Strategy

Still More On Strategy

Posted on by j.giglio

In business, tradeoffs occur when companies have to make choices between strategies that are inconsistent. For example, senior executives’ short-term focus on earnings per share may conflict with long-term shareholder value and derail the firm’s strategy.

The pressure from financial markets can tempt executives to perform unnatural acts, such as managing earnings in a fashion that undermines a long-term strategy. They are motivated by the personal impact of the decision and fixated on the short term.

One downside of stock-based compensation for executives is that it incentivizes strategies that might benefit stock prices in the short term but could be detrimental to firms in the long term.  So rather than repairing the unsafe roof on the factory in Toledo this quarter, they decide to postpone the work to meet investor expectations for the quarter.

This asymmetrical reality, coupled with the four-to-six-year average tenure for a CEO, undermines the serious consideration of strategy.  This is unfortunate since the stakes and therefore the costs of failure are high.

Limited resources force executives to carefully and wisely match the resources available to the problem or set of problems at hand. They must not only choose among resources, but also integrate and rationalize their use.

One of the challenges in developing a successful strategy is to set goals that are realistic in the context of finite resources and not to confuse means with ends. Since executives can’t have everything at once, they need a set of goals that recognize the firm’s limitations.  Goals should be feasible, not pipe dreams found in the wild blue yonder.

Closely related, since external circumstances are not static, resources that are valuable now may not be in the future.  When this occurs, executives are faced with the interplay and tradeoffs between internal and external considerations.

Keep in mind that executives are trying to perform all these tasks while trying to cope with the tyranny of day-to-day events and crises.  Functioning in this intense environment inevitably affects the quality of the choices made.

Moreover, all strategies are contextual.  Strategies are derived from and shaped by political, regulatory, social-cultural, economic, and technological forces.  None of these contexts should be ignored.  Context provides meaning to events.

Strategies should act in these multiple contexts.  Successful executives analyze the varied contexts that impact strategy and the ways in which context and ideas act on each other from the time they are developing strategy through its implementation, a progression that will in turn give rise to further ideas.

While the definition of strategy may have changed over the decades, in a word, strategy remains consequential and the stakes are huge.  It involves long-term commitments, large allocations of resources, and the making of critical decisions – all in a fiercely competitive environment in which the path forward is often unclear.  Executives need to maintain the ability to see the forest rather than the trees.

Strategy is an attempt to control the future.  Long-term goals are translated into proximate goals for execution.  Changing strategies is like the popular metaphor of changing the direction of an aircraft carrier—it doesn’t happen quickly.

Despite all these complex variables, strategy should be kept simple.  Simplicity does not guarantee success, but complexity begs for failure.  There is a chain of events between resources and goals.  A chain is as strong as its weakest link, and the more links in the chain, the higher the odds that something will go wrong.  The sovereign role of chance in strategy must be respected.

Surfing for Strategy

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Does Justice Potter Stewart’s quote about obscenity: “I know it when I see it,” apply to strategy?  Is strategy some MBA type’s interpretation of elaborate Excel spreadsheets that claim to define the shape of an enterprise’s future?  Is it a carbon copy of something that worked well for another enterprise at a different time, place?

Is strategy solely the product of stained-glass rational thought uncontaminated by the hurly-burly of the real world?  Is it something to fall back on when all else fails? Is it the ad hoc play calling of a CEO whose gut instincts or may be just pure luck have made him or her a Wall Street favorite so far?

The word “strategy” is beguiling, but do we really know what it means?  The coining of a workable framework is a task fraught with danger.  It has to be right enough. It must highlight the core of the subject.

Perhaps it is time to return to basics.  Let’s make a sharp right turn. Consider a somewhat different and perhaps slightly simpler perspective common to and underscoring all strategies used in the business world.  For sure, stated in this rough and ready way, as well as in a manner that invites scholarly challenge, it underlies and accommodates a potentially wide variety of strategies.

