Category Archives: Economy

A Gap in My Perception

By Lloyd Graff

We just recorded the biggest gain in stock prices for any quarter since 1998 with American unemployment at unprecedented levels. You don’t need to read the obvious in this blog, so let’s talk Yeezy, Kanye West, and Gap.

Gap stock rose 42% in one day last week when Kanye West announced he was designing a clothing line with his Yeezy brand on it, exclusively for Gap for 10 years. Gap’s value jumped $2 billion dollars with the news.

Being no fan of hip hop music, but mildly interested in West because he grew up near where I did on Chicago’s South Side, and because he met cordially with Donald Trump at the White House, I checked out Yeezy. The brand has turned Adidas from the German blahs to Jordan-esque cool with outrageously priced sneakers. A Yeezy pair of gym shoes may sell for $500 a pair if you can get them.

I really don’t feel the allure of celebrity apparel, but undoubtedly West is hot today and Gap, where Kanye worked as a kid, is capitalizing on his caché. Will Kanye West become a fading yesterday in a year? Not likely, with the magic of his wife, Kim Kardashian, continually polishing his image?

***

Another brand that fascinates me with its phenomenal stock performance is Peloton. The company sells an exercise bike and will lose more than $100 million this year. Yet it is worth more than Ford and Chrysler, and its stock has more than doubled since it went public a few months ago.

You don’t buy a Peloton at Dick’s Sporting Goods or Target. For $2,000 you can buy the hardware, but the secret sauce is the $40 a month subscription fee, which brings you a huge array of virtual programs. It also buys you status, because the Peloton bike is the Tesla of exercycles. Like Kanye’s $500 Kicks, it is the brand of the cool rich folk on the 40th floor of Manhattan high rises. And you can use it without having to schlep to the gym and put on a mask with the other infectious plebeians.

The branding is working brilliantly. The company is worth $16 billion.

***

Another fascinating story is Nikola, headed by Elon Musk wannabe, Trevor Milton. The company went public a couple weeks ago and has a market cap approaching $30 billion. They plan to build hydrogen powered semi-trucks at a yet-to-be-built plant near Phoenix. They might get a vehicle on the road in a couple of years. They are also taking reservations for a battery powered pickup truck called the Badger, which will eventually compete with Tesla’s Cybertruck, which Musk is already testing.

Nikola’s branding is clever, right down to the name, which is a play on the first name of the famous Serbian-American inventor Nikola Tesla.

***

One other stock I like to follow is DraftKings, which is an online sports betting company. The stock goes up and down with the likelihood of playing the baseball, basketball, and football seasons. When COVID flares up and players fall ill, the stock price falls. The company is valued around $10 billion dollars now. It is a play on the likelihood of a viable vaccine in a short period of time.

An assessment of Gap, Peloton, Nikola, and DraftKings, paints a colorful picture of America around the 4th of July 2020. The promoter and the entrepreneur are definitely alive. Should we be joyful or sad? Not a Yeezy question.

Question: Did Gap make a good deal?

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Zooming in Different Worlds

By Lloyd Graff

I feel like I am living in several different worlds. 

During the day I am a business guy, trying to put together the diverse strings of commerce around the country and the world, culminating in a buy and a sell with a margin of profit for my company built into it. The outside world keeps telling me that there isn’t anything but scraps to be had, but I am finding a lot of opportunities when I contact the smart small and medium-sized business owners who are sniffing for opportunity at the moment. It really is quite refreshing to connect with these aggressively optimistic folk who ignore the gloom of the TV and radio blabs. I feed on their energy and they seem to enjoy mine.

As the late dusk sinks in, I turn on the news shows, which at the moment are immersed in pictures of broken windows, strewn Nikes, and stray flat screen TV boxes thought to symbolize the moment. It is demoralizing and scary journalism with no depth of understanding, just an abject play for ratings and a rising fear quotient. It affects me, even though I know it is a transient flicker of pain in 2020. The race riots have replaced COVID-19 this week as the story of the moment.

