For generations, American chief executive officers (CEOs) have believed it was their job to create global platforms that would maximize their short-term profits and hence their stock price (and their own compensation, which has been closely linked.)
It did not matter where their companies sold their products or services, where they obtained financing or where they developed or sold technology. Phil Knight of Nike was one of the first to take advantage of “Third World labor arbitrage” by producing his athletic shoes in China, India and Vietnam.
“Globalization” became the rage as CEOs shuttered US factories and built new ones in Asia and Mexico.
But the Covid pandemic, the war in Ukraine, increasingly cozy relations between China and Russia, and China’s own exertion of power internationally are challenging the conviction of CEOs that they can be truly “stateless.”
The mantra of US multinational CEOs has been that they manage their businesses, some of which have a majority of sales outside the United States, in a way that conforms with the rules and regulations of each nation where they operate. CEOs genuinely believed they had no special responsibility to the United States or its national security.
That business philosophy is now under assault, first because the pandemic revealed that global just-in-time supply chains are profoundly vulnerable to interruption. Those supply chains worked well, and to great profit, during a long period of general world health and geopolitical stability. CEOs were able to overcome floods, earthquakes and the nuclear disaster at Fukushima, Japan, because those events were regional and short-term.
But two full years of Covid lockdowns, port disruptions, shortages of planes and ships, and shortages of workers to manage each aspect of the supply chains have proven that they are not always functional or secure. At least some functions will need to be “reshored,” or brought back to the United States.
Another theme that has clearly emerged is that control of manufacturing offers geopolitical advantage: The fact that China largely controls the manufacturing of certain medicines and safety equipment, solar panels, electric car batteries and all manner of computers and smartphones is a strategic challenge to the United States.
One reason American information technology systems are so vulnerable to Chinese hacking is that the Chinese manufacture much of the equipment. An excellent report from the National Bureau of Asian Research in March, entitled “China’s Digital Ambitions: A Global Strategy to Supplant the Liberal Order,” clearly showed how China is leveraging its digital strengths.
Russian President Vladimir Putin’s invasion of Ukraine, launched after a summit meeting with Chinese President Xi Jinping, is another blow to globalization. American CEOs sensibly responded with alacrity and bowed to the US government and US public opinion to suspend or halt their activities in Russia.
That was relatively easy because Russia represented such a small percentage of their global sales. For much the same reason, CEOs have largely respected sanctions against Iran, North Korea and Venezuela.
China, however, is the 800-pound gorilla in the room because many American companies such as Intel sell more of their products in China than they do in the United States.
As a correspondent based in Hong Kong and Beijing from 1979 to 1982, I witnessed the early stages of American companies moving into China. They (and I) believed that it was fine for them to pursue profits in China because it was ultimately in America’s best interests.
We expected the Chinese governance model to gradually liberalize as wealth spread and a middle class emerged. We thought China would become a “responsible stakeholder” in the world order the US had taken the lead in creating following World War II.
But China has lurched in a very different direction under President Xi and American companies are essential to his continued success.
Cisco Systems helped build the Great Firewall that protects the Chinese people from the “spiritual pollution” of the Western media. Microsoft, Apple and Amazon Web Services have provided the Chinese government with important tools as well as access to their technological secrets.
Semiconductors made or designed by Intel, Nvidia and Qualcomm have reportedly showed up in the hands of the People’s Liberation Army. They also have been used by Hikvision and Dahua to create artificial intelligence-based facial recognition systems used not only to suppress populations in Xinjiang and Hong Kong but also to buttress the rule of authoritarian governments around the world.
So far, American CEOs have been able to ride out the controversies caused by their support for the Winter Olympics in Beijing and by their China sales, but what happens if Beijing lends further support to Russia?
China already is lending diplomatic support and is helping to disseminate Russia’s propaganda as part of its effort to tilt the “global discourse” away from Western control. That already represents key support for Russia because the control of opinion is so important. That already should serve as a cautionary flag to American CEOs heavily dependent on China as a market or manufacturing platform.
But what if it is revealed that the Chinese have provided technological or military support to Putin?
It may be very difficult to track because of China’s opaque internal distribution systems, but China purchases $300 billion of semiconductors each year from companies in the United States, Taiwan, Japan, South Korea and Holland. Semiconductors are going to be one item in great demand by the Russians because they have been cut off. Would China sell or provide any of these semiconductors or other high-tech gear to Russia?
If it surfaces that the Chinese have done that, American CEOs may no longer be able to straddle the geopolitical differences with China. The backlash against them could be intense. The “decoupling” that has long been advocated by those on the extremes of America’s political debate could become much more of a mainstream reality.
It appears that the confrontation between Western democracies and authoritarian nations is going to last for years. It could take years, and many billions of dollars, for CEOs to reconfigure where and how they make and sell things. Profits and share prices will suffer.
American CEOs may be forced to move in the direction of how their predecessors behaved in World War II. Those business leaders created a war production board and organized themselves to make the things that America needed to prevail.
When the American system coalesces around common goals, as is often argued, it is the most powerful system in the world. It was acceptable to allow American companies to go global and stateless during the decades when the United States enjoyed unchallenged power.
But that era is now over. It’s time for American CEOs once again to start playing for the home team.
William J Holstein, former editor-in-chief of Chief Executive and Directorship magazines, is the author most recently of A Grand Strategy: Countering China, Taming Technology and Restoring the Media. Follow him on Twitter: @HolsteinWJ