Let’s take the capacious model advanced by Arthur F. Lykke, Jr., a military strategist who taught a generation of military leaders at the Army War College in the United States.  He divided military strategy into a ends/ways/means/risk equation.  It is a basic framework for discussing the particulars of a military strategy.  For our purposes, focus on means and ends.

At its most basic, overarching level, strategy is the essential linkage that connects resources with a set of defined, prioritized, and feasible goals that fit the competitive environment.  Usable resources are both tangible and intangible.  Strategy demands the intelligent interaction and integration of all the firm’s significant resources to achieve goals.

It aligns means with ends while reserving some resources for rainy days.  It is the link between resources and goals, the scheme for how to make one produce the other.  The alignment, like beauty, is in the eyes of the beholder.

Strategy may not be about asking “who” and “why.”  The question that haunts every strategy may be “how.”  How do you get from means to ends?  It is always the how before the who and why. Strategy happens in the space between means and ends.  It is the relationship that unfolds at the intersection of means and ends.

Strategy, according to this model, is a force multiplier when it provides value added to resources.  This perspective can accommodate the various schools of strategic thought and plausible arguments about various definitions and their imperial claims that they are valid for all times and places.  This vantage point may provide a unifying perspective among various strategies, a conceptual center of gravity covering competitive activities.  All the relevant resources come together to create a center of gravity to bring to bear on achieving the goal.

Again, in this context, it is not the strategist’s job to select goals, but he or she is obliged to contribute to the setting of goals by advising what is possible based on resources.  Strategy frequently fails when the resources prove insufficient to achieve the goals.  This can happen because the wrong resources are in play or because the ends are too ambitious.

The strategy adopted may frequently be dictated by the availability of resources rather than by desired goals.  Executives quickly come to understand that strategy is unavoidably and inevitably about trade-offs. Making trade-offs means accepting limits—saying no to some customers, for example, so that you can better serve others.

Strategy As A Way of Thinking

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Strategy may well be a disposition rather than a doctrine for practitioners.  Strategy is a way of thinking about issues in the future tense that goes to the success or failure of an enterprise.  From this disposition, certain positions follow, views of change and innovation key among them, along with a deep sense of situational awareness.

Strategy, while essential, is not everybody’s idea of a good time.  In a world clamorous with so many other demands on their attention, it is challenging for practitioners.  Helpful as the various schools of strategy have been, successful practitioners are not intellectually hostage to any one school, consulting reality before embracing any of them.

On the other hand, the strong hand, for practitioners there are intelligent arguments on the debate for the superior strategy and on the other hand, the shaky hand, it is hard to know who is right when little guidance is provided on which models and tools to use.  Management theorists who seek the Holy Grail of the Great Single Solution to the problems of business are disappointed.  Successful practitioners understand how each of the various strategies advanced works individually, as well as how they might be combined for best effect.

Behind closed doors, senior leaders embrace a number of approaches and tools to reach a decision as to what their strategy should look like and what they should avoid informed by their own on the ground experience.  Choosing a strategy to meet the specific demands of their competitive environment in mature, nascent, growth, and declining industries is a major effort.  Ultimately, strategy is a way of thinking, not the mindless application of models and tools.

However, how and when to use the various tools and their limits is still an outstanding issue.  How to use business strategies is settled only in the minds of the practitioners who know how to apply the art and blend the various schools.  Should the firm in a mature industry pursue an innovation strategy trying to create new markets?  Should it seek to dominate existing markets, or perhaps use a hybrid strategy?

Also, strategy can be a strange and frustrating subject matter for students who frequently feel as though they are lost in a whiteout, paralyzed with boredom.  Many students are none too enthusiastic to study strategy.

Part of the problem is that students are generally unprepared to receive knowledge that is not immediately useful or exciting, that won’t free them from the financial wars and close the book on their debts.  For many students taking the required course in strategy, time seems to pass more slowly than in a laundromat.

