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Kia ora from New Zealand where this Trade Secrets writer’s return to normal life as a foreign correspondent in South Korea has been delayed by a nationwide lockdown.
Today’s main piece looks at the most important industries in each country, milk powder and memory chips, and offers a contrarian view on the question of whether their economic dependence on China will recede in the wake of the Covid-19 crisis. Our policy watch features Italian prime minister Giuseppe Conte’s announcement of a “complex programme” to start reopening the country, while our chart of the day looks at the oil price crash.
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Will foreign companies really be able to diversify away from Beijing?
Holed-up in a windswept valley near Wellington, my focus has mostly trained back towards the Korean peninsula, home to the world’s biggest producers of memory chips, smartphones and electronics displays, and the erratic North Korean leader Kim Jong Un. But the bellowing cattle on a nearby paddock have been a daily reminder of the dairy sector that underpins the economy of my native New Zealand.
Milk powder and memory chips are, of course, completely different markets, but speaking to businesspeople and trade officials working in both industries over recent days has revealed some striking parallels in the age of Covid-19.
Most important: a dawning realisation that for many, China’s reopening is the only glimmer of hope.
As one western dairy executive noted, because China appears to have moved past the nadir of the coronavirus downturn, Beijing will soon sharpen its focus on growth.
That means business opportunities for foreign companies in China, while Europe, the US and much of the developing world remain in the throes of the virus.
“They are going to come out of this in an incredibly strong position,” he said.
While a simple point, it threatens to potentially undermine efforts by governments and companies to diversify away from China.
To some Trade Secrets readers, this might seem like a contrarian take.
Evidence of a cover-up in Wuhan in December, coercion of the World Health Organization and bizarre claims by Beijing’s propagandists has left the Chinese Communist party’s international reputation in tatters.
The world’s second-biggest economy has just reported its first official quarterly economic contraction since 1976, raising questions over rising unemployment and the pace of any recovery.
Moreover, political leaders, including those in Australia, India and Japan, appear adamant that the Covid-19 shock will be a catalyst for a final, irreversible, drive to reduce their reliance on Chinese labour, consumers or cash — a potentially tectonic and generational shift.
Money still talks, however.
In the tech sector, China alone is expected to account for a whopping 70 per cent of the smartphone market this year, as well as drive the uptake of 5G with support from Beijing — two key factors in softening the blow for South Korean chipmakers, the country’s most important industry.
“Opportunities lie ahead for companies with heavy exposure to China . . . As China starts to get back to business, Europe is in the heart of the storm, while North America and other regions still see the worst ahead,” analysts from Bernstein in Hong Kong wrote in a report this month.
Food is a similar story.
The US food services industry — a hitherto juicy growth market — had “fallen off a cliff” and the near-term chances of a recovery looked bleak, the dairy executive said.
China, comparatively, has seen better business continuity throughout the crisis, thanks in no small part to the resilience of delivery and ecommerce networks even during a countrywide lockdown.
In a further sign of the direction ahead, in both New Zealand and South Korea there is a rush among some multinationals to get staff stranded by the virus back into China.
The manufacture of memory chips is South Korea’s most important industry © SeongJoon Cho/Bloomberg
Beijing has blocked almost all foreign arrivals — even suspending the Apec business travel card system which reduces immigration hurdles across the Asia-Pacific region — in an attempt to protect its people from further outbreaks. No one is clear on when the travel restrictions might be eased despite urgent diplomatic efforts.
For South Korean tech giants such as Samsung and LG, this breakdown of the human supply chain has meant expansion plans at Chinese factories are being jeopardised. For New Zealand exporters such as Fonterra, one of the world’s biggest dairy companies, there are rising risks of losing sight of their Chinese customers, local staff and distribution networks.
The problem also highlights how many businesses and trade officials are faced with the prospect of having to kowtow to the Chinese officials who can offer special exemptions or waivers to the immigration rules.
And, already, those businesses affected are cautious about criticising Beijing: one Korean executive, apologising for not being able to say more, described the immigration issue as “too sensitive” to talk about. “We cannot say anything unless the Chinese government says something.”
This is an incredible turn of events, just months after China was rocked by the outbreak in Wuhan, and a wrinkle in the hypothesis that the world will take a tougher stance against Beijing.
Diversification sounds good in theory, but for export-dependent countries, the unanswered question in a global recession is: where to?
Charted waters
Global oil markets remained under intense pressure on Tuesday, with Brent crude dropping below $20 per barrel for the first time in 18 years while other major benchmarks across the world tumbled.
The coronavirus pandemic has sent the oil sector into a state of crisis, with lockdowns implemented by authorities to smother the outbreak slashing demand for crude as much as a third.
Policy watch
Italy’s prime minister Giuseppe Conte hopes to reopen the country from May 4 © Remo Casilli/Reuters
Italy’s government will later this week outline a plan to reopen the country by the first week of May, Prime Minister Giuseppe Conte said on Tuesday.
“Over the next few days we will analyse this reopening plan in depth and go into all the details,” Mr Conte said in a Facebook post. “Before the end of this week, I look forward to communicating this plan to you and explaining the details of this complex programme. A reasonable expectation is that we will implement it from May 4.”
Italy was the first European country to implement a full-scale national lockdown, which has been in place since March 10.
The Italian prime minister also cautioned that it would not be possible to instantly reopen the Italian economy, even as the number of new diagnosed Covid-19 cases has been slowing for several weeks.
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Tokyo talk
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Source: Economy - ft.com
