The post COVID-19 world is going to be a different one especially when it comes to Asia. Roughly, one fifth of the world's goods are produced in China. But what is China's role going to be in the coming days?
To discuss more about this BOOM's Govindraj Ethiraj spoke to Parag Khanna, Founder & Managing Partner, FutureMap.
'We will see an acceleration in the trends that were already underway which specifies that Asia is indeed much larger than China,' says Parag Khanna.
Other than this, he made the following points -
* Japan and other economies have been shifting their production out of China into South-East Asia; partially into India as well to take advantage of open, fast-growing markets, lower labour costs and more.
* The supply chains are shifting. We are globally moving towards 'Make Where You Sell' model.
* Whether its the geo-political tensions, trade war or Coronavirus, these are all nudging us incrementally in the direction of potential and a more resilient, distributed system.
* Power of connectivity is the ultimate power.
This episode of From The Frontlines is transcribed below:
The post COVID 19 world—is going to look a little different, maybe even dramatically different, particularly from where we are right now in Asia. One of the big questions is: what is the role of China going to be in coming days, as they might and likely lose their hold over the global economic portfolio, so to speak. Roughly, one-fifths of the world's goods are produced in China, China is about 14 trillion dollars of GDP and almost 15.5 or 16% of world GDP, second to the United States. All of this could change, and as this changes, it could mean opportunities and threats for other countries in Asia where we are. And who better to throw more light on it and project, and do crystal ball gazing than Parag Khanna, Founder and Managing Partner, FutureMap, a data and scenario-based strategic advisory firm based out of Singapore. Parag also has a PhD from the London School of Economics and has travelled widely and lectured widely as well.
Govindraj Ethiraj: I know you have always argued that Asia is not China and China is not Asia. And that was in a certain context because you have also argued that other countries in Asia, who also represent about another half of the Asian GDP have been grow fast, they have been growing faster but this equation is, obviously, going to change now in many ways. Including, for instance, Japan saying that it is going to give Japanese companies 2 billion dollars to essentially get out of China. So how do you see all of this unfolding in the months and years.
Parag Khanna: I think it will accelerate the trends that were already under way, which is the appreciation that Asia is indeed much larger than just China with the fourth wave of economy, as I call—the first wave of Asian growth was Japan, the second wave was the Tigers, the third wave was China itself, and now the fourth wave led by India and Asean (South-East Asia). So, what we have seen over the last few years, even before the US and China trade war, is that Japan and other economies moving, shifting their production, out of China, into South East Asia, partially to India as well to take advantage of open markets, fast growing markets, lower labor markets and so forth. And that is absolutely going to accelerate now. Asia is still the winner, if you will, but it is not just a China show. It is extremely important, [there is a] positive acceleration, the trend that was already underway. We will see more diversification, more distribution of the footprint of manufacturing, of the footprint of foreign investment. Asean is
catching up quite closely to China in terms of annual volumes of inward FDI, I expect them to reach parity perhaps within the next two-three years.
Govindraj Ethiraj: And you have also written about supply chains and the intricacies of the supply chain between China and rest of the world, particularly the Western world, where a lot of the consumption happens. How do you see that unravelling or ravelling as you go forward?
Parag Khanna: Well supply chains in manufacturing, electronics and quite a few others have centered on Asia for a long time, again. The Tiger economies, then China, and now South East Asia. So, it is staying within Asia. The competition is between who gets the value added and gets the volume. So, we are starting to see in both of these areas, a shift out of China. The reason is partially, also because China has moved so far up the value chain that the intermediate imports, to produce Chinese exports have gone down. In other words, China makes most of the components for electronics. Now it has its own indigenous semi-conductor industry. So, it relies less and less on imports from South Korea, from Japan and the United States. Meanwhile, South Korean chip manufacturers and even American companies like Intel and handset manufacturers like Samsung and others have been choosing Vietnam as their new preferred destination. In fact the majority of the Samsung phones in the world are made in Vietnam. So, the supply chains are definitely shifting as well. And we are moving towards globally towards a model—what many people call—make where you sell. And I think that is perfectly logical and I think it is an example of how you can see that whether it is the geo critical tensions, or trade wars, or coronavirus—these are all nudging us incrementally in the direction of potentially a more resilient distribution system, whether it is fewer bottle necks, or single points of failure that ultimately ease/affect these supply chains, that is also a good thing.
Govindraj Ethiraj: As Western multinationals look at their whole manufacturing and supply chain system, the one response can be to reduce dependence on China, which—as you said—already has been happening and can be distributed further. But the response could go one step further and say, Asia is too far, let us bring it closer—exactly your point, sell it where you make it. Are you able to see or project on this count?
Parag Khanna: When it comes to India's role in the make where you sell?
