Which companies will suffer with globalization’s reversal?

Danny Crichton:

So, let's just dive in. So, obviously we had recent news, the Biden administration, kind of the waning weeks, two weeks before going out, and changing over to the Trump administration announced new export controls on edge chips. And the debate for the last couple of years has always been about US, China. Should Nvidia, should Intel be allowed to sort of export its best chips, its best technologies to China, an adversary of the United States? But this was far, far greater. It covers dozens and dozens of countries. In fact, it only really exempts 18 critical US allies from these controls. So, I'm just curious as we sort of dive into the subject of export controls, influence operations, et cetera, why so wide of a gamut, when the focus in Washington has been so focused on one country?

Isaac Stone Fish:

Both Democrats and Republicans, reflecting their voters, have gotten fed up with globalization, and we are at such a radically different place than we were 20 years ago, 30 years ago. We are in a place where there, on both sides, is much more of a focus on domestic manufacturing, American needs, American jobs, and we forget that Hillary Clinton was also against the TPP, and there was also a big retrenchment after 2016, but also after the financial crisis, and the feeling that this has been bad for American workers. There's also the need to ensure that despite what Musk, and other folks in the tech AI space might do, that a techno utopian culture doesn't take hold in DC. And there's a lot of other arms of the Republican Party that do not feel that way. But I think this is also an attempt by the Democrats to get some of those things in before some of the new czars of various crypto AI worlds can overturn any of them.

Danny Crichton:

And do you think this is a real sea change, compared to what was here in the past?

Isaac Stone Fish:

I don't think that is a sea change. I think that the sea change will come... Gosh, predictively, I feel, and I felt for quite some time that we're in this pre-war period, we're in this sort of interregnum between light on China, and war with China. And I don't quite know how, or when that's going to evolve, but I don't see this as the particular sea change, or the last straw, or as the Chinese say, the spark that starts the wildfire.

Danny Crichton:

Well, we talk about pulling back in globalization. We've seen this pattern basically since the first Trump administration. So, we're looking at about eight years now of sort of pulling back. And Trump has done this through tariffs and trade. We saw the same thing with Biden, with Nippon Steel, and US Steel just in the last couple of weeks. But now we're seeming to accelerate that, and this is where your firm comes in, because a huge part of what you focus on is sort of these global interlinkages for large Fortune 500 companies, and suddenly people are starting to ask, "Look..." When I was doing an op ed on US Steel, one of the challenges is I couldn't find its international sales data. One answer is it probably doesn't have a lot, because it's not a very competitive global company. But, not all companies publish their data. Not everyone makes it very transparent of who they're selling to, or why they're selling, or any of the sort of geopolitical risks that come into this. How do you sort of collect this information? How do you sort of see the world today, and what's coming up next?

Isaac Stone Fish:

We at Strategy Risks have SR 250, which ranks the top 250 US companies on their China exposure. And we feel like this is the most important risk factor that folks are not talking about. And so, a lot of it is, how do you keep score? How do you understand where US companies are globally? Where are they in China? Where are they in Japan? Where are they in India? How do we get that granular data? And some of it is algorithmic, but a lot of it is just having a wonderful team of researchers that knows what to look for, and tries to gather, and put this information together. It's especially challenging with China data, because the problem with China is not the lack of data, it's the quality of data. There's arguably a lot more data coming from China than there is from the United States. It's just, it's so much less trustworthy. And so, how do you clean that data, or how do you add analysis on top of that data, to better ensure its reliability?

Laurence Pevsner:

As you're looking at that data, are there other signs, given that it's so messy, that you look at besides just raw economic data? Like for example, are there some kind of canary in the coal mine, there's rare earth mining in Africa is speeding up, or suddenly we see a cultural export of Chinese K-pop equivalents, or something like that. What other signs are you looking for, besides just the economics, given that some of that is quite messy?

Isaac Stone Fish:

It's a great question. For the actual companies themselves, and their exposure, a lot is how they talk about it, and the language they use around China. There's so much codes implicit in the way people describe it. So, an easy example of that is, how do you talk about Taiwan? Do you say Taiwan is a country? Do you say Taiwan is an island? You say Taiwan is Taiwan province? Do you refer to Taipei as, I think the IMF does, as the capital of Taiwan District? I think that they have a very odd way of framing it. But these words matter, and the communications matter.