Strategy requires students to have well-stocked minds, which means having knowledge of cross-functional disciplines and acquiring a more than nodding acquaintance with history—in short, to be educated. That means having knowledge of literature, history, and philosophy.  Sadly, historical consciousness is no longer in currency, let alone in vogue.

Students need to think in interdisciplinary terms, invariably that means finding dazzling connections, for as historian Edith Hamilton put it: to see anything in relation to other things is to see it simplified”.  Instead they struggle with trying to integrate and coordinate various functional areas.  Reference to context is de rigueur when discussing and analyzing a particular case or scenario.

Students get caught sometimes between warring disciplines such as finance, accounting, marketing, and other functional subjects.  This is especially difficult in an academic environment with the pressure to specialize and many students living exclusively in the present.  Students who go into the real world and attempt to practice strategy will quickly gain a healthy respect for the myriad challenges it poses.

Jack Welch and Strategy

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Everyone, it seems, is in need of a strategy these days.  Luckily, everyone is a strategist. The word is used promiscuously as a value-enhancing modifier: a strategy for tax preparation, a strategy for losing weight, a strategy for coping with stress and the beat goes on.

Overuse has left the word “strategy” devoid of meaning.

As a practical matter, it is about using your limited resources to achieve the best outcome in situations that are both uncertain and contested. In the business world, books about strategy are legion and usually voluminous. These days, no company would dare to admit it lacks one.

One can argue that references to strategy in a business context started in the 1970s, as American companies became subject to increasing global competition and no longer enjoyed benign market conditions.  In 1964, when Peter Drucker sent his publisher the draft of a new book called Business Strategies, the publisher changed the title to Managing for Results, believing that the word “strategy” was associated with politics and the military, not business.

The post-World War II boom in the United States was produced by the massive, global, industrial-scale war that was not fought on American soil and radically depleted the industrial capacity of America’s most important competitors and potential competitors; including but not limited to Germany, Japan and Great Britain.

The American economy benefitted from the Marshall Plan and other spending to help rebuild these nations.  They used much of the money to purchase American goods, and for several decades the United States had very few major global competitors.

For instance, post-World War II Japan relied on close ties with the United States to protect its territorial integrity and regional interests.  This enabled Japan to focus its resources on education, economic development, and nondefense production that created competition for the United States.

America provided assistance to rebuild shattered economies in Western Europe and East Asia and opened up its market to their products.  However, by the 1970s, these countries were competing against American corporations.  By then, thanks to negative trade balances, higher oil prices, the combination of high interest rates, unemployment and inflation, and a crushing defeat in Vietnam, American corporations and households were experiencing real distress.

In response, academics, management consultants, armchair strategists, and corporate executives such as Jack Welch, the CEO of General Electric, the Apple of its time, began to transform their business strategies to acknowledge that international competition was a serious threat.  By then writing and consulting about business strategy had itself become a big business, offering magic bullet solutions such as “attack the competitor’s strongest point,” “swim in blue oceans away from the competition,” as universally valid nostrums.

Jack Welch understood that large firms could use their scale and scope to deal with increasing foreign competition, leverage international opportunities, and exploit the shift from manufacturing to services in the emerging knowledge-based economy, all while managing to stay cool.

Fortunately for Welch, he came to understand that the strategic resource in the new economy was human capital.  He realized that how strategy plays out depends on the operational effectiveness deployed by the Dilberts in the firm.  This is one reason why he was so insistent on learning and sharing knowledge and expertise throughout the organization.  In sum, he got the strategy right in the context of time and place, communicated it relentlessly, and monitored the strategy’s execution.

He understood that it is easier to grasp strategy in theory than to put it in practice, not least because strategy is difficult to develop and implement.  He likely subscribed to Yogi Berra’s perspective: “In theory there is no difference between theory and practice. In practice there is.”

