The rise of tensions between the USA and the PRC has caused many companies to adjust their business strategies. This has already spawned numerous projects to implement the new strategies. At X-PM India, we have already seen the effects of this as our clients now need to set up new factories, shift existing production to new locations, develop new supply chains and become more self-sufficient in terms of technology. We believe that this new global business environment will create opportunities for change agents, including our clients and ourselves.

The changes that we foresee are likely to be long lasting, as it is taking the form of a new cold war. The US-USSR Cold War lasted forty years. A new cold war now appears to be developing between the USA and the PRC. 

Background

Various observers have identified three main factors contributing to Cold War II: the changing balance of power, differences in values and conflicting national interests. However, only one of these factors explains why the conflict is happening now, rather than three decades ago. Two of these factors, interests and values of the US and PRC, have not changed significantly over the past sixty years. We can rule them out as immediate causes of the conflict. However, the third factor, the power of the PRC relative to that of the US, has grown dramatically in recent years.

Therefore, while interests and values are important underlying factors in Cold War II, the catalyst that triggered it appears to have been the shifting balance of power. Nevertheless, it appears that both sides will use moral arguments as a basis for the new antagonism. The US has begun to focus on human rights, after years of ignoring PRC’s human rights record. At the same time, the PRC has begun to rake up past humiliations and challenge the international status quo.

In 1991, the four decades of Cold War I ended with the collapse of the USSR. The Soviet economy simply could not support the cost of the conflict. Cold War II is likely to last longer because the PRC’s economy matches its geopolitical ambitions. Just as the post Cold War I globalization had a pervasive impact on the business world, the impact of Cold War II will be felt by most companies. The world is separating into two separate zones, each of which is somewhat borderless within itself. And each zone will increasingly separate from the other. Therefore, thousands of companies will need to adjust to the new reality for the foreseeable future. For example:

• Large technology companies will need to comply with US regulations to ensure a steady supply of semiconductors. Alternatively, they will need to develop new sources.
• Pharmaceutical companies will need to cooperate with the PRC to ensure a steady supply of Active Pharmaceutical Ingredients (API’s). Or find new suppliers.
• Startup e-commerce companies will need to source capital from non-PRC sources.
• Manufacturers of defense equipment need to expand capacity.
• Assemblers of consumer goods (e.g. shoes, toys, electronics, appliances) will need to develop new suppliers.
• Buyers of rare earth minerals (e.g. battery and electronic manufacturers) will need to find new sources. Or find a way to use alternative elements.
• Companies with large databases of customer information will need more robust cyber security systems to avoid sabotage or data theft.
• Some companies will need to hive off subsidiaries in countries that no longer friendly to them. They are likely to reinvest the proceeds in countries that are pereceived to be more reliable.

The PRC was able to position itself as the factory of the world over the past several decades. The decoupling process driven by Cold War II will likely force it to re-position itself as a consumer of the products it manufactures. This will trigger the need for new production capacities elsewhere and will contribute to the expansion of manufacturing capacity in other low cost manufacturing locations in Asia, Eastern Europe, Africa and Latin America. This process has already been underway for several years because of the PRC’s rising labor costs.

For many countries, the formation of two major zones, the PRC-friendly zone and the US-friendly zone, will result in the existence of two distinct technology standards, the duplication of manufacturing infrastructure and the diversification of supply bases. This decoupling from PRC-based manufacturing will require significant investment. Also, it will be highly disruptive unless it happens gradually over many years. It could lead to thousands of projects as companies adjust to the new reality. Or it could lead to a series of supply shocks and crises.

The thirty years between the end of Cold War I and the beginning of Cold War II were a period of global economic unification and high economic growth. As we enter a period of decoupling and the formation of two increasingly separated zones, there will be winners and losers in an era of lower overall growth. Cold War II will likely lack a third non-aligned bloc, as digital technologies will force companies and countries to pick either the standards of the PRC or the US.

Given that Cold War II is likely to last longer than the first Cold War, it will likely have an impact on every industry. Companies in many industries will face new challenges and opportunities. Those that anticipate the changes and are flexible enough to adapt to the new environment will survive and may even thrive. Our role at X-PM, as always, is to help companies overcome this new set of challenges and take advantage of future opportunities.