Investigation: Globalisation and the Coronavirus
In this special investigation, David Price looks at the success of global manufacturing over the past decades, and its vulnerability to pandemics like Covid-19…
Back in 1978, NAD launched an entry-level integrated amplifier for under £80 in the UK. Although it looked dull and had a tacky plastic fascia panel, the chassis was sturdy steel, the mains transformer heavy and the component quality surprisingly good. The sound was superb at the price – better indeed than many amps at three times its cost – and people wondered how this was possible. All it took was one look around the back, and the answer was there staring you in the face – a sticker saying 'Made in Taiwan'.
New Acoustic Dimension – as it originally called itself – wasn't the first company to de-localise. The more you scratched the surface of seventies hi-fi, the more you could see examples of Western companies outsourcing production – or buying in products from Asian OEMs. Everything from Linn Ittok LVII tonearms, to Rega R100 phono cartridges, were made in Japan. Nakamichi was even supplying cassette decks for famous European brands like ELAC, Goodmans, Leak, Sonab, Thorn and Wharfedale. In the eighties, British brands like Musical Fidelity moved production to the other side of the world, and companies like Cambridge Audio and Creek Audio followed.
In 2000, the US Congress conferred “permanent normal trade relations” upon China. This meant that imports would be treated as they would from any other friendly country – a stark contrast to the frosty trade relationship springing from the Tiananmen Square protests in 1989. Thus began China's meteoric rise, and Shenzhen – the republic's special economic zone created by President Deng's reforms of the early eighties – turned into the workshop of the world. Swathes of UK hi-fi companies moved production there, enticed by vanishingly low costs and the dramatic rise in world shipping capacity – plus its physical proximity to Hong Kong, which still retained much of its Western, business-friendly outlook after the British had left.
Yet this model of manufacturing has its problems. First, it relies on the relationship between the western company and its Chinese OEM suppliers; this can be a fraught one, to say the least. Second, it needs constant oversight, lest the wrong types of components end up in the second production batch – making the product sound completely different. Third, it's prone to what Donald Rumsfeld once called “unknown unknowns”; wars in the Middle East, earthquakes and pandemics, to name but a few. In the past decade, we've seen all three.
Ten years ago, the World Health Organisation issued a new definition of 'pandemic', namely a disease that infects a large number of people and spreads quickly across the world. SARS, Swine flu and Ebola have all taken their toll, causing large loss of life due to the relatively high rate of transmission /or lethality of these deeply unpleasant conditions. Now it's the turn of Covid-19. The problem is exacerbated by the interconnectedness of modern life, something that's much more apparent than 1979 when the 'NAD model' of working was more the exception than the rule. Already, with just a fraction of the people who die from tuberculosis every year now infected with the coronavirus, it's estimated that it has cost up to $1.5 trillion of cancelled flights, postponed orders and shut down businesses.
Just four months on, the coronavirus is already leading to cancelled sports and social events. The Geneva Motor Show has announced that it is off this year, as has the hi-fi industry's Munich High End Show. Speculation is rife about the Tokyo Olympics, the London Marathon (now postponed) and the Glastonbury Festival. Suddenly, globalisation now looks far from secure. Events such as the Covid-19 outbreak show how interconnected we all are – in work, in leisure and in consumption.
In globalism's defence, market liberalisation has done some amazing things. Firstly, it's given relatively affluent Western consumers the ability to buy things cheaper – from some types of food and clothes to consumer white goods like TVs and washing machines. The meteoric rise of Apple arguably wouldn't have been possible without it, and we'd be paying a lot more money for our smartphones, be they Android or iOS. At the same time, poverty has plummeted in China and other developing nations; it's a salutary lesson for those complaining about the evils of the modern world that we as a species have never been so affluent and so long-lived – with more people taken out of poverty since 1990 than any of us could have imagined. According to the World Bank for example, in 1820 less than 10% of the world's population earned more than $2 per day in real terms, but by 2016 it was around 91% – and the rate of earnings rise is actually increasing.
