16 Comments
Feb 26, 2020Liked by Matt Stoller

Hi Matt. I don't have a lot of insight into how Coronavirus will affect the US, but I'm in New Zealand right now and also have connections to the tourism industry, so I can share what's happening here. You're focused on things being imported from China, which is an issue, but halts in exports to China are also creating big problems.

1. Electronics companies (the local Best Buy equivalents) have already said they will have shortages of many items. NZ is a small country (4.7m) so any shortages are felt here faster than elsewhere.

2. The forestry industry here in NZ has largely been told to drop tools because they can't export to China. There's no one at the docks there to receive the wood. This has been ongoing for several weeks now. Forestry is a big industry here, so that's a lot of people out of work. There's talk about relocating the workers from the North Island to the South Island to do conservation work, but obviously that presents its own challenges.

3. There's been a huge drop in tourism to Australia and New Zealand from China, which is a major market for both countries. This drop happened at Chinese New Year, which is the peak for tourism from those countries, so it's a huge hit. (Sadly for me, I have not noticed any resulting travel bargains yet!)

4. Just about every cruise line that has Asia routes is repositioning to Australia and New Zealand. This is already causing huge gluts (and discounts) in the Australian and NZ cruise markets. For example, the Queen Elizabeth 27-day circumnavigation of Australia is USD$1475. That's $55/day. It's less than rent + food for a month for Americans in major cities.

5. There's been a follow-on effect to airlines. Flights between Australia and New Zealand are being reduced due to coronavirus. Air New Zealand just announced a hiring freeze.

6. Dairy is also taking a big hit in NZ, again because they can't ship it out to China. China's a huge market for NZ dairy.

An academic was recently interviewed on what would happen if New Zealand was quarantined for several months. Oddly, one of the biggest issues would be fuel. New Zealand has plenty of oil, but there aren't enough refineries here that could turn it into automobile-ready petroleum. New Zealand is one of the countries that would do the best in a quarantine (so long as you like eating dairy products and kiwifruit). Though this article is specific to New Zealand it might give you some ideas for US industries to look at (although I'm sure you have largely thought of these): https://www.stuff.co.nz/national/health/119356599/how-nz-would-fare-during-a-world-catastrophe

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Feb 27, 2020Liked by Matt Stoller

I've been taking interest in wristwatches lately, and wouldn't you know it-- there's news about antitrust action in the swiss watch industry! I think yesterday was the regulator's deadline to respond to Swatch Group's complaint, but I'm not sure what the latest status of everything is. It's been unfolding for a little while now... here's an article from back in December: https://www.reuters.com/article/us-swatch-competition/swiss-body-considers-ban-on-swatch-unit-selling-parts-schweiz-am-wochenende-idUSKBN1YI0FY

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Feb 26, 2020Liked by Matt Stoller

A major theme of all MBA programs in the late 70's and early 80's was all about globalization and being 'multi national'. It was thought profitable and desirable to allow everything to be sourced and manufactured from wherever in the world that could provide the product at the least delivered cost. A secondary theme was all about how companies could leverage their long established core business, brand name and history of product quality, reliability and service to enable financial endeavors.

Over the years these themes propagated and grew until now we have reached a point where many of our basic everyday needs origin in some foreign country or another. The latest revelation is that many medical supplies and drugs are sourced in China or India. Who knew? Most car parts are now made and sourced in China or Mexico. Folks out of work knew that. Companies like GE disregarded their core businesses for so long, to pursue financial endeavors, that many have recently have been on the verge of bankruptcy.

Many old line American brand names don't mean much anymore. Craftsman Tools and Black and Decker are but two examples. It used to be everyone knew that Craftsman was a Sears brand, was only sold in a Sears store and was guaranteed for life. Now, few know who actually owns the Craftsman brand or where the products might be made. Black and Decker once was a reliable product maker but over the years most of their products got outsourced and produced in batch lots in some third world country. Once the batch is sold, good luck trying to get a repair or a part or, heaven help you, get another matching item - the batches change every year!

Then there is the logistical supply chain. America began disregarding that shortly after World War II. During the war we built and manned fleets of cargo and other ships like the world had never seen. Those ships played a major role in winning that war. Americans not only owned the fleets but also had control and allegiance of the crews manning them. But soon after the war ended it became "too expensive" to build the ships in this country or man them with American crews. As a result there are now relatively few US built or manned ships plying the worlds oceans. This not only means that we now have a shipbuilding industry that is only a shadow of it's former self but we also do not ultimately control our supply chain for most the goods and products made in other countries.