The BRICS and the Almighty Dollar

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When the BRICS (Brazil, Russia, India, China, and South Africa) summit was held last month in South Africa, it highlighted both the group’s main economic strengths and the divergent interests that make it difficult for them to leverage those strengths.  Whether those differences can be resolved will have a major impact on the U.S. in general, and the dominance of the dollar in particular.

Nearly two dozen countries formally applied to join the group. The bloc invited top oil exporter Saudi Arabia, along with Iran, Egypt, Argentina, Ethiopia, and the United Arab Emirates, to join in an ambitious push to expand their global influence as a viable counterweight to the West.  This is certainly the goal of Beijing and Moscow.

Developing countries are increasingly the biggest the most dynamic parts of the world economy.  This has resulted in both the shift of a vast amount of know-how from the West to the rest and the development of new know how in the rest—not just in China but also in India.

The new BRICS members bring together several of the largest energy producers with the developing world’s biggest consumers, potentially giving the bloc outsized economic clout.  Most of the world’s energy trade takes place in dollars, but the expansion could enhance the group’s ability to push more trade to alternative currencies.

This is a win for China and Russia, who would very much like to undermine the dominance of the US dollar. This would be especially helpful to Russia as its economy struggles with sanctions imposed after its invasion of Ukraine last year.  China is looking to build a broader coalition of developing countries to extend Beijing’s influence and reinforce its efforts to compete with the US on the global stage.

Former French President Valery Giscard d’Estaing called the dollar’s role as the world’s reserve currency “America’s exorbitant privilege.” Most Americans don’t think about the value of the dollar.  But for the rest of the world, its value on currency exchanges is a big deal.

U.S. monetary policy is closely watched around the world because interest rate hikes by the Federal Reserve increase the dollar’s value and make loans denominated in dollars more expensive to repay in local currencies. This is certainly an advantage for the U.S.

But the dollar’s unique position is under threat on several fronts and will likely experience a stress test in the future. The most immediate and unnecessary threat would stem from the self-inflicted wound of the U.S. defaulting on its debt.

One of the bedtime stories D.C. politicians tell themselves is that the dollar is unassailable. If Americans have learned anything from history, it is that there is no escaping it. Moving on from history requires some honesty and truth telling, but truth tellers are an endangered species among the political elite.

There are a growing number of countries, notably China and Russia, that resent the US’s weaponization of the dollar on global markets.  Their de-dollarization efforts bear watching. Another threat arises from technology, as central banks around the world work to develop their own digital currency networks.

Though home to about 40 percent of the world’s population and a quarter of global GDP, the bloc’s ambitions of becoming a global political and economic player have long been thwarted by internal divisions and the lack of a coherent vision.

The BRICS countries also have economies that are vastly different in scale and governments that often seem to have few common foreign policy goals, which complicates their decision-making.  China’s economy, for example, is more than 40 times larger than South Africa’s.

Russia, isolated by the United States and Europe over its invasion of Ukraine, is keen to show Western powers it still has friends. Brazil and India, in contrast, have both forged closer ties with the West.  Given these differences it is unclear how the group will be able to act in unison and enhance their clout on the global stage.

It’s Déjà vu All Over Again

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What’s telling about the Silicon Valley Bank collapse is that no one saw it coming.  When, on a visit to a London business school after the 2008-09 global financial crisis the late Queen Elizabeth asked why nobody saw it coming, no one had a clear answer.  Why, in a financial world crawling with regulators, did no one realize that subprime mortgages were toxic and on the brink of falling apart?

It looks like the regulators dropped their guard again.  Had they come to simply and blindly assume another set of false beliefs that ultra-low interest rates, designed to help tackle recession, were here to stay?

Entire business models were built on this assumption.  But then inflation returned and interest rates shot up.  And now we’re learning just how many banks bet the house on the idea that rates would never rise again.

