Jordan McGillis is joined by Isaac Stone Fish to discuss the ways in which exposure to China poses risks to U.S. companies.
Audio Transcript
Jordan McGillis: Welcome to 10 Blocks. I’m Jordan McGillis, economics editor of City Journal. In the past decade, the Chinese Communist Party has become more repressive at home and more assertive abroad. The developments come while China remains among the most critical nodes in the global economy. Perhaps belatedly, the American public and private sectors are reassessing linkages with the Chinese economy. My guest today is Isaac Stone Fish, who, through his geopolitical analysis group, Strategy Risks, has created a new tool for investors, analysts, and government officials to make those important assessments. This tool, the Strategy Risk’s Index 250, ranks America’s largest publicly traded companies by their China exposure.
Isaac, thanks for coming on the show.
Isaac Stone Fish: Thanks for having me, Jordan.
Jordan McGillis: Before we go in depth on your index, I want to familiarize our listeners with your biography a bit and your career progression. If I understand correctly, you not only lived in China for the better part of a decade, you actually traveled to every province and autonomous region, is that right?
Isaac Stone Fish: That is. I spent about six years in Beijing and spent weeks, months, days in all sorts of parts of the Chinese country from a couple hours in Macau to long, several years in Beijing.
Jordan McGillis: What was your general method of travel? Did you fly all over? Did you take the train and what were your preferred ways?
Isaac Stone Fish: Train, bus, and then flights. Some of the places I went to more than 20 years ago, and it was a lot of really long buses or very cramped car trips.
Jordan McGillis: So 20 years ago, that’s before some of the rural parts had the sterling infrastructure they have now. What sort of changes did you see as you traveled over the years, particularly in those rural areas?
Isaac Stone Fish: Some of it was this Hanification, this normalization, so to speak, where Beijing would work to make cities look very similar in ways that, in some places, was positive and in some places felt very dystopian. But I went to Xinjiang a few times and Xinjiang in 2001 versus 2006, even in that small period, felt a lot more Han and a lot more under Beijing’s artistic thumb as well as its policy thumb as well.
Jordan McGillis: Were you in Beijing from the Olympics in ‘08?
Isaac Stone Fish: I was, and that was a really exciting time to be in Beijing. There was a feeling of real optimism, a feeling that China had arrived and a lot of really positive energy.
Jordan McGillis: All right, so this time period you’re talking about, this is the Hu Jintao era before Xi Jinping takes the mantle at the top of the party. Things have changed dramatically in the last 10 years. What’s your general assessment of how the economy has evolved and how those global linkages that you talked on the index have become more problematic?
Isaac Stone Fish: The biggest problem for businesses in China isn’t the geopolitical risks. It’s Xi Jinping’s strong leftward turn and implementation of really strict status control of the economy. And the reason we’re seeing such an exodus of business from China is so much less to do with what the US and other countries are doing around the world, but with what Beijing is doing to businesses that are trying to succeed there. That said, there’s so much more risks of having heavy exposure in China today than there was several years ago, 10 years ago. And some of those are economic, but a lot of those are also regulatory risks, running afoul of US and European and Japanese laws and regulations, but also reputational risks of being closer to Beijing than your consumers or stakeholders want.
Jordan McGillis: What I like about your index is how specific you are about these different sorts of risks. On the one hand, you’ve got companies that have perhaps a supplier in Taiwan say that faces a regional risk, but then you’ve also got companies that are themselves working with the Communist Party in China in partnership in certain ways. Can you talk about your different categories and how you came to those selections?
Isaac Stone Fish: So we decided to use five categories to rank companies on their China exposure. They are business fundamentals, partnerships and politics, regional issues, supply chain, and opacity. Business fundamentals is the most standard. Looks at things like revenue or broad business exposure to China. Partnerships and politics we think is arguably the most important, and also what’s least-
Jordan McGillis: Can I just slow you down a smidge? On the business fundamentals, you may be referring there to revenue generated from China.
Isaac Stone Fish: Yes.
Jordan McGillis: All right, so the extent to which a business is dependent on sales and other interactions with the Chinese market, we might say.
Isaac Stone Fish: Yes, exactly. And I think a lot of times when people capture exposure, that’s what they look at, but it’s so much more complex and multifaceted than that.
Jordan McGillis: Okay, next up, partnerships and politics, is that right?
Isaac Stone Fish: Yes. And that looks at the ways that companies are entangled with the Communist Party of China and Chinese economy is so different from most economies in the world because of the overlay of the Party into businesses. And so western businesses will often bemoan that they can’t do business in China without working with the Party. And our point isn’t that the way to succeed in China globally is to ignore the Communist Party, but that this has to be a very important risk factor. So we measure things like joint ventures with the Party, links with state influence entities and the ways in which companies may advance Beijing’s policy goals by the sector that they’re in.