COVID is a lingering story of government mismanagement framed by the paranoid thirst of the press. It is an extremely costly one, but the threads of fear have a vibrancy for me in the death numbers of older, sicker people which comprise 80% of the dead.

Then I check stock prices and oil prices before I go to bed. Stocks are near their record highs. The NASDAQ, which has younger firms, is 3% below its all-time high. If I am looking for an indicator of optimism in America and investors from around the world, this is where I look for it.

I also take my assortment of medicines at night, which include a statin for cholesterol, a refined fish oil for all around cardiovascular health, and a Bystolic, which is an amazing beta blocker that controls high blood pressure. The negativists who see the world in decline don’t understand that people like me would never be alive at 75 after a heart attack 12 years ago. Folks living in the good old days of 1962 never would have recovered from blocked arteries like mine and their kids might well be in Iron Lungs with polio. 

We are likely to have a COVID-19 vaccine that actually works by the end of the year.  We now have a useful treatment for the illness, which will be augmented shortly. 

Not to be ignored is the rapid adoption of Zoom to connect people. My wife Risa uses it every day. I get to see my grandkids more often than I ever did before. Some young entrepreneurs infiltrated the market with a better product and took a dominant position in person to person TV while the giants, Google, Microsoft, and Cisco, slept. Now they are hopelessly behind.

The SpaceX Dragon 2

Before I go to sleep at night, I like to imagine the possibility of Zoom connecting the world with American astronauts zooming up to the International Space Station in Elon Musk’s rocket taxi. Yet the image of a brick smashing a Macy’s window plunders my calm. 

It’s June 2020. My life is good except when the noise of the day interrupts my joy of being alive.

Question: Do you still listen to the news?

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Do You Trust Yourself?

By Lloyd Graff

Deciphering the path of business through the COVID-19 mess is more difficult than finding your way through Boston without Google Maps. 

Stock markets zoom while Hertz declares bankruptcy. Oil prices fall to $18 a barrel but then double in five weeks. Auto plants shut down en masse but then reopen to parts shortages from Mexico, which didn’t want to produce until GM, Toyota, and VW leaned hard on the government.

The political and scientific elites caution us not to reopen because a mistake could mess up their reputations. They scare us about the “second wave” that may be coming sometime.

Meanwhile, the salon owner worries that she may never comb out another wave at her shop if she can’t reopen.

Small businesses navigate through government bureaucracies to claim the cash to survive, not knowing how much they will have to pay back because the SBA itself doesn’t understand the authorizing legislation. Washington consultants earn their juicy retainers by explaining stuff even the dudes who wrote the laws don’t understand.

People ignore barricade near Chicago’s North Avenue Beach.

The boardwalk fills up in Venice Beach, California, and Myrtle Beach, South Carolina. In Chicago, real people keep knocking down the fences that the park police keep erecting to keep them off the grass. In Georgia, Florida, and Alabama, where the governors took the risk of opening before other states, the caseload from COVID did not change.

There are at least a dozen possibilities for successful vaccines. With a decent chance we’ll have a real one before Christmas, and a drug is being made today that really does help reduce hospital stays.

Yet 100,000 people have died in the United States.

The press makes its living by promoting bad news. Maybe there would be no pandemic without cable news. But there is 20% unemployment, doors are locked, cities have emptied, and I am afraid to go to my own anniversary party. 

Yet somehow Americans seem to retain their optimism. The smart people predicted new home buying would fall apart. Yet yesterday the Commerce Department stats showed that real people put down real money and took out real mortgages to buy more homes in April than in March. People are making airline and hotel reservations. They probably are even nutty enough to plan cruises.

But if you are running a machining business, even if you are making respirator parts, it looks iffy. Will people start buying new cars? There are lots of leases ending, but dealerships are quiet because they seem like scary places to go to. 