Regulators closed Silicon Valley Bank, which catered to the tech industry for three decades, on March 10.  After an old-fashioned bank run, it did not have enough cash to pay its depositors.  It was the biggest bank to fail since the 2008-2009 financial crisis and the second biggest ever, after Washington Mutual fell in the wake of the collapse of investment bank Lehman Brothers, which nearly took down the global financial system.

During the COVID pandemic, Silicon Valley and other banks were raking in more deposits than they could lend out to borrowers.  In 2021, deposits at the bank doubled.

But they had to do something with all that money.  So they invested the excess in long-term ultra-safe U.S. treasury securities and mortgage bonds.  But rapid increases in interest rates in 2022 and 2023 caused the value of these securities to plunge.

The bank said it took a $1.8 billion hit on the sale of these securities and was unable to raise capital to offset the loss as their stock began to drop.  The bank’s client base, which included a lot of tech companies, exacerbated the problem.  Venture capital firms advised companies they invested in to pull their business from the bank.  This led to a growing number of the bank’s depositors to withdraw their money, too.  The investment losses, coupled with withdrawals, were so large that regulators had no choice but to step in and shut down the bank.

Despite being the 16th largest bank in the United States, Silicon Valley Bank was exempt from many stress- testing regulations other banks were compelled to follow.  It did its best to show it was one of the good guys.  Last year, for instance, it publicly committed $5 billion in “sustainable finance and carbon neutral operations to support a healthier planet.”

But how sustainable were the bank’s own finances?  It turns out its business model was hugely sensitive to interest rate hikes.  It had tied up its money in government bonds, which decrease in value as rates rise.

Here again the Queen’s question is relevant: Why did no one see it coming?  In this case, why was the bank so complacent in the year leading up to the crisis, when inflation was soaring?  And what other problems are lurking in the banking system as interest rates move back toward historical averages?

Silicon Valley Bank’s collapse highlights how blind regulators were to the scenarios that ultimately led to the bank’s demise—large and rapid increases in interest rates.  Do the Federal Reserve’s bank regulators not talk with or read about what their monetary brethren are doing?  Are the regulators fighting the last war, the last crisis?

More laws and regulations don’t always help if regulators are incompetent.  If they are, they should be terminated – along with the senior management at failed banks.

Dec 7 A Day That Will Live in Infamy

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Early in 1941, the government of resource-poor Japan realized that it needed to seize control of the petroleum and other raw mater sources in the Dutch East Indies (now Indonesia), French Indochina (now Vietnam and Cambodia), and the Malay Peninsula (now Malaysia).  Doing that would require neutralizing the threat posed by the U.S. Navy’s Pacific Fleet based at Pearl Harbor in Hawaii.

The government assigned this task to the Imperial Navy, whose combined fleet was headed by Admiral Isoroku Yamamoto. The Imperial Navy had two strategic alternatives for neutralizing the U.S. Pacific Fleet.  One was to cripple the fleet itself through a direct attack on its warships, or cripple Pearl Harbor’s ability to function as the fleet’s forward base in the Pacific.

Crippling the U.S. fleet would require disabling the eight battleships that made up the fleet’s traditional battle line.  But to be really successful, this alternative would also require disabling the two brand-new U.S. battleships then assigned to its Atlantic Fleet (which could be quickly reassigned to the Pacific), along with the three aircraft carriers in the Atlantic

It was quite a tall order.

The most effective way to cripple Pearl Harbor’s ability to function as a naval base would be to destroy its fuel storage and ship repair facilities.  Without them, the Pacific Fleet would have to return to the U.S., where it could no longer deter Japanese military expansion in the region during the year or so it would take to rebuild Pearl Harbor.

It soon became apparent that the basics of either strategy could be carried out through a surprise air raid launched from the Imperial Navy’s six first-line aircraft carriers.  Admiral Yamamoto had a reputation as an expert poker player, gained during his years of study at Harvard and as an Imperial Navy naval attache in Washington.  He decided to attack the U.S. warships that were moored each weekend in Pearl Harbor.