This all has sort of snuck up on us quietly over the years. Who knew? But it was all planned decades ago in the business schools. No one seemed to care as long as the goods were cheaper. We became a throw away society. Product quality didn't matter because we could just go buy another cheap item. It didn't matter that the factories closed down because those workers who had had good paying jobs could just go on welfare. And, the smart and lucky who ran the "multi-national" companies got rich merging, divesting, right sizing, and on and on.

But now we have what could be a serious National Security issue at our door step in this Corona Virus. And, so we'll just throw a few billion dollars at it and go on. . . maybe.

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> NVIDIA charges different prices for similar chips, depending on whether you’re a gamer or you’re building a data center

This practice goes way beyond NVIDIA. Back when clock speed was the main constraint on processing power, overclocking was widely pursued by hobbyists. Nominally identical chips come out of the fab with slightly different speed tolerances. The manufacturer tests them and sells them at a variety of default speeds. In part this reflects a speed range that won't cause malfunction; in part it's about what the market will bear.

Another example: Windows 10 Home Edition maxes out at 128GB. The Pro version supports 2TB. But it doesn't cost Microsoft any more to manufacture a version that supports 2TB.

Another example: some Tesla models are offered with varying battery capacities despite being manufactured with a uniform set of battery hardware. You can purchase additional capacity at any time--a software setting gets flipped and your car's computer is now able to use the full capacity.

A hypothetical example: the margins on wedding cakes are much better than on bread. Why can't sugar manufacturers price their product differently for different uses? Why shouldn't they?

The "why can't they" question probably amounts to accidents of history--what business models were invented and popularized (and what technical and legal controls existed) when an industry reached maturity.

I think the "why shouldn't they" question is more interesting. Chips and software both have small marginal costs relative to the up-front investment that goes into each product. That means there is an unusually vast surplus--consumer or producer--being forfeited at any single price point. None of this makes competitiveness concerns irrelevant! But, if we're assuming a constant and reasonable margin, a larger amount of beneficial use can be enabled by pricing differently for different markets, which will have varying abilities to pay. A large assumption, I admit.

I'm not telling you anything you don't already know about price discrimination. Still, I think it's important to distinguish between low- or zero-marginal cost industries and examples like Tesla's, if only because significant resources are being wasted in the latter. In the best case, pricing by industries' ability to pay makes a useful thing available to a larger quantity of people. Whether that outcome is being achieved, I couldn't say.

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Good piece on the financial impact of affluence and COVID-19. As a child of the Cold War, I also see parallels with the former USSR - where the availability of goods was also unpredictable. The fact that the off-shoring of production might put us in 1960's and 70's Communist Russia is an irony I can hardly stand. So much for Capitalism being the opposite of Communism.

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Hi Matt,

Merger-laden company Thermo Fisher is buying merger-prone Qiagen. Leaving one less major competitor in the biotech supplier market. (The list of acquisitions on wikipedia for Qiagen is incomplete; I don't know about Thermo Fisher.)

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The point about containers is apparently serious. In Northern Europe there are dire projections that due to halt of shipments from China, there will not be enough containers arriving to even carry out intra-European exports on road or rail, as export is counting on steady stream of available containers from imports. Who knew that what is essentially packaging could become a critical factor in global trade. I do not even want to guess where containers are manufactured as the answer will likely not please.

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Love your blog but I have to object to this piece:

(quote)"The last plant in the United States closed decades ago because of the environmental and health regulations made it virtually impossible to manufacture these products…

China has invested heavily in facilities and infrastructure to enable the manufacturing of these products. Coupling this with the focused training of human capital, China has created a mature environment to manufacture these products."

Teo is correct. What happened in the last twenty five years, through a variety of legal changes, was the creation of a globalized Just-In-Time economic system with pockets of hidden risk everywhere. And largely it happened because American and European policymakers enabled it through consolidation and the creation of the World Trade Organization. (quote)

Your point in the last paragraph is NOT what he is saying. Environmental and health regulations passed by the USA cause production to be more expensive here than in other countries which do not have such regulations. See environmental impact studies for building plants, requiring health insurance to be provided to full time workers, etc. China does not have these regulations and therefore out-competes US producers on price. If production in the US is something we value, then we should reduce these regulations. If we value these regulations more than US production, then we should not complain about production moving to other countries.

This has nothing to do with monopoly, "consolidation", or the WTO. China can produce more efficiently and thereby benefit US customers with a lower price. In this case the WTO rules clearly benefit the US as we get products for the cheaper price, but also maintain the environmental and health regulations in our own country. You are spinning it as hurting us because production moved away, but given our choices on regulation it is to our benefit that production happens in China- and this is Teo's point.

You focus a lot on government's role in creating market power and it is a very serious problem. But reading your blog for the last month or so I think you neglect gains from trade and other benefits to tariff-free exchange. Must keep both in mind to come up with good policy.

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