Major League Baseball can’t seem to figure out if players can take showers if it resumes.

We live in the land of phases.

I am coming around to the idea that government should trust people to decide their next steps. It would be chaotic, I know. Most old people will not do dumb stuff like going to the beach or a restaurant. Young people will mix it up and some will get sick, but probably not real sick. 

We could have school this fall for those who want to go. We will get closer to the herd immunity that a successful vaccine could complete. 

Death in the economy by asphyxiation could be defeated. China would lose the COVID-19 war. Toilet paper would be everywhere. 

Is this crazy?

Question: Do you trust yourself to make the right decisions regarding COVID-19? Do you trust other people?

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Ep. 82 – Running a Pizza Place During COVID-19 with Marco Schiavoni

By Noah Graff

Today’s guest on the podcast is Marco Schiavoni, owner of Pizza Metro, one of my favorite pizza places in Chicago. Marco has been in the restaurant business for 20 years, and like most business owners he’s seen his share of ups and downs over time.

Scroll down to listen to the podcast.

I spoke to Marco last weekend about how restaurants in Chicago are navigating the COVID-19 crisis. He also taught me the secret to making the perfect espresso.

Main points of the interview

(2:45) Marco gives his story. He talks about leaving his home in Rome to come to Chicago in the ‘90s. He realized there wasn’t a traditional Roman style pizzeria in Chicago so he opened Pizza Metro in 2001. Roman style pizza is served cut into square slices that are easy to eat on the go. He says that Pizza Metro is one of the top 10 pizza places in Chicago. 

(4:10) Marco describes the small size of Pizza Metro. The restaurant is around 700 square feet and has 15 stools. One cool feature of the restaurant is that you can sit at a bar and interact with the cooks while you watch them cook your food. 

(7:00) Marco talks about how his pizza is unique because it’s made in the traditional roman style, but every slice customizable as far as toppings. This differs from pizzerias in Italy, which usually only offer a few choices

(8:40) We discuss how Chicago’s Wicker Park neighborhood has changed since Pizza Metro opened on West Division Street in 2001. Marco says when he first opened there were hardly any restaurants and many gangs in the area. He said during his second year in business the laundromat across the street was replaced by Starbucks and everything started to change. Today, Division Street is super trendy, with too many restaurants to choose from.

(10:15) Marco explains why Pizza Metro’s espresso is the best in Chicago. Marco says he started making espressos when he was 13 years old. He says you have to grind the coffee to a different thicknesses based on the humidity at the time. He says his beans are some of the best imported coffees from Italy. Marco also says he makes his espresso with much less water than the way it’s usually made in the US. He says you can tell if the espresso was made properly if you put some sugar on top and it takes 6 seconds for it to fall through the surface. 

(16:40) Marco speaks about shutting his restaurant down at the very end of March. He says that one day he noticed the street was empty and that Starbucks was closed. He saw this as a sign that he should close as well. Marco closed Pizza Metro for a month and said it was the first time in 19 years he had a true vacation because it was first time that he didn’t have to worry about what was happening in the business. 

(18:22) Marco explains that the pizza business is good in both strong and weak economies. He says in a weak economy a pizza business can thrive because many Americans don’t know how to cook and a pizza can feed a family for a relatively low price.

(19:30) Marco says that what spurred him to reopen his business was that his employees needed the work. Otherwise he might have stayed on vacation a little while longer. 

(21:30) Marco says that people are going to start new businesses and alter their business models to adapt to the COVID-19 crisis. He says that restaurants who succeed will use social media to get exposure. He says people will put up videos of new, creative dishes they are working on. He alludes to a secret new desert item he is working on. He plans to pass it out to Starbucks customers waiting in line for coffee when it reopens.

(25:20) Marco thinks that many big restaurants will close, which will decrease competition. He says that many restaurants cannot stay in business if only a small number of people can eat there because the restaurant still has to pay the same rent and expenses as they did before COVID-19. He also says that if the country goes into a recession less people will eat out.