But in this case the expert poker player picked the wrong target.

The Imperial Navy’s model for everything it thought and did was the British Royal Navy.  Standard histories of the Royal Navy emphasized its victories in spectacular naval battles like Trafalgar, during which Royal Navy warships attacked and destroyed opposing ships.  Thus the Imperial Navy inevitably focused on attacking the U.S. Pacific Fleet’s battleships while at Pearl Harbor.

Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. So it was that, in one of history’s finest displays of tactical management, six of the world’s best aircraft carriers under the command of Vice-Admiral Chuichi Nagumo furtively approached the Hawaiian Islands from the north just before dawn that fateful Sunday, December 7, 1941, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion.  On paper at least, this rivaled the British Royal Navy’s triumph at Trafalgar.

But so what?

The American battleships at Pearl Harbor were slow-moving antiques from the World War I era.  As we know, the U.S. Navy already had two brand new battleships in its Atlantic Fleet that could run rings around them.  And eight new ones the navy was building were even better.

More importantly, the Pacific Fleet’s three aircraft carriers weren’t at Pearl Harbor.  American shipyards were already building 10 modern carriers whose planes would later devastate Imperial Navy forces in the air/sea battles of the Philippine Sea and Leyte Gulf.  Moreover, the Air Force program was moving quickly to produce the B-29 bombers that would burn down 66 Japanese cities and drop nuclear bombs on Hiroshima and Nagasaki.

Most importantly, as the sun set on December 7 and the U.S. Navy gathered the bodies of its 2,117 sailors and Marines killed that day, all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing Pearl Harbor to continue as a forward base for American naval power in the Pacific.

So in reality, December 7 marked the sunset of Japan’s extravagant ambitions to dominate Asia.  Admiral Yamamoto and the Imperial Navy’s other tradition-bound leaders chose the wrong targets at Pearl Harbor.

The dictates of tradition are usually the worst guides to follow when it comes doing anything really important.  After all, if they survived long enough to be venerated, they’re probably obsolete.

OPEC+ decision to cut oil production will impact gas prices

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Earlier this month, the 23-member oil-cartel known as OPEC+ (Organization of the Petroleum Exporting Countries), of which Russia is a member and led by Saudi Arabia, announced it would slash production by 2 million barrels per day.  The production cut is equal to 2% of the world’s daily oil production.  The cut was seen as a slap in the face to President Biden.  The move by OPEC+ drew angry criticism from Washington and the White House accused the Kingdom of taking sides with Russia.

In response the Biden Administration said it plans to re-evaluate the U.S.’s eight-decade old alliance with Saudi Arabia. It is hard to forget that during the Presidential campaign in 2020, the president’s money quote was he promised to make Saudi Arabia a “pariah” state.  He said there is “very little social redeeming value in the present government in Saudi Arabia.” He has criticized the Crown Prince for his role in the killing of Washington Post journalist and political opponent Jamal Khashoggi.  All this while courting Iran, an arch enemy of Saudi Arabia, in the hopes of striking a nuclear deal that would give Tehran billions of dollars to threaten the security of Gulf States.

Still for months the leader of the free world lobbied Saudi Arabia to help ease energy prices by pumping more oil into the market.  These pleas fell on deaf ears. The Administration urged the Saudis to wait for the next meeting of OPEC+ on Dec. 4 before making a decision on production cuts.  The Administration wants to hold down gas prices to advance the Democrats’ chances in the midterm congressional elections. Now the administration has announced it will sell 15 million more barrels of petroleum from the nation’s strategic reserve, aiming to ease gas prices.  The White House said it was prepared for more sales of the $400 million barrels in the strategic petroleum reserve if there are further disruptions in the world markets.

Not only that but the White House is starting to relax some of the sanctions on the authoritarian government in Venezuela which sits atop some of the world’s largest oil reserves to allow Chevron to resume pumping oil and exporting oil to the U.S.  There is an ominous sound of barrel scraping here.

