09.09.20 Publication:

The Covid-19 pandemic crisis has combined forces with the already ongoing clash between
the United States and China about trade and technology to give new commercial and
political prominence to the concept that in English is called “Decoupling”: this means a deep
separation, even divorce, between technology processes and standards in the world’s two
largest economies that could spread to other industrial and service activities. If carried
through deeply and widely this would replace true globalisation, at least for technology-
related sectors, with a world fractured into two.

We can’t tell how far this decoupling might go, as that will depend on political
decisions in both Washington, DC, and Beijing, and of course the United States faces a
presidential election in November which will determine who is leading those decisions on
the American side. But it is already clear that this phenomenon has the potential to be quite
disruptive for a wide range of businesses.

One point we need to bear in mind about this idea is that East Asia already has
experience with a trend like this, although this earlier case was driven by commercial
choices and not political ones. I am referring to the trend in Japan that became called “the
Galapagos syndrome”, namely the choice by companies, especially in mobile phone
technology during the 1990s, to produce systems and operating procedures that applied
only to the Japanese market rather than seeking a global market by using, even helping to
create, global standards and global systems.

Just as animals, reptiles and birds were found to have evolved in separate, special
ways in the Galapagos Islands in the Pacific Ocean, so these Japanese technology sectors in
effect “decoupled” from the rest of the world during the 1990s and evolved separately,
after having been pioneers of global standards in consumer electronics and some aspects of
computers during the 1980s. Some lessons can be drawn from that experience.

The main lesson is that separate evolution can be quite profitable in the short term
because it enables products and services to be conceived and built for the needs of one
market rather than the much larger global market. Costs are therefore lower and for top
companies the risks may be lower too. Japan’s market, then still the world’s second largest,
was big enough to make that success possible. But those short-term profits came at a high
long-term price, especially when technologies were evolving very rapidly. Eventually the
“Galapagos” producers fell behind their global competitors and not merely lost global
opportunities but also lost chances to keep their own costs under control and to satisfy their
own customers. Japanese producers had decoupled, but technology had continued to
advance, along with consumer tastes and behaviour.

The issue with the decoupling of China and the US, if it really happens, will become
one of whether China proves to be a sufficiently large market to be able to avoid these
“Galapagos” disadvantages. For Chinese companies market size will be the crucial issue,
with the added complication that political actions by the US also risk affecting their choice
of component and technology suppliers. The issue for non-Chinese companies, including
Japanese businesses, will be whether their market shares in China will be large enough to
compensate for the cost of meeting separate rules and standards for the Chinese market
alone. For although the aim of American sanctions will be to restrict the activities and
capabilities of Chinese companies, they will also affect non-Chinese companies.

Given the uncertainty caused by November’s election, this issue remains somewhat
theoretical. But it is already clear that the Chinese authorities have decided to encourage
the separate evolution of some technology sectors in order to safeguard against future
political risks arising from the United States. So a Galapagos-style evolution in China may                                happen to some extent regardless of who is the US president next year, rather as it did in
Japan during the 1990s.

This adds a further complication to corporate planning about both supply chains and
market access after the Covid-19 pandemic becomes resolved, which will probably happen
next year. The general lesson of the pandemic for long term planning is that shocks and
disruptions to value chains both of supply and sale are more frequent and severe than most
businesses thought 10-15 years ago. A new report by the McKinsey Global Institute, “Risk,
Resilience and Rebalancing in Global Value Chains” predicts that, based on its analysis,
somewhere between $2.9 trillion and $4.6 trillion worth of global production could be
moved from one country to another during the medium term, as companies seek ways to
make their supply chains more resilient to these more frequent shocks. These truly are
disruptive times, causing new corporate evolutions.

Image by Tumisu from Pixabay