Govindraj Ethiraj: Yeah, India or Asia in general. You said that Samsung makes most of its phones in Vietnam but what if tomorrow Samsung was to say that in this new world order, we cannot have so much of production happening in one country, whether it is China, or some other country is not the issue.
Parag Khanna: So, one of the responses that countries will have to that phenomenon is increased labor automation, robotics...Infact the countries that have highest, what is called, robot density—the number per 100 thousand workers in industry are the countries like South Korea, Japan and Singapore. If you take a car manufacturer like Hyundai, they were importing automobile parts from Wuhan, it had sick workers at its automobile plant in Ulsan in South Korea and of course their exports hit because of the virus. So they suffered what you could call a triple whammy and in response to that, there is no question that Hyundai is going to use more automation, so that it makes its car parts, 3-D printing, its own factories at home, uses the robots to make them at home as well. So, I think that is definitely going to
be one consequence. In terms of India, India must take advantage of the situation, in terms of trying to attract more investment because foreign investment in India has been much lower than it could be in terms of manufacturing, technology, and others. That has been starting any way again—the trade war had more to do with it at this point but also the industrial policy, the Make in India policy, and so on forth. If all of that comes into a clear investment policy, then I think it will be India's moment as well to capture more of those supply chains.
Govindraj Ethiraj: And from your perspective...just to remind our viewers, you are sitting in Singapore and therefore you have a physical landscape view of the region as well. Are you seeing, India having additional benefits and advantages in this particular phase which it may not have had even in the earlier wave you spoke about, the fourth wave?
Parag Khanna: India is indeed one of the anchors, one of the pillars of the fourth wave—the fourth wave is just about getting going, if you think about India's the demographic dividend, much younger median age than China, median age is much more like the South East Asian countries, large and growing economy, the advantages are there. As I mentioned, investment policy and regulation is one factor. I mean cheaper currency now will play an important role in potentially attracting those investments. Even though India did not sign the Regional Comprehensive Economic Partnership, it certainly still has the ambition to trade more with its East Asian neighbours. Obviously, software exports will be very competitive at a time when many companies are going to accelerate digitalisation. So, there is no question
that, stars are aligning in a way India could take advantage of now India has to go and do it.
Govindraj Ethiraj: And how do you see large Chinese companies or Chinese companies who have vested and invested in this entire supply chain, in the manufacturing...everything effectively. How do you see them responding? What should we be looking out for?
Parag Khanna: Well, China is trying to remain an attractive destination despite its rising wages. Labor automation is also strong in China. So, they are saying, stick with us in China because you get high output, you have productive workers, they may cost more but you are going to get lot more production. We are connected to the rest of Eurasia through the Belt and Road initiative, and railways—so you will be able to export faster. We are still a large and wealthy market and we will try better not to steal intellectual property and these kind of things. We will allow more full onshore ownership of your operations. Like Tesla has done for example—Tesla owns its Giga factory, it owns its production plants, its owns dealerships fully. So that phenomena also, there could be incentives for China to loosen up a little bit, to continue to attract that capital that will otherwise have more choices and will be looking to South East Asia and India instead. So, China knows that it must now, compete for more investment rather than assuming that everyone wants to invest in China.
Govindraj Ethiraj: I am going to bring the United States as well...in a post COVID world, how do you see companies are going to react. So, one is to say that let us be cold and clinical and therefore if China is going to produce my goods at half the cost or 1/3 rd of the cost, I will bear the other risk. Or conversely, my whole perception of risk has changed today, therefore, I will look at the manufacturing and supply chain with new eyes.
Parag Khanna: In general, diversification is the surest path to resilience. And companies have realised since before the trade war that they had are too many eggs in the China basket. And that was apparent to them because of geopolitical issue, political risk in the country, reputational risk in the country, IP theft in the country; there were many reasons why. Then came the trade war and the …... sort of incentives to pull out of China, the political pressure and then new incentives being offered by other countries. So, in general by now, every company whether it is American, European, Japanese or otherwise has woken up to the reality that one should not have too many eggs in the China basket. Meanwhile, as you rightly pointed out Chinese companies continue to grow and expand. Huawei is taking advantage of the digital cell growth, pharmaceutical companies taking advantage of the health sector growth, construction companies obviously in terms of the infrastructure projects. They are gaining/gaming in media, telecom and buying into the Indian gaming sector. Obviously, their presence is in the power and the energy sectors around the region as well. And that does continue as well. And many people have been saying that China will be looking for buying opportunities because equity value is getting significantly corrected by this shock of the coronavirus. So, you have investment restrictions also growing, so that Chinese funds cannot take controlling stakes over companies. That was again already happening in America during the Obama administration and the Trump administration; the European Union has passed growing investment restrictions in Chinese investments since 2015-16; Australia has done the same thing. So it will be a tug of war, a push and a pull—how much capital you want from China, how much you
need from China, what are you willing to give up to Chinese entities; are they genuinely private entities or not. It will be extremely individualised, this decision-making process and that is absolutely fine.