Congressmen from both parties called for retribution against the cartel as well.  Some called for taking direct action against Saudi Arabia such as denying it access to military hardware and passing legislation allowing OPEC+ members to be sued under antitrust laws.

The Saudi’s rejected the accusation that it was getting in bed with Russia. They stated that the decision to cut output was driven purely by economic considerations and in response to future uncertainty about demand for oil.   OPEC+ was doing what it usually does.  They want to regulate the flow of crude oil to world markets in an effort to control prices. That is what the cartel is all about, full stop.. They are seeking to protect their national economic interests as has always been the case. The Saudi’s need money to provide for a decarbonized future and to fund its on-off war in Yemen.

The irony here is that according to the U.S. Energy Information Administration in September 2019, the U.S.  became a net exporter of crude oil and petroleum products for the first time since 1973.  In 2022, the U.S. will again be a net oil importer.  The Administration’s policy has been to ween the American economy off fossil fuels in favor of clean energy.  Quite apart from bans on fracking, bans on drilling, the President’s first act in 2021 was to scrap the cross-border permit for Canada’s XL pipeline which was projected to carry 900,000 barrels of crude oil a day into the U.S.

Events like the coronavirus and the tragic war in Ukraine should have revealed the dangers of being dependent on unreliable regimes and geopolitical adversaries.  These choices have left the U.S. in  an untenable, vulnerable place.

Corporate America and Income Inequality in the U.S.

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Economic inequality, the gap between the rich and poor, has always existed. This disparity has increased dramatically in the U.S. over the last four decades.  Inequality can be measured in many ways, frequently using income.

The Gini coefficient is one of the most utilized measures of how income is distributed across the population with 0 being perfectly equal (where everyone receives an equal share) and 1 being completely unequal (where 100 percent of income goes to only one person). The measure has been in use since its development by Italian Statistician Corrado Gini in 1921.

The United States has a Gini Coefficient of 0.485, the highest it has been in 50 years according to the Census Bureau, outpacing that of other advanced economies.  This measurement finds that the U.S. is the most unequal high-income economy in the world.

The top 1 percent of earners made a little over 10 percent of the country’s income in 1980.  Currently they take home about 20 percent, more than the entire bottom half of earners.

Academicians and politicians argue over whether automation or overseas manufacturing is more responsible for eliminating American manufacturing jobs and keeping wages lower.  The question is debatable, but the answer is surely a mosaic from globalization to automation.

One factor that catches the eye time and time again has been the role of corporate America.  Sure, automation and globalization have transformed labor markets across the globe, but it is important not to overlook corporate America’s role in accelerating these effects.

The late Jack Welch, the CEO of General Electric from 1981 to 2001, captured this reality when he talked of ideally having “every plant you own on a barge”.   He turned the firm from a manufacturing company into more of a financial services firm while offshoring American manufacturing jobs.  In 1999, Fortune Magazine named him manager of the century.

Other leading companies followed Welch’s path. For example, General Motors moved production to low-wage areas like northern Mexico starting in the 1980s.  In 2017 Boeing, America’s biggest exporter, opened a plant in China for its 737 planes.

From both an economic and national security perspective, the US needs to strengthen smart manufacturing and provide good jobs for future generations through effective public policies.  War and the pandemic have exposed the fragility of supply chains. Increasing domestic production of items like energy, food and medicine would better secure supply chains and create high value jobs and support American workers and their families.

For example, semiconductors (chips) are foundational for many industries, as everything digital has transformed all sectors of the economy. Bear in mind that digital technologies are disrupting entire industries and blurring industry boundaries.  Still, the US is suffering from a severe shortage of semiconductors.

While the US global share of semiconductor manufacturing capacity was 37 percent in 1990, the number has fallen to an alarming 12 percent today.  The US has become an outlier in an industry that is a major engine of U.S. economic growth and job creation.

