James McGregor doesn’t believe the trade war is just another trough in the up-and-down relations between the United States and China.
In fact, he doesn’t believe the present state of affairs is properly called a trade war at all.
“It’s a technology war more than a trade war,” Shanghai-based McGregor said yesterday at the MedTech Conference, the annual exposition of trade lobby AdvaMed. “We are in the middle of a paradigm shift.”
McGregor, who is Greater China chairman for APCO Worldwide, said the conflict’s impact could loom large in the medtech space.
The “Made in China 2025” plan is the third government plan for technological advancement in the last decade, he said, and it’s got plenty of potential for disruption. Although it is state-funded, unlike the two prior plans it is not state-directed, which McGregor believes will make it more efficient – and more concerning for the competition.
“What we face now is Made in China 2025, which is much more dangerous for the West and is much better planned out,” McGregor said. “Made in China 2025 is about the industries of the future. Medical technology is one of them.”
The U.S. and China, by the numbers
Although the countries have been feuding on the trade front, they certainly haven’t ceased relationships. Currently, the U.S. has a $420 billion annual goods deficit with China; the U.S. exports $120 billion in goods and $60 billion in services to the People’s Republic each year, according to McGregor. The largest spend is on R&D, where the U.S. enjoys a huge advantage, spending about $3.5 billion a year in China against that country’s $35 billion annual tab for foreign intellectual property. U.S. companies and affiliates in China produce about $550 billion in annual sales, he said.
“That doesn’t get talked about when you’re talking about the trade deficit,” McGregor added.
Trade war or tech war, it could be bad for medtech – and there’s no end in sight
McGregor said he fears a scenario in which companies decouple from the U.S. because they don’t want to be subject to U.S. Entity List restrictions, which mandate that a product made with 25% American tech falls under certain restrictions.
“Companies will look at expensive and advanced technology products and be looking at the key parts of those products that are the most valuable,” he explained. “They’re looking at moving that piece out of the U.S. so they can be under that 25%. If that becomes a trend … we could really be damaging the U.S. That could be an inadvertent and unwanted result of this trade war.”
There are potential solutions to the China problem for the U.S. The first, he said, is changing immigration laws to keep foreign students who could have a big impact in technology in America.
“The best and brightest come to our universities and we tell them to go home,” McGregor said. “That might have been OK in the 1950s, maybe in the ’60s. It’s absolutely ridiculous now. We should staple a green card to any foreigner who gets a PhD in the hard sciences.”
The U.S. government should block Chinese investment and acquisition of U.S. companies with critical technologies or businesses that are important to economic security, while also focusing on stopping Chinese cyber-hacking and espionage, he suggested. Domestic technology education and R&D spending should be expanded and the U.S. should cooperate closely with foreign allies, he said.
McGregor said he’s not optimistic in the short term.
“This trade war we dropped into is getting pretty far down the road,” McGregor said. “I don’t see any end in sight. I also don’t see any real endgame fashioned in Washington right now. The American and European companies are in a difficult position.”
Industry: The tariffs sure aren’t helping
Asked for his take on the tariffs and ongoing trade war at a press conference yesterday, AdvaMed CEO Scott Whitaker put it plainly.
“It’s not optimal, obviously,” Whitaker said, adding that the effect isn’t uniform across different segments of the industry. Although medtech had early success in getting some products exempted, Whitaker said he’s not sure if that will remain the case down the line.
“I think it’s a position that’s maybe better than some of the other industries,” he said. “As it continues, I think the fear is that everything gets swept up. Then, it will become a bigger problem for us.”
Stryker (NYSE:SYK) CEO Kevin Lobo, who is in the middle of a two-year run as AdvaMed chairman, said his company is most affected by components imported from China and finished for sale in the U.S. or elsewhere.
The regulatory pathway for medical technology makes it difficult to quickly move things out of one regulatory district and into another, unlike consumer products, Lobo added.
“It’s having a negative impact on us, but it’s something that we’ve told the investors we can manage our way through,” Lobo said. “We’ll be very happy when and if this gets relieved.”