Knowing this, it's understandable that many are worried by the apparent move to deliberalise the global market. Two years ago, US President Trump told the UN General Assembly council that he rejected globalism, a message that resonated strongly with US workers who saw their own jobs outsourced by the world's corporate multinationals. Now European Union member states are busily erecting border walls – Austria's wall with Italy being the most recent – and this is part of a global trend. When the Berlin Wall came down in 1989, there were 15 walls or fences dividing countries around the world, and now there are 77. Nothing deglobalises like a pandemic though, not even President Trump!
Photo Credit: Paul Yeung, Bloomberg
The advent of SARS in 2002 was a shock, but back then China was only 4% of world trade, and now it is 16%. Avian flu in 2009 was another difficulty that global supply chains had to work through, but still China was not as embedded as it is now. Factor in the just-in-time manufacturing processes that dominate the global manufacturing sector and a pandemic is a recipe for economic disaster. Global trade has bought us untold benefits, but also its own set of problems. These have been all too apparent after 2012, as the growth of world trade has slowed, and global foreign direct investment has decreased. The rise of environmentalism has also hurt the globalist cause. Localism – manufacturing that doesn't involve the expenditure of vast amounts of fossil fuels getting the products from one side of the world to another – makes a lot of sense.
It appears Covid-19 cases have now plateaued in China, and the government is itching to get its factories up and running again. This is understandable because the country is already in a more precarious economic position than outsiders imagine. Its recent announcement – which has been given little coverage in Western media – that it has scrapped plans for China's fifth and sixth aircraft carriers on cost grounds, is a clear sign of this. At the same time, the country faces a demographic timebomb similar to Japan, with an ageing and declining population. Sensing the damage that the coronavirus could do, the Chinese government has acted in a draconian way to contain it, for now at least.
While Shenzhen may be back online soon, there's a real worry that some Western countries will be hit hard. In Europe, apocryphal stories are coming from Italy, while in the Middle East Iran is having a terrible time. Japan and South Korea have been hurt badly, but both have highly developed health systems able to mitigate it in the long run. In the UK, deaths from coronavirus are a fraction of the 17,000 people who die from seasonal flu every year, but already people are panic-buying in supermarkets – something that Brexit singularly failed to cause.
HOME AND AWAY
Globalism has brought huge benefits, but also downsides too. The hi-fi industry is a diverse mixture of global and local, with some companies running their own manufacturing facilities in China, and others deliberately working very locally. Linn's Gilad Tiefenbrun says that there's a balance to be struck. “Our way is making in-house where possible or using local sources. Our products are not as price-sensitive as others though, our market allows us to make these decisions based on quality which other businesses selling further down the hi-fi price range do not have the benefit of.”
Gilad Tiefenbrun - Linn
He continues, “because we design, manufacture and build all our products at the factory in Glasgow, we are uniquely protected from many of the issues other manufacturers who outsource assembly to Asia are experiencing. We already focus on sustainably sourcing quality materials close to our factory where possible and so the only eventuality we are currently planning for is an issue with component sourcing of electronic parts which typically come from Asia.”
He adds that because Linn's approach is quite different from most in the technology industry, it protects the company from situations such as this current global threat and allows greater accountability of the supply chain. “Longer term there could be an impact on base materials,” he notes, “as Asia is a major supplier of these. For example, China produces more than half of the world's requirement of aluminium. But generally, Linn is more at risk from the longer-term global effects of this current threat than the short term immediate impacts which could be severely affecting other businesses.”
Mike Creek - Creek Audio
Creek Audio's Mike Creek has manufactured in China for the past twenty-five years but recently decided move production closer to home. “I took the decision last year to move production to Slovakia. The factory I will use has facilities better than most of those I used in China,” he explains, “and buying anything from China has been tricky, so I have got used to working from large stocks, purchased at other times of the year. There's no doubt that the coronavirus will have serious consequences for buying components and selling finished products in the near future.”