Jordan McGillis: Something that I’ve been aware of for a few years now but haven’t devoted much of my own research to is national security policy within China that requires even private sector companies to work with intelligence agencies in that country and perhaps turn over information that would here be considered proprietary. Is that something that’s factored in?
Isaac Stone Fish: Yes. Every Chinese company that has at least three party members has to have a party cell and people often forget that the Chinese state is in a way a lot more porous than the US state, and there’s a lot more exchange between various ministries or types of individuals in various ministries. And so if you’re working with say, Bank of China, which is a large state-owned enterprise, there’s a lot of infiltration in Bank of China of the People’s Liberation Army, the Ministry of State Security because this is part and parcel of the same organization. They’re both parts of the Communist Party. And so when Western companies work with those organizations, whether they like it or not, there’s real risks involved.
Jordan McGillis: Okay. I’ve got a couple of American companies that I want to circle back to on this partnerships and politics axis, but let’s move on to your other categories.
Isaac Stone Fish: Regional issues is things like their links to Xinjiang, their links to Tibet, their broad exposure to forced labor through exposure to Xinjiang or potential atrocities in Tibet. And this one is not a proxy for broad exposure, but an important metric of how companies are entangled with China today. The Communist Party will often encourage companies to invest in places like Xinjiang and Tibet, both for more mild business reasons, but also to help them shift the narrative of Xinjiang being their problem and making it more of a global problem. We see this also as a very important risk factor because companies who have high exposure to these regional hotspots and sites of atrocities do tend to have higher reputational risk or higher risk of violating the Uyghur Forced Labor Prevention Act.
Jordan McGillis: Yeah, they’re going to run up against our own regulatory state at some point. We talk a lot, especially my energy policy work, about the solar industry in Xinjiang, but what sort of American businesses would be interacting with Tibet?
Isaac Stone Fish: Tibet is much smaller and what you see is less folks importing from Tibet and folks selling into Tibet. So selling cars, selling consumer goods. It’s not a very small market, but it is a market and some companies in their China strategy think, well, we have to be everywhere and we have to make sure we’re in Tibet as well.
Jordan McGillis: Do you include Taiwan Strait crisis issues in this regional issues section or is that somewhere else, or is it outside of the domain of the index entirely?
Isaac Stone Fish: To a degree. We feel that companies presence in Taiwan and the way that they talk about Taiwan is important for this. We have other work where we quantify risks of a Taiwanese invasion and what would happen if China were to invade Taiwan, but we see this more as what would happen to businesses exposure to China rather than their Taiwan exposure. However, a lot of Taiwanese major companies are also heavily exposed to China. It’d be fascinating to do this kind of analysis with the big Taiwanese companies, companies like TSM.
Jordan McGillis: Foxconn.
Isaac Stone Fish: Yes. Foxconn is so majorly exposed and is one of the reasons that Apple is so exposed.
Jordan McGillis: Supply chain. Apple is probably one of the biggest, most vulnerable companies on that axis, I assume?
Isaac Stone Fish: Apple is very high there. The supply chain data is so stunningly difficult to find and to quantify. And so a lot of what we did was back into that using various proprietary methodologies. But it’s so interesting to me how little good public information there is on supply chain exposure. In an earlier version of this, we tried to just use companies self-reported supply chain data and then we looked at it and we saw companies like Walmart with a very low score for supply chain. And then you dig a little deeper and you realize that when Walmart was disclosing its Chinese suppliers, they had roughly 25,000 of them. And so massive, massive supply chain exposure, just the companies don’t want to talk about it.
Jordan McGillis: As someone who’s quite fond of market economics, I think the lack of clarity and openness around supply chains is in part due to the flexibility and nimbleness that these global companies show they’re able to change suppliers quite rapidly and there may not be the documentation that a firm like yours is looking for always available. Would you think that’s a reasonable way of cutting some slack?
Isaac Stone Fish: Some of it is nimbleness, some of it’s competitive pressure, whereas if they show what they’re doing, other companies can find and copy that. The other issue, too, and this is something that, frankly, I often forget, is supply chain exposure isn’t by number of factories but by weight of goods or importance in their supply chain. I remember talking to someone who ran a big successful clothing company and he said I think it was only a couple percent of their factories were in China, but those factories produced roughly 50% of their materials and so massive, massive supply chain exposure even though it was just a handful of companies. And so I think there’s a lot of reasons why the supply chain data is less well understood. I think the issue for companies, regulators, and investors is there’s a major difference between say clothing supply chains and semiconductor supply chains and some supply chains are incredibly nimble and some are not. And so major US companies are facing existential threats for being so dependent on certain Chinese and Taiwanese supply chains that can get cut off for geopolitical reasons.