And from a macro trade perspective, I remember James King's excellent book, China Shakes the World, from about 20 years ago, where he started noticing folks stealing manhole covers because China had been pushing up the price of metals. So, it suddenly became economically viable for thieves to take these, and sell them, whereas before, it wasn't really worth the squeeze. And so, we do love finding great leading indicators that say, "Huh, maybe the story is different than you think." And the way that we focus on it is often how companies behave, because we feel like that is often the missing piece. And the banks, and the other entities that tend to cover companies quite closely, also tend to have pretty large staffs in China, and so they can't cover US companies in China, or Chinese companies with the rigor that it deserves.

Danny Crichton:

When you look at this, I mean, I'm looking at the list, and one of the things that's really surprising is, one, you would think Tesla would be number one. In fact, The Global Times, just in a recent op-ed was like, "As a reminder, Elon, you have 36.3% of your total revenues globally is China derived. Be very careful what you do in the coming weeks." But it was actually not Tesla, it was actually Ford, and not just kind of in line with a couple of the other companies. It's sort of a little bit ahead of basically everyone else. So, you had Ford, Carrier, Apple, Tesla, and Coca-Cola, sort of your top five on the SR 250. What made Ford so dependent on China, particularly vis-a-vis Tesla?

Isaac Stone Fish:

Just thinking back, was it Brave New Worlds, where Ford is a god of this dystopia?

Laurence Pevsner:

Yeah, yes. Ford [inaudible 00:06:43].

Danny Crichton:

Yes.

Isaac Stone Fish:

So, Ford has been such an iconic reflection of American capitalism for decades, and American capitalism has become so entangled with China, and it's something that happened... It feels like it happened overnight. We're all living through this, we all saw this, and this all just seemed like the normative way that things should be. And I was also surprised that the data found Ford as number one, and the reason why it's scored so highly was its deep partnerships directly with the Communist Party, and US automakers especially, it's part of the reason why Ford and Tesla are both in the top 10, have been forced by Beijing to have joint ventures with state-owned enterprises, which are entities owned directly by the party.

And it's that, it's their business fundamentals, the actual business they do in the country, their supply chain links, their links to Xinjiang, and other sensitive regions, and then their unwillingness to be fully transparent about that. And we saw, was it about a year and a half ago, when Governor Youngkin of Virginia said he did not want Ford there because of their partnership with the Chinese company. And again, you look at the... As American as apple pie, and Ford, and just the real brand equity that that company had, and how much of it they've lost because they've had this strategy of being very heavily exposed with China.

Laurence Pevsner:

My understanding is that Tesla is one of the few car companies that got a carve out. They didn't have to do a joint venture, when many of the other ones did. Do you think that is part of the reason why they're lower on your list?

Isaac Stone Fish:

Partially. They would certainly be higher if they had that explicit JV. They do have other relationships with the party, and they have an important loan from a Chinese state-owned bank. And the way that Musk talks about China, and the way that other Tesla entities, Tesla links talk about China are also incredibly important. I think the other piece is the difference between the measure of success in China, and exposure in China. And one of the perhaps saddest things about Ford being number one is that it wasn't Ford is doing the best in China. It's, Ford has become the most entangled with China, and Tesla, as evidenced by its stock price, has done a much better job of navigating China, and navigating the United States, and Ford has been left behind.

Danny Crichton:

Well, we just published our China EV Game in December, and I mean, one of the things that really is emphasized in that game is intellectual property, and specifically that companies like Ford, GM, in the real life, had intellectual property around internal combustion engines. Chinese companies did not. And so, there was this sort of negotiation that says, "We'll fund, you have market access and exchange for moving some of your intellectual property over here." It seems like that was quite successful.

Now what's interesting is Tesla basically was able to avoid this by saying, "Look, we're doing EVs, that's where you want to go in the future. You also don't have that technology, we don't have this technology." So it's much easier to sort of say, "Look, there's not only to transfer to you, it's only a couple years in. We're just getting started." And they've been able to hold onto that line up until today. Now the question I think, as you go into 2025, now that there's, if you look at the top 10 EV producers in China, only two of them are now Western, Volkswagen and Tesla, what happens next, as more costs go in, there's an incredible level of competition now, in the Chinese electric vehicle market, to the point that the government's actually trying to stabilize it, and make it go back up? It's no longer very sustainable.

