Thursday, August 3, 2017

Major Investments as a Company's Way of Ensuring Policy Stability

From his candidate days, Donald Trump promised to bring manufacturing jobs back to the US and save the Midwest Rust Belt.  For that Trump, the past few days finally brought a major victory that he can publicize.  Foxconn, the manufacturing contractor for Apple (and main other electronics brands) announced the biggest single investment by a foreign company ever in the US, launching a manufacturing facility in Wisconsin that will bring tens of thousands of jobs to the middle of that Rust Belt.  Major news outlets did not shy away from putting on their front pages pictures of smiling Trump next to Foxconn boss Terry Gou.

Considering that the investment was just made and building a manufacturing facility of the size that Foxconn envision will take years, the final numbers and plans for hiring and production are largely unconfirmed and subject to change.  But Trump has wasted no time claiming a victory for himself, in the process exaggerating the size of the investment and the economic impact to figures that Foxconn really cannot promise.  For Trump, what is important is not so much how many phones the Wisconsin factory will produce, or even how many people will work there, but that he is making concrete steps to fulfill his campaign promise.

Without a doubt, Gou is very clear of Trump's political imperative, and his Wisconsin factory's outsized role in Trump's political message.  For him, just as it is for Trump, the Wisconsin facility is much more than just an investment in economic productivity.  The underlying political value of the investment, in the long-term, may be much more important than the immediate cost savings and efficiency gains of building a factory in Wisconsin (honestly, it is doubtful if there is any decrease in costs or increase in efficiency considering most of Foxconn's supply chain remains in China).

What Gou bought with the investment is political affinity with the Trump camp and the American blue-collar population.  By gaining the favor of Trump camp, Gou temporarily deflected the continuing pressure many tech firms face from a US government aggressively seeking to raise tariffs on anything produced outside the country.  By publicizing a major investment in the US, Gou gave Trump an excuse to not enact any punitive legislations against foreign produced products, at least for the moment.  In essence, Gou lobbied Trump for turning a blind eye to continued dominance of foreign-made products in the US.

Indeed, one Wisconsin factory, no matter how big and valuable it may be, does not fundamentally change the fact that US imports most of its manufactured goods.  As China and other major manufacturing centers move up the value chain, more higher-end products will be made in these countries, and the total value of US imports is bound to continue its current increasing trajectory.  Instead of smartphones being made in the future, even the likes of airplanes, the pride of American manufacturing, may shift offshore in the near future as relevant technologies diffuse to other countries, even if robotics make American manufacturing more competitive over time.

Hence, what Gou did in Wisconsin does not represent an economic trend (as Trump would like the public to think) but an economic outlier that is conducted for the sake of political benefits.  For major firms like Foxconn that always have the attention of media outlets and politicians around the world, policy risk like Trump's proposed tariffs can realistically change the simple calculation of economic cost-benefit analyses of where to make a phone.  And given how fickle politicians like Trump can be, predicting future trends of policy risks are much more difficult than doing the same for operating costs and revenues.

By choosing to buy temporarily policy stability with a massive investment, Gou has acknowledged a fact that many businessmen often refuse to acknowledge: the reality that business is still influenced by politics even in some of the world's most pro-business of countries.  Even if the local governments purportedly consider laissez-faire economic policies to be ideal, voting citizens with real grievances about their own personal economic situations force governments to make moves to "rectify" economic unfairness.  More often than not, these are anti-market measures that takes away from the efficiency of businesses.

To prevent politicians from clumsily taking swings at the economic order at the behest of the electorate, they must preemptively appease whatever concerns that the voting public may have before they become serious enough to warrant political actions.  Gou's actions in Wisconsin, not just in terms of investing money, but actively rubbing shoulders with Trump and seconding his statements, is a good example of this business-led appeasement effort.  It is a smart move, but one that sets precedent for others like him who now must visibly show submissiveness toward government interests in America.  

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