Jordan McGillis: So you have business fundamentals, partnerships and politics, regional issues, supply chain, and then your final category seems to be what we don’t know about the companies, that’s opacity, right?
Isaac Stone Fish: Yes. And we did that for a few reasons. One, we think there’s a correlation between openness and low exposure and companies that are more transparent tend to be better global stewards. We also wanted to be fair to the companies that might have relatively high China exposure like Disney, but because of their business models are a lot more open on what they’re doing. We also want to applaud Cummins for being quite transparent even though it has quite high China exposure. And the final reason is this is creating order out of chaos and we don’t want to pretend that this is a perfect reflection of these companies’ China exposure. We find it a very helpful way of thinking about it, but a lot of it is subjective and so we wanted to make it clear that this is something that we are creating and we think this is the right way to do it, but to put it out there so that it can be subject of debate and analysis.
Jordan McGillis: Were there any other categories that you left on the cutting room floor that were close to making it?
Isaac Stone Fish: That’s a really good question. I think there were elements of these, you mentioned Taiwan and Taiwan war risk. There’s an aspect of that. Their links to the Chinese military is one of them we think is very important because on the one hand, like we mentioned with Bank of China, Bank of China is entangled with the PLA, but then there are entities that are more directly entangled with the PLA. I think those are the two main ones.
Jordan McGillis: So as I look at your top line numbers here, the companies that are at the point of the spectrum reflecting most risk are some real heavyweights, Ford, Carrier, Apple, Tesla. These are some of our most name-brand companies out there. Can you talk about those four in particular just to not necessarily flay them, but to give our listeners a sense of how a particular company might perform better or worse on these different axes?
Isaac Stone Fish: So Apple and Tesla are well-known for having high China exposure and we see that both with regional issues and business fundamentals especially, for both of them. Tesla ranked relatively lowly on its partnerships with the Communist Party, which should give the U.S government a sigh of relief and also makes me more comfortable about SpaceX because they’re controlled by the same person, Elon Musk. Ford and Carrier were surprising to me. Ford especially, did not expect them to end up-
Jordan McGillis: I’m surprised by that, too.
Isaac Stone Fish: Yes. And many people pointed out, well, there are other car companies that are more successful in China, like GM and Tesla, and this is certainly not measuring the success of these companies in China, but their exposure. And I think one of the important lessons from this is that the right corporate strategy might not be to be so exposed to China and reducing your exposure can have benefits for even the size of your market in China, which is not something that I want to broadly recommend. But I think from a corporate risk perspective, there’s been this misconception that companies have to really expand in China in order to succeed in China. But working with the Communist Party is notoriously tricky, for Chinese companies and for American companies. And as Jack Ma famously said before he got in trouble, you want to, oh, what is the quote? I think it said, "You want to love the Party but not marry it." And so you want to have some relationship with it, but I think companies have been too close to the Party and that can hurt them.
Jordan McGillis: As I look at these top four companies, I see that Ford doesn’t rack up as many points, racking up points being bad in this case, doesn’t rack up as many on the business fundamentals as does Carrier. Carrier looks like it might have the most reliance on China perhaps for revenue. Is that what I could interpret this as saying?
Isaac Stone Fish: Yes. Yes. Broadly speaking, they have a much higher revenue exposure than Ford does, and then many other companies on this list.
Jordan McGillis: And as you said, as I look here at Tesla, it is surprising that they don’t perform worse on the partnerships and politics side of things because there has been such high-profile coverage of Musk’s courtship of the Party with the Shanghai factory that they’ve got.
Isaac Stone Fish: Yes. And it’s surprising that Ford has gotten so little attention of this. There was that scandal with Virginia Governor Youngkin not wanting Ford and their Chinese partner to build a factory there, but for some reason Ford has not gotten the same kind of scrutiny. And we see the same thing with Carrier. It’s a less well-known company. The company on this list, probably most surprising to me is RTX because it’s a pillar of the US defense establishment. It’s the parent company of Raytheon, and yet they are heavily exposed to China.
Jordan McGillis: That’s pretty shocking. It seemed to require some assessment from DOD and our other interested stakeholders. What are some other companies that surprised you for their poor performance or for their nice performance?