Isaac Stone Fish:

Arguably the most successful IP transfer came through theft. And the issue with companies having so high China exposure, is that when their IP got stolen, they did very little about it, because they thought, "Well, I can't really overturn the apple cart here. I have to stay in China, so I can't take the steps that would be necessary to really allow me to protect myself."

And so, there's the actual, "Okay, yes, we have a joint venture, and we're sharing this IP with you." And then there's all of the times, whether through email, or through other means, where IP is just stolen, and companies do not go public with it, and they think, "Oh gosh, the best that I can do is have this quiet meeting with a minister who frankly probably doesn't care at all that Tesla IP is going to, say, theoretically BYD, and understanding... And it took them way, way, way too long to do this, but understanding that China does not want them to win." Remember the CEO of GE, I think it was about 12 years ago, said, "Oh yeah, China doesn't want us to win." And it got leaked from a dinner, and it was a big scandal, and GE had to walk that back. But now, you can expect to hear that from a US CEO of a Fortune 500 company, even potentially publicly, because that is now the understanding. And that's less changed than the perception of it has changed.

Danny Crichton:

Right. And so today, the argument for A CEO going into China is to say, "Look, we know we were only going to have 10 to 15 years before everyone catches up, but there's cash flows today. You do this kind of cash flow model, we make a bunch of money, et cetera, et cetera, et cetera," and that's sort of the argument, and it's more acknowledged as the short to medium term game.

Isaac Stone Fish:

I think one could justify that argument, especially in 2001. It got a little checkered in 2011, 2012. Today, I think it would have to be, gosh, we probably have months, or years, before this grand experiment blows up. And again, it's very difficult to predict. I think the other thing that businesses need to understand is, what is your strategy both now, and then after the convulsion, after the war? So, AIG, the insurance company, didn't leave China after the Tiananmen Square Massacre, and the Chairman, Greenberg, publicly crowed, "Oh, we stayed, and the Chinese remember that." And you'll see that with Russia too, with certain businesses trying to say after that war ends, "Hey, we're always for Russia and the Russian people. And yeah, we had to sort of disappear a little bit." And so, one wonders, if, when there is a World War Three, or there's a Chinese invasion of Taiwan and a lot of companies leave, who's going to try to weather the US storm, and then be able to say after the war, providing China doesn't lose the war, "Hey, I was here, and I was with you the whole time?"

Laurence Pevsner:

That leads me to asking about a broader definitional question for you, which is how do you define a war with China, right? Is it simply an invasion of Taiwan? Because we've talked about how there's all these acts that China and the US are constantly doing against each other, that in some ways you might be able to interpret as acts of war, whether it's the Salt Typhoon hack, whether it's cutting undersea cables, there's all these acts that are maybe less defined as traditional warfare. So, how would you personally define that moment?

Isaac Stone Fish:

The funny thing about acts of war is that the definition of an act of war is what a government decides is an act of war. And I think back on the Marco Polo bridge incident, which the Japanese used to start World War II, or start their invasion of China, and they decided that this was a provocation of a war, and I think back to the sinking of the Cheonan about 10 years ago, where North Koreans sunk a South Korean submarine, killed about four dozen sailors, and South Korea decided that that was not an act of war.

And so, Salt Typhoon absolutely could be seen as an act of war. Perhaps if it wasn't done in the waning days of a Biden administration, it might have been seen that way. I do wonder if the Trump administration will decide to see it that way. The broader question of what is a war between the US and China, the easiest answer is that we're already fighting a war. We're fighting a cyber war, we're fighting a trade war, we're fighting a cold war. I think there's been a lot of misguided op-eds about how we have to prevent a cold war between the US and China, and that those should have been published in 2015, so we're way out of date.

We have been fighting a cold war with China for years, if not longer, and I think the big question is the kinetic war, even the proxy war. I'm open to be convinced that we are fighting a proxy war with China in Ukraine. I don't think we are. I think there could be something that sparks in the Middle East, something could spark In India. We do not defend Bhutan. China is actively invading a small portion of Bhutanese territory, but that is happening, getting very little attention. There's a lot more focus on the Philippines because of its relationship with the United States. And so, I think the actual definition is difficult, and would be much easier in hindsight, but I think the question is, are Russia, Ukraine, Israel, Lebanon, Israel, Gaza, are these the Spanish civil wars of early wars that don't bleed into World War II? Or are these the Sino-Japanese war, that becomes part of a global confrontation?