Mike also thinks the disruption caused by the coronavirus isn't just about dealing with breaks in supply lines of specific components from China. He agrees with Gilad that there are going to be considerable knock-on effects for everyone. “Hi-fi is really small beer in the grand scheme of things. It's clear to me that the number of companies and available products significantly exceeds the number of potential customers. There has always been a disparity in my view, but never more than recently. Perhaps the current events could be like the recent stock market crash, which can be likened to a correction?”
He's never been a fan of 'just-in-time' manufacturing. “It's too reliant on everything being perfect. I cannot imagine running a JIT business like MINI for example, which I visited last year for a factory tour. The clock is ticking, and the collection trucks or trains are waiting at the factory gates for the day's production.” Gilad from Linn adds that we are all now, to an extent, hostages of this manufacturing method – and the trick is being ready. “Linn always holds safety stock, and we have dual supply routes in place where components are sourced overseas. It is normally also possible to find alternatives when necessary – although this adds cost and takes up resource to find, test and administrate.”
Bob Surgeoner - NEAT Acoustics
Bob Surgeoner of NEAT Acoustics is doing exactly the same. “We're monitoring all our suppliers around the world, to ensure existing delivery schedules are realistic – and we're looking at alternative sources too”, he told me. He's fairly sanguine about the effect of Covid-19, saying that, “it depends on the extent of the spread of the virus, but is likely to have some negative effect, as it has already had on stock markets. In a worst-case scenario, I can imagine all industries being affected, some perhaps fatally. Minimum order quantities for many of our overseas suppliers mean we usually have large stocks of many of our parts.”
Around seventy percent of his company's components are from the UK. “We do try and source locally wherever possible in any case. However, there are many items that simply cannot be sourced in the UK at all, and some items that can only be sourced within the UK at prices that would increase our factory gate prices to unprecedented levels. With increased isolationism, this might change over time, and we – along with all manufacturing industry – will be forced to adapt, but at an unknown cost.”
Simon Powell, Operations Director at Henley Audio, is responsible for the day-to-day running of one of the UK's largest and most successful hi-fi distribution companies. “At this stage, the coronavirus is only affecting a few models. One element of good fortune is that the outbreak happened so near to Chinese New Year, which meant many companies had already planned for a production slow-down. So important sellers already had a production plan in place which meant we could compensate for a break in supply. However, we are obviously now very clear of this period and products continue to sell – so soon there will be a wide range of products from a wide variety of manufacturers (not just our own) which may be impacted. It depends on how quickly and effectively the world reacts, in order to keep product moving. That element remains to be seen…”
Simon Powell - Henley Audio
Simon says that as a distributor, there's very little his company can do to mitigate what's happening. “The manufacturers have a duty of care in their supply, and shipping companies are running quarantines before they dock. As with anything we offer, we will only accept items we know to be safe and fit for supply – but more often than not the issue will already be addressed for us by the manufacturer. There is, however, an opportunity. Hopefully, this shortfall in certain products will mean we can all have conversations about other items in our portfolio, perhaps bringing greater diversity to the scene and exposing customers to not just the common products?”
“I think it's going to affect all markets in some way,” he adds. “It's what we collectively sign up to as part of a world with fluid borders, preferential trade agreements and specialisation on a country-by-country basis. But I think one interesting topic to come out of this, is can the world afford to be so reliant on one country for so many aspects of its day-to-day life? Diversity, competition and more people in work across different territories is perhaps a better world than one who diverts all business options to the same place as everyone else - like with Klipsch who still design, innovate and manufacture in US while also running production from the Far East. You could say that were an outbreak to happen in Central London, what would happen to world banking? Or if something happens in Silicon Valley does all the software we use day-to-day suddenly shutdown?”
