We must hope that there will be no war with any other nation on the horizon, but to avoid those conflicts we need to be Patriotic in our business dealings, not focus on just short-term profit.
How dependent are our corporate profits on Chinese revenues or profit?
Technology is the most important industry and where most vulnerabilities exist. We must remember that all business done in China is done with the Chinese Communist Party (CCP) regardless of the name over the door. These companies have sales to China, as a percent of total worldwide sales, of approximately:
- Qualcomm 66%
- Micron Technology 57%
- Texas Instruments 55%
- Qorvo 52%
- Broadcom 50%
- IPG Photonics 43%
- AMD 39%
- Intel 26%
- Avery Dennison 19%
- Dupont de Nemours 18%
- Nike 18%
- Otis Worldwide 16%
- Teradyne 15%
- Apple 15%
- Microsoft 10%
A Partial List of U.S. Companies now owned or partially owned by China (CCP)
- General Electric – Was bought by Chinese company Haier in 2016 for $5.4 billion.
- AMC – AMC Cinemas sold a majority stake to Beijing based Dalian Wanda Group in 2012, but this was at best a poor investment.
- Smithfield Foods has over 500 farms in America but was sold to WH Group of Luohe, China in 2013.
- The Waldorf-Astoria Hotel is now owned by the Anbang Insurance Group in Beijing and sold in 2014 for $1.5 billion.
- IBM sold its personal computer business to Lenovo back in 2005 for $1.5 billion and reportedly still has significant influence within IBM today.
- General Motors is still American owned, but with heavy influence from Shanghai Automotive Industry Corporation since they formed a joint venture to sell cars in China back in 1998.
- Microsoft has a focus in China on its cloud service, Azure, where it is in partnership with 21Vianet to operate their servers. 21Vianet also operates Microsoft’s Office 365 in China. Microsoft openly states that its primary source of revenue in China is helping Chinese companies set up operations overseas. China now accounts for 10% of Microsoft’s total revenue.
Other Franchises that are either entrenched in China or headed that way.
- NBA has made a reported $10 billion investment in China.
- NFL is developing “fandom clubs” in both mainland China and Taiwan, with a commitment to play one game each year in China.
- Wynne Resorts – 70%+ of revenues through gambling operations
- Estee Lauder – 17% of revenues
- Starbucks – 10%+ of sales
- McDonald’s – 5% of sales
In international financial markets there is little Chinese reciprocity. Chinese companies do not have the same standard reporting requirements or regulatory oversight. We must also remember that the CCP eventually owns it all, so they expose or report as little or as much as they want about corporate profits and activities. According to the group International Financial Reporting Standards Foundation (IFRS) China has “substantially” converged their accounting standards with those generally accepted.
However, the Chinese accounting standards apply to only 30% of publicly traded companies and only because of dual listings of companies in foreign markets that require the standards. The oversight is provided by the Accounting Regulatory Department, Ministry of Finance, People’s Republic of China, but no commitment has been made by the CCP to comply with generally accepted accounting practices. In other words, the CCP owns or has oversight of all companies, does its own supervision, reports what it wants to, and has made no commitment to comply with global standards.
As a final warning, in the Harvard Business Review on January 26, 2022, author Seth D. Kaplan warns:
“Given China’s growing repression and threat to the liberal international order, companies should be reevaluating their approach. Additionally, in China, the line between any purely civilian endeavor that benefits the population and contributions to state-led repression are getting blurrier by the day. The U.S.-China Economic and Security Review Commission, an independent government agency tasked with evaluating the risks stemming from China, warns, ‘U.S. businesses and investors must recognize that their participation in the Chinese economy is conditioned by the CCP’s policy priorities and subject to its control.’ It is often hard to know when any reasonable line has been crossed.”
This is a fair warning to all corporations doing business with and in China. Their goals are not our goals, nor are they acting in our best long-term interest. Short-term profits and Wall Street reporting cycles should never come before Patriotism. China is a win/lose society driven by the CCP and we need to remember that when engaging with them. It is the only way to avoid Hegel’s warning on history repeating itself.
This is not a “no win” situation for the United States. We must refocus our corporations and management to deemphasize China in favor of nations with shared values. The clock is ticking, and we need to change our behavior now. We must better understand who we are, who they are, and the differences.
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