Laurence Pevsner:

At the very least on Ukraine, I'm with you. I'm not convinced at all. When I was at the UN, I was there when the Russian invasion happened in Ukraine, and it was very clear that the Chinese were very uncomfortable. They really did not like the position they found themselves in, because especially at the UN, they spend so much time talking about the importance of national sovereignty, for reasons that we all understand, and so then the hypocrisy of them not standing up for Ukraine's national sovereignty, they felt it. So at least in that particular case, it didn't feel like a proxy war with them at all.

Isaac Stone Fish:

My colleague Jesse spent considerable time in Ukraine, and tracking that pretty closely, on where exactly that is, where it's going, and what could be next with that.

Danny Crichton:

Well, we talked a little about the electric vehicle industry, and autos, and tech, and finance have traditionally been the ones most entangled with China, but you haven't limited your analysis to just those industries. One of the other ones you're trying to highlight these days has also been defense. And so, when I think about the future of a conflict, whether real, imagined, whatever the case may be, what does your research show on the defense industry? Because they also have entanglements, and they're not just exclusively selling to the United States.

Isaac Stone Fish:

One of the most striking things to me was seeing RTX, the parent company of Raytheon, in the top 10 of China exposure, and I was flabbergasted by that, that a US company that's supposed to be a pillar of the US Defense establishment, could have such heavy supply chain, and joint venture exposure to China, and to the Chinese Communist Party. And I think RTX's response to that, if asked directly, would probably be something on, "Hey, we're a diversified business. We don't just do this, and so we keep this part of our supply chain clean, and the other part perhaps not so clean."

I don't buy that. It's similar to how Boeing operates. Boeing's second-largest customer is the Chinese Communist Party. Its first is the US government. And it gets, I think it's roughly 14% of its revenue from the Communist Party directly, because there are no private entities in China buying Boeing airplanes, you know that they are Chinese airlines, and Chinese airlines are all state owned, because for Beijing, it's too much a liability having someone else be able to fly a plane over your airspace.

And so, one thing we're going to see in the Trump administration is a pretty drastic rethinking of US relationship with the primes, the big military contractors, and some of that's driven by Palantir, and Anduril, two defense tech upstarts, which are quite influential with the new administration. Part of that's driven by a frustration with the sort of business as usual among these big slow primes. Then part of it is just understanding, and this is a perverse thing to say, but we are in a situation where it may go against shareholder value of RTX, and Boeing shareholders to go to war with China. And perhaps it should go against all of us. Perhaps there's something to say about this is good that it's a stopgap for war, but considering the role that Boeing, and especially RTX are supposed to play in US defense strategy, that's a pretty drastic mismatch of interests.

Danny Crichton:

One of the things that has been really popular in the last year has been around reindustrialization, bring back the supply chains, come back here, don't have this separate, you call it a secure supply chain, and that comes from the first Trump administration, where you're going to have a secure supply chain, but it's really, really expensive. And the chips that normally would cost a couple of pennies for let's say an automatic brake system, cost dollars to the Pentagon, because you're making these custom chips, they're not really competitive, either globally, et cetera. How realistic do you think it is to say, "Hey, Boeing, it's time to bring it all here, all those parts?"

Because I remember, I'm just stepping back, you think of the 787 Dreamliner. The big sell of that was that it was this massive plane that connected parts from something like 40, and I'm making this up from 15 years of memory, but 50 different countries contribute parts. It flows into this massive supply chain, and it's like the greatest compilation, synthesis product of engineering of all time. And now we're saying like, "Oh, look, there's huge risks, like countries closed down in COVID, in '19, or a pandemic." Sometimes there's supply chain risks because the Suez Canal gets blocked by a barge for a couple of weeks, and suddenly none of this stuff comes in on time to your facilities, et cetera, et cetera. You really just need to be vertically integrated. Do you think that there is a path where people start to go back towards saying, "Vertical integration is good, bringing all the supplies is good. It'll save costs, and we can be more competitive?"