Marco Schiavoni, owner of Pizza Metro in Chicago

(27:30) Marco expresses worry about the health of restaurant workers. He says most restaurant kitchen staff do not have a lot of money so they are forced to take public transportation, and this puts them at higher risk for catching coronavirus. He says if one person on staff gets coronavirus he would have to close his restaurant for at least 2 weeks to ensure everyone is not infected. 

(33:40) Marco says he thinks that the US will look at how businesses are reopened in Europe. He talks about the first coffee bars in Italy that are just opening up. He says that people have to wait outside the cafe and only one customer is allowed to enter. The customer has to be 2 meters from the barista, so after the barista makes the coffee she has to back up from the bar for the customer to pick up the cup of coffee and leave the money. He says that even some restaurants in Italy that have been open for 50 years will eventually be forced to close because they can’t afford to pay their fixed expenses.

(35:00) Marco believes that people will learn to adjust to the new normal. He wishes the best to all the other restaurant owners and says the ones who survive will be stronger than before.

Question: What’s been your favorite takeout food during the COVID-19 crisis? Are you afraid to order takeout?

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Ready to Travel?

By Lloyd Graff

The reopening of 90% of the Starbucks stores in the US over the next 4-6 weeks is a signal moment in the COVID-19 recovery, but what does it mean for the machining world?

I think it is a significant moment, but not a game-changer in itself. Nor are the very hopeful results coming in on the new Gilead drug remdesivir, which is already in use but not approved yet as an antiviral in America.

For many of our clients who make so much product for cars, trucks, and airplanes, as well as the oil and gas industry, the big question is when will people feel confident about getting out of their homes and doing the things they did routinely last year when the economy was humming along.

Unfortunately, this is much less clear because we are dealing with the big issue of fear of sickness and dying, especially if you are over 70 or have issues such as diabetes, heart disease, breathing problems, or lack of immunity. These categories probably affect over 25% of the American population.

If you take out 80 million people in America, plus millions in other countries with a lot of older people, such as those in Europe, it is hard to imagine robust auto, aviation, and travel business for quite a while. A second wave of COVID would cement the fear factor well into the next year.

Travelers cautiously brave O’Hare Airport

It seems to me that America really goes back to work when illness and death from COVID-19 is no longer the lead story in the news. This is why I keep thinking how important it is for the 2020 election and big time sports to become the focus on TV. The news media has correctly gauged the interest in the pandemic but have also fanned the panic.

We are really getting closer to it becoming just an addition to the flu season, but it will probably not happen until we have a credible vaccine. The scientists who know the regulatory hurdles, which will probably be more significant than the successful development ones, say it is very unlikely until next year sometime.

The question that I keep noodling is when will my wife and I feel confident enough to go to the airport, get on a plane, and visit our daughter and family in the Bay Area and vice versa. I know it will take longer than just for Starbucks to open its doors. It will take longer than the NBA and Major League Baseball to restart, which I project to restart by early June.

I will throw out my guess and ask you to give me yours. When will you feel safe to travel? When will you jump into an Uber car? When will COVID-19 be old news?

I will go with August 15th 2020. The Cubs will be in first place then. The presidential campaign will be starting to get nasty, and the 2021 cars will be ready to roll out.

Your guess?

Question: When will you feel confident enough to travel?

 

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The COVID Conundrum

By Lloyd Graff

Norm and I were born on the same day. We grew up together. We did Cub Scouts in his basement. His mom, Miriam, was the den mother. Norm died from COVID-19 last Friday.

I was stunned when I received the news, even though I had not had any contact with Norm for over seven years, and didn’t know of his Alzheimer’s. He was the first of my high school classmates to die from it. I heard this from the internet listserv our class maintains. It brought the COVID plague off the CNBC news streamer into my heart.