Simon agrees that the world needs a mix of localism and globalism. “Sadly though, localism is often punished in favour of globalism - like how independent dealers are being impacted by Amazon. That can't continue unabated unless we all are willing to succumb to an Orwellian vision of the future. Pro-Ject is a perfect example of this. Outside of a few specialist components (Bluetooth transmitters, power transformers and some other small parts), everything is made in Europe. In a typical turntable overview piece we might often score low in features but high in sound, and can often be criticised for a higher retail price compared to an alternative product. However, Pro-Ject will still be able to produce a huge portion of its portfolio (providing government measures allow) during this time because they stock huge quantities of power supplies (to account for unexpected market trends) and produce everything they need in house in Europe. On the flip side, Klipsch has a meticulous control over its production in the Far East and is generally speaking keeping everything moving “as normal” in a very trying time, where others with less control may be suffering. Basically, there is no one way to operate, but manufacturers have a duty to ensure their supply chain is as durable as possible to best combat times like these. Our portfolio of brands at Henley are, generally speaking, as in control of this as possible.”
Vincent Luke - iFi Audio
Vincent Luke, Sales Director of iFi, says that manufacturing in China has encountered some disruption. “This has affected virtually everyone in the consumer electronics industry to some extent, but it's been perfectly manageable to date. The impact of the coronavirus on our business has so far been small, but there's still a long way to go in terms of how it affects consumer behaviour, etc. iFi has a global customer base and a global production base. Whatever happens, we will have done our utmost to mitigate a downturn in business because we have a sufficiently diversified portfolio across the globe.”
For Vincent, localism doesn't make sense. “We live in a global economy. Even products that are said to be 'made' in one country are usually only 'assembled' in that country. Audio products are typically made from a multitude of components that have been sourced from across the globe. For example, an aluminium chassis from Taiwan/China, capacitors and resistors made in China, Indonesia, Malaysia, and NOS tubes sourced from USA/UK, etc.”
So, it's keep calm and carry on for iFi. “We would like to say that there is no need to panic. Yes, we will end up travelling less to shows, events, etc., but we should take the time to read more and not have a knee-jerk reaction to the press, which has a tendency to sensationalise! Use this 'downtime' to spend more time with our family and friends, and probably avoid social media!”
Jamie O'Callaghan, Global Head of Sales & Marketing at the International Audio Group, is philosophical. “Business is inevitably affected as a result of changes in consumer confidence, supply chain issues and logistical concerns. But, we've been planning since late January to ensure our operations, in all aspects, are protected. We are in a unique position in manufacturing ninety-five percent of the components for everything we produce, which means that external impacts can be managed beyond that of many other manufacturers. We're producing higher than normal 'safety stock' and planning further ahead than usual.”
He adds that “little is reported on the local and national government measures to facilitate 'normality' in China. Each of our locations and departments is following well-thought-out local protocols which ensure regular disinfection, logical social distancing, provision of safety equipment, increased awareness and ability to respond to complications with efficiency and care. This means our workforce is safe, confident, and we're experiencing very few labour resource issues. We were able to get our workforce back into place, promptly and safely. In February, we shipped ninety percent of our global orders – on par with our usual Chinese New Year capacity!”
Linn Factory, Scotland. Source: StereoNET
It's interesting that all hi-fi manufacturers StereoNET has spoken to – whether they're UK specialists or global corporates – are managing their supply chain issues carefully and aren't unduly worried about supplies. The threat as they all see it is general consumer confidence – this goes back to John Maynard Keynes' so-called 'animal spirits', the emotional mindset of customers and markets. The Covid-19 pandemic may cause people to tighten their wallets and retrench. Or as Simon Freethy – Managing Director of Cyrus – suggested to me, it might actually be beneficial to the hi-fi industry, because people will be spending more time at home. As Jamie puts it, “there's never been a better time to kick back and enjoy some music!”
David started his career in 1993 writing for Hi-Fi World and went on to edit the magazine for nearly a decade. He was then made Editor of Hi-Fi Choice and continued to freelance for it and Hi-Fi News until becoming StereoNET’s Editor-in-Chief.
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