Isaac Stone Fish:

We have to be much smarter with the risks and efficiencies, and my favorite example to that is TSA screening, and it's insane to me that what, 24 years after someone tried to smuggle a bomb on his shoe, people without TSA pre have to take off their shoes at the airport, and it's so obvious to say it, but great, I have to take off my shoe. I can't bring peanut butter onto an airplane, but I can bring a gun onto a train. And one thinks perhaps we should realistically manage that, but we are in an era where things are going to get gummed up, and so let's take the efficiencies when we can. I think a lot of that airport screening has to be reduced. That's a massive, massive inefficiency, and at the same time, companies do need to realize that we're not in an era of, was it just-in-time supply chains? That era is dead.

And perhaps it was US-China rivalry, perhaps it was COVID, perhaps it was this push to bring American manufacturing, and jobs back to the states, but it's no longer that companies can do that. And so, companies like Boeing have to weed out the most sensitive parts of their supply chain, and this is work we do with some big US companies. It's what are the biggest risks in your supply chain, from both a political, and efficiency perspective, when it comes to geopolitics, when it comes to US regulations, and how do you remove those companies from your supply chain? Because right now the trick isn't, "Hey, I have 1,000 factories that I buy from in China. I need to reduce that to two." The trick is, "Hey, let me get rid of the worst actors, both from a US perspective and a Chinese perspective, and then have plans for, 'Hey, what if there's an invasion, or a embargo? What do I do?'" Don't let it be existential.

Laurence Pevsner:

As we think about supply chains, that directly relates to the trade surplus that was just announced. I believe today as we record this, China announced a record trade surplus, nearly a trillion dollars. That's a very complicated issue for us. On the one hand, for all the reasons you just described, it makes us feel like we're entangled. It's worrisome if we're already in a cold war. On the other hand, of course, if we try to do something about that, like tariffs, that's going to likely dramatically increase inflation. But how do you think the next administration might think about that? How would you advise them to think about that?

Isaac Stone Fish:

Well, Trump despises trade surpluses, it's one of his pet peeves, and it's been for a very long time. And considering the well-known inaccuracy of Chinese statistics, one imagines this was also delivered for maximum impact on the, "Look at us, and look at how much power and control we have." On the other hand, the number in 2025 is almost certainly going to be much lower, and that will allow Trump to claim victory for really decreasing that trade surplus. It seems almost impossible for that number to be that high, and it's also a global problem, and countries like Brazil, and Indonesia, and India really feel the burn from cheaper, better Chinese exports in certain areas.

I think from a trade... If we were advising the administration on this, and the way we advise companies on this is to understand that the cost of Chinese exports are much higher than you think, and to better price in those externalities. We talked about IP theft, reputational risk, regulatory risk, strengthening your Chinese competitors, but also the real difficulty of partnering with the right entity in China, and understanding that the company you're buying from might have a lot of other risks that you haven't priced into just the bottom line number.

Danny Crichton:

One of the questions I have for you, you talk about shareholder value, and obviously that's been the driving... The idea of just optimizing for shareholder value, since the '70s, '80s, and the shareholder revolution. The question for the last 10 years for a lot of technology companies is, look, we engage with China, we build the IP here. I'm thinking of companies like Qualcomm, I think of companies like Nvidia. There's an upfront cost to building a new technology. That's a capital improvement. I spend the money on the engineering, the plans, the capital, et cetera.

Now I just have the marginal cost with these chips, and the argument that the industry will say, and I used to cover them much more heavily than I do today, but the argument they'll always say is like, "Look, if we get rid of all this additional profit from China, they're sort of the marginally best dollars to get, because we've already built the technology, and we're making the money, and we're kind of recouping it here in the United States. When we go overseas, now we're kind of not having to amortize those costs. In the same way that's just higher margin for every additional unit that we're selling."

How do you start to think about share prices? Because obviously Trump, in addition to not liking trade surpluses from other countries to the US, or at least hating the trade deficit from the US perspective, is really obsessed with the stock market going up. How do you think he would balance those two sides of things, and how would you advise him to think about it?