The cold brutal fact is that most of the people who are dying from this terrible plague are like Norm. They are over 70 with other complicating health issues like Alzheimer’s, kidney dysfunction, lung disease, cancer, and diabetes. Their defenses are very weak and COVID-19 devastates them quickly. 

* * * 

In the past week the narrative in the country has rapidly shifted from desperate New York City and shortages of respirators, to what do we do when we loosen up the nation’s economic strait jacket. Many of the vital facts needed in the national and individual decision-making process are gradually emerging from the fog, and the MSNBCization of the news media. 

Most of the people who are dying are people like Norm. He is “the norm.” It kills mostly the weak who can’t fight back. It kills old people on cruise ships, but not sailors on aircraft carriers.

We know this because it hit the aircraft carrier Theodore Roosevelt and virtually every one of the 4860 crewmembers was exposed. Only one person, 41-year old Chief Petty Officer Robert Thacker, died.

Old people on cruise ships got infected and several succumbed. One person out of nearly 5,000 was the unlucky one on the carrier. Anecdotal evidence, yes, but also very important for the country to make its decision on going back to work. Opening up the economy is not just President Trump’s call, or Andrew Cuomo’s call, or Gavin Newsom’s or Jim Cramer’s on CNBC.

The decision will ultimately rise up from the people in a democracy because the politicians will be polling incessantly. Real people are gradually going to start coming out of their homes, meeting their friends, going into grocery stores, and returning to their barbers and hair salons. 

Temporarily closed barber shop in Bucktown, Chicago


The shutdown will begin to collapse because people will gradually, very gradually, start to shed their fear and their masks. They will quietly start asking Starbucks about when it will open its stores, and then they will ask to go back to work. Soon after that they will demand that they go back to work.

When the news trickles out that the number of people who have been exposed to Covid-19 but did not get really sick is 50 to 100 times higher than the published statistics, which is what the data coming out of Santa Clara County, home of Stanford, Google, and Apple indicates, the decision for the fearful politicians will almost be made for them. The people will decide.

More folks like my Cub Scout buddy Norm will die. The statistics in Italy are about as blunt and awful as it gets—55% of those who have died were 80 or older. People age 70 or older have accounted for 80% of deaths.

COVID-19 is the Grim Reaper for the old, infirm, and defenseless. For everybody else it is the flu. 

We had to shut down the country to save the hospitals in the big urban areas from being overwhelmed. That moment has passed. 

If we open up the country gradually, more of the old and weak will die, but the vast majority of people will be okay. People like me, born on the same day as my childhood buddy Norm, but hopefully in better shape, will ultimately have to decide for themselves when to get back in the fray.

Question: Do you feel safe enough to go back to work?

 

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False Positive?

By Lloyd Graff

Are we getting a false positive signal from the stock market, or is it a predictor of the economy in 3 to 6 months? This is the question business folk, big, small, and tiny, are asking themselves as the markets regain the ground lost in the early March slaughter.

The big tech stocks, Microsoft, Google, Apple, and Facebook, plus Amazon, Walmart, and Costco, are still sitting near all-time highs, while unemployment swells, small businesses languish, and Macy’s and Kohl’s starve. GM and Ford stock shrink, and Tesla stock hits $700 per share.

Are we on the eve of a depression or is this just a temporary misstep on the great trampoline of growth in America?

The machining business is straddling the chasm between panic and smiles of confidence. If a firm is predominantly an automotive supplier to anybody but Tesla, things look bleak. But for how long? There is plenty of potential demand waiting in the bushes.

People fear public transportation, which may translate to car sales. My sister bought an Audi SUV in February and my wife and daughter were both on the cusp of buying new vehicles. They will be back in the market when it feels safe to test drive some possibilities. My daughter is looking at the Jeep-Chrysler Pacifica, while my wife’s lease expired 3 months ago on her Camry.