Isaac Stone Fish: Walt Disney, even though they are in the top 10, was lower than I was expecting. And I think we had done various versions of this as we refined our methodology and Coca-Cola came up quite high, but they’re not at the top, which is good for them. They have a lot of deep partnerships with the Chinese state, but Coca-Cola is just a less sensitive good than what RTX, Honeywell, Cummins and even what Ford makes. And so that’s an important distinction as well. And then the companies on the bottom of the list are almost without exception, smaller than the companies on the top. And there certainly is a correlation between percentage of China exposure and size.
Big companies tend to have been around longer, tend to have more robust global expansion strategies, but also have tended to buy into this fantasy that you have to be in China, you have to be very exposed to China. In some cases, it’s made companies a lot of money, but in some cases, it’s been more of a net negative for them. So we see insurance companies, we see energy companies on the bottom. Public storage really does fit in the bottom 10. And it’s interesting to see Wells Fargo there as well. So it’s almost at the bottom. And it’s a financial services company where most of the other financial services companies are near the middle or closer to the top.
Jordan McGillis: Yeah, that did surprise me. On the supply chain front, which companies are particularly at risk?
Isaac Stone Fish: So for supply chains, if we look at it from a geopolitical risk perspective and a Taiwan risk perspective, it’s companies that are heavily exposed to semiconductor supply chains. If we look at it from a cost perspective, it’s a lot of major consumer goods manufacturers because those supply chains are so heavily exposed to China and the risk for them isn’t existential, it’s cost related. If you can’t buy silica from Xinjiang to use as a desiccant in your pet food, for example, you can find that elsewhere. And if you can’t use COFCO, a major state-owned enterprise’s sugar processing, Coca-Cola has a partnership, has deep ties with that company, you can find that elsewhere. Whereas there’s certain types of goods that you basically need China for. And so it’s not a question of, okay, this is cheaper and faster in China. It’s a question of, well, we need this and what are we going to do for our business if we can’t get this from China?
Jordan McGillis: Looking at this from another perspective, do you factor in partnerships that take place here domestically, thinking about battery companies, for example, that are coming to the US to set up shop?
Isaac Stone Fish: Interesting. So we look at partnerships in the Chinese mainland and joint ventures that exist in the United States should still have to be registered in China. But broadly speaking, the companies that are more active in the United States are less likely to be state-owned enterprises, are less likely to have the same level of state ties as they do in China.
Jordan McGillis: Any last comments on the index before we move on to a couple of other topics?
Isaac Stone Fish: No, I thought those were a good thorough series of questions on it.
Jordan McGillis: Certainly seems like a very useful tool. I want to turn attention to your book, America Second. Give us the rundown there.
Isaac Stone Fish: So America Second looks at Beijing influence in the United States and how to fight back without being McCarthyists. We focus a lot on these kind of networks and how to separate the Party from the people, but also how to look at the ties between the Communist Party and various US and global institutions. And I talk a lot about the United Front, which is a party entity that seeks to strengthen China’s friends and weaken its enemies. And also just a lot about what it means to be a friend of China because it doesn’t mean what we think it means. It doesn’t mean someone who supports Chinese people or loves Chinese culture, it means someone who aligns with the Communist Party. So knowing the words that the Party uses is so incredibly important.
Jordan McGillis: You certainly would seem to be somebody that does have a love for Chinese culture. You studied Chinese literature, you moved there. Did you anticipate this is what you’d be doing professionally 20 years thereafter?
Isaac Stone Fish: Gosh, no. Yeah, I ran a literary agency in Beijing in 2006, 2008, and then I had a brief disastrous stint in sales and marketing in 2008. I got fired from that. Was a freelance journalist for a while, got a job with Newsweek, moved to DC in 2012, late 2011, to work at Foreign Policy Magazine. And each step of the career felt much more like that Chinese idea of crossing the river by feeling the stones as opposed to having some grand plan. And it’s something I remind folks all the time about China, as well. There is no decades long plan to supplant the US. It’s a much more seat of your pants kind of place. And Xi Jinping doesn’t wake up in the morning thinking about 30, 40 years from now. He almost certainly wakes up and thinks about how he stays in power today.
Jordan McGillis: Our guest today has been Isaac Stone Fish. Isaac, where can our listeners follow your work online?
Isaac Stone Fish: Thank you. So StrategyRisks.com is our website. We are on Twitter and LinkedIn on @StrategyRisks as well. And then my name is Isaac Stone Fish and Twitter and LinkedIn there.
Jordan McGillis: Terrific. Thank you so much for joining us today.
Isaac Stone Fish: Thank you, Jordan. Appreciate it.
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