Isaac Stone Fish:

So first off, for companies, they need to understand that there's a big push for them to not free ride on American patriotism, and the idea of, "Hey, it's great that you can ship chips to China, but do you want to hire guards to protect you from pirates, as you go through various places?" Now, of course you don't. You want to have seamless shipping, but that's a US military cost, and you need to price that in, and you need to understand that there is a cost from being an American company, and part of that cost is supporting American interests.

And so, I would encourage companies to be careful about their public argument on that, and it makes a lot of sense, the way you laid it out on like, "Yes, we already spent the money, and now we should reap the rewards." But there's not much sympathy for that either in Washington, or across the United States, to sell technology to the People's Liberation Army, because you've put in the R&D costs 10 years ago. From a, "How do you advise the US government on that?" I think it's making companies both understand, and disclose their China risk, and making sure that US companies aren't the tip of the spear of the Chinese military, and the Chinese security state because they feel the need to share cutting edge technology with the Chinese Communist Party. Or, what more commonly happens is they don't share it, they just don't fight back very hard when it's stolen.

Laurence Pevsner:

If you're having companies disclose their risk, as you're suggesting, there's been similar movements, most obviously in ESG, but it strikes me that the China risk might act differently than say ESG, like for example, on climate, right? That's a slow burn, right? That's like things happening over time. Maybe there's one natural disaster, or another, but where with China risk, right? You're kind of talking about something can happen all at once. You have one big movement, one big strike on Taiwan. How do you think about that as a different kind of disclosure than the ones we have on the market?

Isaac Stone Fish:

I actually think the model for climate risk is quite good. I mean, we're having this conversation amid a big explosion in climate risk in LA, and forcing companies to disclose that, or to be transparent about various parts of their China risk is very important. I think the idea is that investors, regulators, consumers, corporates, have long underpriced China risk, and what the market needs to do is better price that out. And I think there's a lot of different messages you can give to various people in that value chain. To the board, it's, "Hey, you want to not deal with a lawsuit if your stock goes down 9% because China invades Taiwan, and you can't get a critical component." For the US government it's, "Hey, you need to be screening for China risk. You need to be working with a firm that provides you that data." For the SEC it's, "Hey, this is a material risk. You're not sharing this material risk."

And it's got to be something that's much more widely understood. And I think, to complicate already a very complicated issue, there's a major pushback against ESG, but also DEI, and also this sense of being too coddled on race. That said, I am very worried about a pushback against Chinese citizens, and Chinese people, both in China, and Chinese American. And so, that really needs to be taken into account. And I think the part that I'd like to see be on both sides, but perhaps especially on the left, is a big problem with US business exposure to China is you're putting Chinese people in danger, and that you are not vulnerable necessarily, but your staff is. And so, I want to know that Boeing has a plan to take care of its Chinese employees if the US goes to war with Taiwan, because when that happens, is it that there's thousands of people there who Beijing sees as enemy combatants? And I just want to know, and I think the US people, and the DOD, you should know that Boeing has a plan to take care of those people, or it's actively firing them now.

Danny Crichton:

Do you think, I mean obviously with Strategy Risks, you're consulting with a lot of different companies, you're advising them particularly on the China stuff, but not exclusively. I've noticed over the last 10, 15 years, we've seen the rise of this chief risk officer, someone whose job it is supposedly to capture all these different risks, and some of them are very far off, and so you're like, "Okay, I'm the CEO, I don't have time to deal with it. I have quarterly results to close in three weeks, and so you think about that." And they're designated, oftentimes in the general counsel's office, sometimes with the CFO.

Do you feel like people are taking these risks more seriously in the C-suite? Are people starting to pay attention to them more? Do they get into board of directors conversations? Do you feel like there's a sea change among CEOs, a cultural change that says, "Look, maybe there was zero risk before, but it's clearly not zero anymore. We have to include that in our modeling. We have to include that into some of our contingency planning," or do you think nothing has changed, and you're still sort of like, screaming on the side of the sidewalk, so to speak?

Isaac Stone Fish:

We're getting there. I think companies are understanding the need to focus on geopolitical risks, and what we always emphasize is we don't want to be the departments of no business. We don't want to be in the process of slowing people down. What we want to do is remove speed bumps, so that they don't trip a company up. And it is that ounce of prevention idea, and it's been that way for a long time.