We are waiting for the waters to calm. I’m sure there are many others in our shoes. But when will it be safe to do something, when right now a big trip is to visit the local supermarket for groceries to be put in the trunk after ordering ahead? The crazy thing is that we know our fear will dissipate and mostly be forgotten, but will it take 2 months, 6 months, or a year to regain our mojo?

We are just beginning the early spring of revival. I can feel it on good days when the sun is shining and neighbors are venturing out and talking without masks on. My sons are going out on walks together. My granddaughters recently met up with some close friends (10 feet away). I’ve almost gone to Dunkin Donuts to pick up coffee. My cardiologist tells me that his hundreds of patients are doing well and that the few who tested positive have recovered, except for the one frail man who died. I have friends who have recovered. It almost gives me confidence, but not enough to end my 33 day quarantine.

Yet business goes on. Most of my precision machining clients are working and reasonably busy. Medical and guns are strong. Military is okay but hesitant. Auctions are still taking place.

When will the umps say “Play Ball!”?

There will be a warm gust that begins to clear the fog of hesitation. It may be Major League Baseball or the NBA that gives the signal that we are waiting for. Yes, they will probably play without crowds and all of the participants will take their temperatures before play or practice begins. There will be missteps. A player or coach or ump will get sick, but one misstep does not mean it isn’t worth resuming. People always get sick and the world doesn’t fall apart.

Eventually we will have to coexist with COVID-19. We are social beings. We need to connect, travel, touch, and do business. We need to shed fear and take some calculated risks. The politicians and bureaucrats will dither, but the stock market is telling us, hopefully correctly, that good news is coming soon. Maybe when the ump yells “Play Ball!”

Question:  What is the first thing you plan to do when shelter-in-place orders are lifted?

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Ep. 72 – Coronavirus and the Supply Chain with Daniel Hearsch

By Noah Graff

On today’s podcast we’re delving into a topic that’s been on many people’s minds these days, the coronavirus.

Scroll down to listen to the podcast

Our guest is automotive supply chain expert Dan Hearsch, Managing Director at AlixPartners. Dan is briefed daily by his associates in China about how people in manufacturing are dealing with the coronavirus. FYI, this interview was conducted one week ago on Feb. 26, 2020.

Main Points

(2:55) Dan gives his background working in the automotive industry for OEMs, as well as Tier 1 and Tier 2 suppliers. Today he is a consultant, focusing on supply chain and procurement projects.

(3:55) Dan says many people have been comparing the coronavirus, also known as Covid-19, to SARS, the last serious epidemic in Asia back in 2003. He says the big difference between the SARS outbreak and the current one is that in 2003, China was roughly only 4% of global GDP, while today China has a much more significant role in the global supply chain and its own internal economy is much larger than it was 17 years ago.

(5:30) Dan says one of the hardest things about the coronavirus outbreak is knowing what the local response is going to be. He says that it seems like the quarantine policies in China, Korea, and Italy are the correct response.

(6:00) Dan says he’s briefed daily on the latest news in China from his associates in there. The news is based on what they are seeing from the Chinese government and what they are seeing in real time from the companies with whom they work.

Daniel Hearsch of AlixPartners

(6:55) Dan says he hears there is a decreased incidence of new coronavirus cases and the death numbers seems to be falling, which makes people hopeful that business will get better soon. He says the worst thing to do is to send people back to work too soon because they could get sick again and the quarantine process would have to start over.

(7:40) Dan says the Chinese New Year amplified the spread of the coronavirus because of all the people traveling back to their homes in the countryside. However, he said that from a business standpoint the Chinese New Year was helpful because people who buy goods from China were already planning for an eight day shut down. People had planned to have extra material already in transit on the water, but had not planned for further delays.