The US has grown dependent on other countries that provide government subsidies and incentives to make it easier and cheaper to manufacture semiconductors.  The European Union is planning to provide the industry with $48 billion over 10 years.

More importantly, China is investing $100 billion into the sector. The Chinese government is funding the construction of more than 60 new semiconductor fabrication plants and is poised to have the single largest share of chip manufacturing by 2030.

When push comes to shove, the political class should remember that the US must be the world leader in advanced manufacturing: “Not only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufacturers”.

Who said that? The never less than interesting Alexander Hamilton, of Broadway fame in his Report to Congress on the Subject of Manufactures in 1791.

Why the U.S. should be concerned China is making moves in ‘America’s backyard’

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The United States is losing ground to China in the battle for influence in Latin America and the Caribbean (LAC). The People’s Republic of China (PRC) is strengthening its relationships in the region often called “America’s backyard”.

China’s growing footprint in the region has raised concerns in Washington that the PRC is leveraging its economic might to further its strategic goals and displace American dominance in the region.

As General Laura J. Richardson, commander of the United States Southern Command, testified before Congress in March, “The PRC continues its relentless march to expand its economic, diplomatic, technological, informational, and military influence in LAC and challenge U.S. influence in all these areas”.

The region is increasingly important to China in both economic and political terms.  It possesses an abundance of natural resources and raw materials, and a productive environment for trade and investment.

In addition to securing strategic resources, expansion in the region helps China increase its sphere of influence and achieve certain political goals in the global geopolitical chess game by challenging the U.S. in its own neighborhood; one the U.S. overlooked for years as it focused on the Middle East and elsewhere.

The PRC is now South America’s top trading partner and a major source of foreign direct investment and lending in energy and infrastructure.  It is also forging cultural, educational and political ties.

For instance, in 2000, less than 2 percent of LAC exports went to China. By 2021, that number had risen to $450 billion.  China is currently the second largest trading partner for LAC after the U.S., and LAC-China trade is expected to more than double by 2035.

Another Chinese objective is to use economic agreements to isolate Taiwan by persuading LAC countries to abandon diplomatic recognition of Taiwan’s sovereignty.  Currently, 25 of the 33 Latin American countries recognize the PRC rather than Taiwan.

The COVID-19 pandemic further elevated China’s status in the region. Beijing supported Latin America early on with large shipments of masks, personal protective equipment, medical supplies such as ventilators, diagnostic test kits and vaccines to curry favor with the various countries.

In September 2013, Beijing officially launched the trillion-dollar Belt and Road Initiative (BRI), using a name that harkens back to the famed Silk Road.  It is at the center of Chinese foreign policy and includes a web of investment programs that seek to develop infrastructure and promote economic integration with partner countries. It represents a direct threat to the US because China is seeking to use it as a connective link with the whole world on its path to becoming the global superpower.

Since 2017, 21 LA countries have signed on to the Belt and Road Initiative and more are expected to join.  In the face of China’s footprint in LAC, the Monroe Doctrine seems to have been forgotten.

In response to China’s impressive trajectory in LAC, President Biden, who took the lead on LAC policy during the Obama administration, and the G-7 leaders agreed in June 2021 to launch a global infrastructure initiative, Build Back Better World (B3W).  This initiative is consistent with the view that China is a strategic competitor to the U.S. in the global superpower game that some call a new Cold War.

B3W seeks to offer an alternative to China’s BRI. Its goal is to advance infrastructure development in low -and middle- income countries, including LAC. It is an international extension of the White House’s domestic Build Back Better proposal.  The LAC is the first region on the B3W’s radar.

How the initiative will be implemented to compete successfully with China in LAC is an open question.  What is clear, however, is that the superpower rivalry is good news for LAC countries.

History may show Latin America to be among the winners of the new Cold War. The U.S. will now pay the requisite amount of attention to the region and provide welcome resources.