It's, "Listen, this company might get sanctioned. This company is an important part of your supply chain, and they're an important customer of yours, take care of it. Have a plan in place so that if the US government does sanction this company, and you can't work with them anymore, this is not a crisis that the CEO of a major company has to deal with, that it's getting handled at lower levels." And so, the best chief risk officer solves problems before they get to the C-suite, and creates a culture of flexibility, adaptability, so that CEOs do not have to worry about things when they happen, because they've been taken care of in the past.

Danny Crichton:

All right, so we've talked about auto, and electric vehicles, we talked about technology industry, we talked about defense. Two other things I want to talk about, to close this out. One is biotech. One interesting... Just in the last three, four weeks, and for Lux here, about a third of our companies are in biotech all for the most part in the US, not exclusively, although I don't think we have any in China at this point. But the key piece here is, in the last few weeks there's been this huge surge of concern around the fact that China is eating more and more of the supply chain around biologics and pharmaceuticals. People are actually figuring out that actually an enormous percentage of the drugs that the US citizens use come from China. And then if you go down to the generics, they're often made in India, and that in the event of a future pandemic, we actually have no ability to kind of produce those here locally. Have you sort of run into the biotech world? Or is that sort of just bubbling up all of a sudden in 2025?

Isaac Stone Fish:

So, pharmaceutical companies, broadly speaking, have a lower than expected exposure to China, because they don't have the same requirements of joint venture partnerships with Chinese state-owned enterprises. And because right now, US biotech companies are well ahead of their Chinese competitors. That could very easily change. I remember I think it was 2022, or 2023 when the largest export from Xinjiang into the United States was API's. And so, there is still those links. I think what US biotech companies need to understand is there's this sense in universities and boardrooms that science should be apolitical. It's not the way the party thinks. You think in this country science is politicized, it's so much worse than China.

And so understanding that your partnerships with a Chinese university means you're partnering with the Communist Party, and that most of the people who work at Chinese universities, and all of the people who work at any meaningful level of Chinese universities have ties to the party, and are very likely party members. So just understand that from a risk and a management perspective, and understand that your beloved partnership with the School of Science at say, Tsinghua University, Fudan University, means you have a direct relationship with the Communist Party.

Danny Crichton:

We did see over the weekend, University of Michigan and it's partnership with Shanghai Jiao Tong University, which is a fairly notable... It was actually one of the earliest partnerships, and now it's sort of closed out. So, on one hand I think the universities are getting a little bit more sophisticated that maybe in the aftermath of the China initiative under Trump. On the other hand, Congress just passed the US China Scientific Exchange protocol, I think a couple of weeks ago, right at the end of December, and renewed that. It's been going on I think since the '70s. So, it's a fairly old agreement, but renewed it for another five-year term. So, I think on the science side, we're still kind of in that interregnum, or intermezzo kind of moment that we have here.

But, I want to turn to the last subject here. We're about a week away from the TikTok ban. Supreme Court had a discussion just a few days ago, at least the press reports were that the justices were not likely to overrule the president on a national security measure, which would be in line with president. And so, barring something crazy happening in the next couple of days, TikTok will theoretically be shut down on January 19th, at the end of this week. Beyond just a prediction on this, what sort of happens next? Because this is the first time in my view that we have really come at a foreign company in China and said, "Get out." Does that change the relationship going forward? Does that give more credence to a Jim Farley at Ford, or someone else to say, "Hey, we got to be protective of ourselves, and we have to think of this as a very different world?"

Isaac Stone Fish:

I think, and we will see when this podcast airs, so that I don't make a prediction that gets overturned by Trump [inaudible 00:34:54] tomorrow, because I don't think it's impossible that Trump decides to let TikTok stay in the United States. It's a very, very potent tool for voter acquisition, as both parties know very well. I do think what often gets missed from the TikTok debate is Beijing's view that TikTok is too pro-American, and Beijing's worry about a platform where you can circulate "anti-Chinese content." And TikTok is certainly too pro-Beijing for America, but it's also too pro-America for Beijing. And I don't think Beijing will actually care all that much if it gets banned. I think there would probably be some noises about it. I think that they'll make a reaction, but I think actually, if I were to be able to be inside the head of someone on the Politburo, or on the standing committee, it wouldn't really be too bothersome for them.

Danny Crichton:

Isaac, thank you so much for joining us.

Isaac Stone Fish:

Thank you. Great to chat.

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