(9:40) Dan says the majority of factories in China that were down have opened up again. He sites a Chinese government survey of 982 enterprises that said 41% had resumed by February 14 and predicts over 80% should be back up and running this month. He says the biggest problems relate to transportation and workforce issues because a significant number of people are quarantined or have trouble traveling. His sources say that Chinese manufacturers in the survey are running at only 30-40% of their potential productivity. The Chinese government is comparing the current electricity usage in various industrial areas to past years to gage productivity. It found that the level of usage was about 57% that it was at this same time of year in 2018 and 2019.

(12:15) Dan says that the automotive sector has a very lean supply chain, meaning companies hold very little safety stock, which makes it vulnerable to the decrease in supplier productivity.

(16:40) Dan says that some North American manufacturing companies are going shorten their supply chains as China, Korea, and Italy can’t supply enough parts. He says this trend would lend itself to machining processes that are fast to set up. He says capacity shouldn’t be a big problem because the domestic automotive market has been down of late.

(18:50) Dan says China has both a supply and a demand problem because many of the domestic customers who buy parts are also closed. This differs from the United States that only has a supply problem because companies are still purchasing goods and consumers are still buying.

(20:40) Dan says that many of the large scale supply chain problems caused by the coronavirus are not new. He draws a comparison to the aftermath of the Fukushima nuclear power plant disaster in 2011, which exposed the problems that occur when companies have too many suppliers concentrated in one region and do not have enough relationships with backup suppliers.

(23:45) Noah asks if the pharmaceutical supply chain in China has similar issues as automotive. Dan says the problems are probably similar. He says the transportation issues could be significant as suppliers try to catch up on a backlog of shipments, though he predicts the production processes might not be as labor intensive as those of automotive.

(27:45) Dan says that the coronavirus is a common type of virus—the same type of virus as the common cold. He says the Covid-19 epidemic is quite contagious and has a high fatality rate of 2.5-3% compared to .05% for typical flu. He says limiting personal contact with other people and washing hands regularly is the best practice to protect oneself against the virus. He says that a lot of people make mistakes such as wearing the wrong type of protective masks and wearing a mask more than one time.

(31:20) Dan says if the United States has an outbreak the impact on its economy shouldn’t be as dramatic as China’s. A higher percentage of people have the ability to work remotely while quarantined because a smaller percentage work in factories. Still, he admits an outbreak will still significantly affect the domestic supply chain.

(33:30) Dan says out of China’s study of 982 surveyed Chinese companies 42% of those enterprises will run out of cash in the next three months and 10% will run out of cash in one month because they can’t cover their fixed costs. He says it is likely the Chinese government will act as a safety net, though he is not familiar with the bankruptcy laws there.

(36:40) Dan says the best case scenario is that the most problematic countries get the Covid-19 epidemic under control and it doesn’t become a global pandemic. He says it is possible that in 4 to 5 months most suppliers will be back up to speed in the problematic countries.

(38:25) Dan says the precautionary health measures by governments seem to be the correct plan to deal with the coronavirus epidemic. He says saving people’s lives is more important than keeping factories running, not just for humanitarian reasons, but also for long-term business success.

(39:30) Dan says it is vital for manufacturers to set up alternate suppliers as soon as possible to prepare for a pandemic or other supply chain setbacks.

Question: Have you noticed supply chain interruptions due to the coronavirus affecting your business?

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The Hole in China’s Apple

A tiny gecko can literally climb up sheer glass.

A team of robotics geeks in Denmark thought, wouldn’t it be cool if we could mimic the gecko in a robot’s gripper? Wouldn’t that be a great product?

They accomplished just that and started a company in Odense, Denmark to sell their gecko gripper, called OnRobot.

Odense, home of Universal Robots, is the robotics incubator of the world. Poetically enough, it is also where Hans Christian Andersen wrote his fairy tales. The gecko gripper concept grew from a research paper written at Stanford University in Palo Alto, which was picked up by NASA as having the potential for retrieving satellites in space. The folks in Odense saw its potential.

Would this have happened in Shanghai?