Govindraj Ethiraj: From what you are saying, and it has been happening for a little while now is, China is being pushed into a corner. Is that something to be worried as well?
Parag Khanna : It depends on if we are talking of its diplomatic posture, its military posture or its commercial practices. If you think of the commercial side, you have actually seen a fair bit of push back against China. The rewriting of investment regulations to prevent majority Chinese ownership is something that China cannot do anything about. This is an age of sovereignty, even weak states like Myanmar, Mongolia, Kazakhstan and others have made sure that Chinese cannot control their strategic industries. So, this is a different world, not a purely colonial world and China has to get used to that. In the military domain, the rise of the Quad [Quadrilateral Security Dialogue]—in which India is absolutely pivotal—India, Japan, Australia, United States—Quad countries that are not only increasing their own internal.....but are also supporting their navies of Philippines, Vietnam and Indonesia. That again is a very strong sign that this not going to be a world where China necessarily gets what it wants. Infact it is going to be possible for us to use this post virus environment and post trade war environment to not only to push back but to push towards a model for Asia in which there is a multi-polar equilibrium. And that no one state is too powerful and again I think that would be a positive outcome for Asia.
Govindraj Ethiraj: What do you see as the new order—we took a lot of things for granted, the direction and linearity of it, for granted in the last few years or last many years. And that is obviously going to change in this post COVID-19 world. How are you looking at it? What are your thoughts, even as you shape them?
Parag Khanna: I am very glad that you used the word linearity. Because the thing about geopolitics is that it is non-linear, it is highly non-linear, highly complex. And one the things that I have always found worrisome in the discourse about geopolitics these days is that people make linear extrapolations—because China is rising, China will be Number 1; because China is investing in its military very strongly, China will dominate Asia. Without the appreciation of the reaction to China's action. What I emphasize in my work constantly is that the reaction matters as much as the action. And again, the rise of the Quad is a reaction to China, and what the Quad does will determine China's ultimate success or failure. Not China itself and in the wake of the Belt and Road, you have the European-Asia connectivity initiative, you have Japan and India partnering on the connectivity corridors, you have the United States, Australia, and New Zealand promoting the Blue Dot certification Network for sustainable infrastructure finance. So suddenly you have a lot of competition to China's Belt and Road and that is important reminder that it is not just a one-way street, it is not just whatever China wants. Instead you have this much more complex environment—militarily, strategically, economically, diplomatically and all that introduces to a world where there is not necessarily one linear outcome or one winner.
Govindraj Ethiraj: China was also seen to be projecting soft power in many ways and India too very strategically—consciously or not—also tried to project soft power. How do you see that changing or evolving now in a post COVID-19 world?
Parag Khanna: You know really Govind, as you probably know, I do not believe in the term soft power at all. It is not one I would ever use outside of quotation marks; it is not a serious measurement of anything. That which you cannot measure is not real to some degree. Other than spirituality of course. But we are not talking about that right now, we are talking of geopolitics. And there you can measure leverage and measure influence. If you are handing out masks that means you are making an actual investment in a country's medical system and you are seeking something in return. That is not soft power, that is actually a tool in which one expects return; so, it is a formal thing/ form of thing? ….And everything that China does is like that whether it was the Confucius Institute, whether it was the mask diplomacy, whether it is debt trap diplomacy—it is not hard or soft power, it is instruments of leverage and there are hundreds of them that China uses and others do as well. So right now, as we think about India's growing outreach to the Central Asian countries, India's growing outreach to the South East Asian countries, even to African countries, that is not hard power, that is not soft power. That is building strong ties, to me the power of connectivity is the most valuable kind of power. The more deeply you are connected to the society, the more influence you can have over them. So, power of connectivity is the ultimate power. And if India wants to compete with China it has to be more connected to those countries that it seeks to influence, than China is. And that is really what this is all about. This is also what the
tension over the Belt and Road about. One of the things that is not on their radar right now is, obviously, whether or not India should ever join Belt and Road—there are two successive major and Road forms and India has refrained each time because they are Chinese projects that traverse Kashmir. So, there is a rational diplomatic basis for not joining the Chinese Belt and Road. However, just to be clear you cannot influence that process without somehow engaging with it or competing with it, not simply denouncing it in terms of speeches. So, I think there has to be strategy which involves increasing India's connectivity. That is the only way to change the landscape.
Govindraj Ethiraj: Connectivity as we are today—digitally and remotely—is a key word and critical input into what should be India's outlook towards building an economic powerhouse and taking advantage of what we see around us.