Recently, things have become quite ugly for China after 30 years of almost unimaginable growth. The Chinese leadership, starting with Deng Xiaoping, has been almost maniacal in pushing growth in China.  With shrewd planning, an industrious and hungry population, heavy borrowing, and a knack for stealing and copying the hard-won knowledge of their competitors in the United State and Europe, they have continued their ascent.

Shanghai is not Palo Alto, California, or Odense, Denmark. Companies like Huawei and ZTE have become electronics giants in recent years by developing copycat products based on intellectual property theft and industrial espionage while playing footsie with bad actors like Iran. This has been abetted by the Chinese government, which has afforded them immense lending resources as part of China’s extraordinary rush to catch up to the United States and ultimately surpass America in almost every way possible.

The Chinese leaders did not have time for the kind of entrepreneurial organic growth of a Universal Robots or OnRobot. They wanted to leapfrog the agonizing trial and error and market flops that little startups have. So Huawei and ZTE and countless other firms stole their way to the top.

They did not have to try that hard to do it. Many large firms virtually handed the Chinese their intellectual property in exchange for market opportunity. Apple’s current falling earnings are a direct result of weakening iPhone sales in China as their competitors are making nice copies for half the price. The only edge Apple has left is their high-class brand, but that apple is now more than half eaten.

Apple was not naïve about China. Its gamble was that they would make billions of dollars in China before the intellectual property theft really bit, and then they would use that money to fund research which would net the next generation of killer phones or some other monster product.

The Chinese leadership’s gamble was that the American leadership would make the same short-range gamble as Apple. In exchange for gaining lucrative markets for America’s relatively cheap commodities, the U.S. would allow intellectual property theft without retribution and the looting of the American and Western European industrial complexes by subsidized ones in China. For example, the Chinese steel industry has grown to be by far the world’s biggest, and yet it is hopelessly inefficient, as the government has run it as a make-work project for hundreds of thousands of workers.

The Trump tariffs on steel and aluminum have hurt American companies who use the materials, many of whom are our customers, as well as the Chinese. The Huawei case in which the founder’s daughter is the mouse who was caught in the trap in Vancouver, Canada, is as clear a signal as America can send to China — that things finally are changing.  It is starting to get uncomfortable for both the U.S. and China as the stalemate continues to bite.

Both countries have a huge amount at stake in the trade talks going on right now in Washington.  Shanghai is not Palo Alto.  It is not Odense. What is being exposed to the world at this moment is that despite the enormous growth in China over the last 30 years and its overarching ambition to surpass America in every way, it is weak at its core. It can be seen as similar to Japan in 1990.  Many futurists saw Japan surpassing the U.S. at that point, but despite America’s missteps, like the Iraq War, it did not happen.

China does not innovate. It mostly copies and steals intellectual property.  Its education system does not produce risk takers.  Nonconformists often end up in jail. I believe the top leaders in China understand this is a profound weakness, but it is extremely hard to address it because doing so would undermine the soft foundation of the country — economically, socially, and politically.

I think Donald Trump, the New York real estate developer and gut puncher, gets this. The amiable Bushes, Clinton, and Obama seemingly did not understand China’s basic weakness and refused to play the strong hand that they had.

The big question ahead of us is will Trump play his strong hand too aggressively and screw up the world economy, or will he find a path to a compromise? The Fed’s recent pullback on interest rate hikes was its statement that they are worried that the whole poker table might collapse.

Question: What copycat or knockoff products have you purchased?

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Ep. 3 – Part 2 of Miles Free Interview

By Noah Graff

Miles Free, Director of Research and Technology at the Precision Machined Products Association, opines on electric cars, economic patriotism and how American machine shops have evolved to thrive in today’s economy.

Question: Are tariffs aimed at China economic patriotism or a tool for the enemy?

Listen to Swarfcast in the player below.

Honda Assembly Plant in Liberty OH   (Dayton Daily News)

 

 

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