More money, more problems

Can private-equity firms turn a crisis into an opportunity?

Their performance matters both for investors and the wider economy

MOST APPARENTLY sound stewards of capital were revealed to be anything but during the 2007-09 financial crisis. Bank bosses were shown to have taken on too much risk. Star hedge-fund managers suffered losses.

Nor have the years since then been kind. Banks have been tied up in regulatory knots and returns at hedge funds have been pedestrian at best.

The private-equity (PE) industry has been an exception to the trend. The funds it deployed during the crisis in 2007-09 have ended up yielding a median annualised return of 18%. And it has become far more important. Investors, from university endowments to public pension funds, have handed over ever more cash to PE managers (see chart).

The biggest PE firms have evolved into financial conglomerates straddling buy-outs, property and credit markets, taking over some of the roles that Wall Street banks used to play. Assets under management have swollen to more than $4trn. The 8,000 firms run by PE in America account for 5% of its GDP, and a similar share of its workforce.

Now another savage recession is in full swing and the performance of PE is a crucial question for investors and the economy. The leveraged companies and debt instruments in PE portfolios are vulnerable and much depends on whether managers can tide these investments over. Meanwhile they have amassed $1.6trn in dry powder that they can deploy on new deals.

PE shops’ fate depends on whether the hit to their existing investments is nasty enough to wipe out the potential gains from dealmaking afforded by the crisis.

Start with the potential losses.

In the first quarter of 2020 the four large listed PE firms, Apollo, Blackstone, Carlyle and KKR, reported paper losses on their portfolios of $90bn. That sounds big, but is just 7% of their assets under management, reflecting their ability to control how privately held assets are valued and, perhaps, their investment acumen. After an early scare PE firms’ shareholders have concluded that the outlook is fairly bright (see chart).

Are they right?

Many PE managers have been juicing up returns by piling debt on to the companies they buy.

In the years immediately after the last crisis most buy-out deals were done with debt worth no more than six times gross operating profits. By 2019, according to Bain & Company, a consultancy, three-quarters of deals were leveraged at over six times.

That would suggest that PE-run firms are vulnerable. More than half of the 18 junk-rated firms that defaulted in the first quarter of the year were PE-owned, according to Moody’s, a rating agency. It expects the overall junk default rate to triple to 14% by 2021.

Over the past decade PE lending has shifted away from dopey, distracted banks towards specialist private-credit firms. These may be more hard-nosed about accepting a haircut on their debt in order to keep a PE-run business afloat. And making things trickier still, most big PE managers say that the firms they own are either ineligible for, or unwilling to tap, the American government’s business bail-out schemes, the Paycheck Protection Programme and the Main Street Lending Programme.

Even so, several other factors may have changed to work in PE’s favour. Much debt issued to back PE deals has become “covenant-light”, meaning that companies can endure a big slump in profits without triggering penalties from their lenders. Since the 2007-09 crisis many PE managers have also set up huge credit arms—for the big four firms, these now account for a third of their assets. They may give managers more in-house expertise and mechanisms for raising debt, making it easier to restructure the debts of fragile portfolio companies on favourable terms.

The strange nature of the recession may mean PE managers are unwilling to pull the plug, as activity is likely to resume after the shutdown. “There is a problematic gap,” says Marc Lipschultz, co-founder of Owl Rock, a private-credit fund. “We don’t know how deep or how wide it is, but funds need to find a bridge across.” And if PE-run firms cannot raise more debt, default or restructure their borrowings, the remaining option is an “equity cure”: PE shops stump up the cash to keep their firms afloat. Already around 70% of PE bosses polled by EY say they will need to inject fresh equity into their portfolio companies.

The way funds are structured means that managers cannot deploy their “dry powder” raised for new funds into firms owned by older ones. But most older funds do have big reserves. Michael Chae, the chief financial officer of Blackstone, says that around $30bn of its $152bn of dry powder is set aside for them. “We have those reserves ready to support companies on the defensive and also to go on the offensive when opportunities arise.”

Funds are also gathering capital in other ways. Typically, a PE fund returns cash to its investors once it sells its stake in a company—but if the investment period is still ongoing, the fund can ask for it back. According to an industry body for PE investors, the number of calls for such “recycled capital” has risen.

Bailing out existing investments will drag down returns for PE shops. It remains to be seen if buying opportunities can make up for that. Most PE managers hope to use their newly expanded credit arms to scoop up bombed-out loans and bonds with collapsed prices—Leon Black, the founder of Apollo, has said the opportunity is “massive”.

But the volume of traditional buy-outs dropped sharply in March, and only a few firms have since made purchases. For years PE barons have boasted of their huge piles of dry powder, which, if spent in a downturn, might generate outsized returns. Now it is time to pounce.

Business will be the loser in the US-China fight

Both nations are indispensable, so companies face a two-track world

Robert Armstrong

web_Chinese US business wars
© Ingram Pinn/Financial Times

It is an old joke among international business people that in China, a win-win deal means that China wins twice. This was never entirely true, of course. If it was, so many corporate supply chains and investment projects would not run through the country.

But cratering relations between China and the US have left global businesses confronting lose-lose propositions. In the past few months, the two sides have exchanged blame and conspiracy theories over Covid-19. The US Senate passed a bill that could force some Chinese companies to drop their US listings.

The commerce department has tightened rules against Chinese telecoms champion Huawei, leading China to consider retaliation. Security legislation imposed on Hong Kong has threatened that city’s status as the main commercial link between China and the world.

This is not just a problem for US and Chinese companies. The new controls on Huawei, for example, are a threat to all global chipmakers that supply the company — they all depend on US chipmaking tools. Mercedes and BMW export cars from the US to China.

The list goes on, and companies are scared. “While we are nowhere close to the same level of hostility yet, we have seen how the US punishes European companies who deal with Iran and Russia,” says Joerg Wuttke, president of the EU chamber of commerce in China.

This is not merely a rough patch, or passing hostility stirred up by the pandemic. Even before this terrible spring, politics and corporate attitudes were in flux. In a survey last summer of members of the American Chamber of Commerce in Shanghai, 21 per cent were pessimistic about the five-year outlook for business in China.

Since 2000, that figure had not risen above 9 per cent.

The Chinese market is too large, with companies invested too heavily, for them to consider bailing out. But the trend towards two-track corporate strategies is accelerating.

As crossing the border becomes trickier, companies are taking a “for China, in China” approach to the domestic market while deepening and diversifying ex-China supply chains to the rest of the world.

China is exacerbating the split, in deeds if not words. Business people report that Beijing remains eager to please US companies that are investing in China.

But, says Mr Wuttke, “while investors get the red carpet, exporters from the US get hammered, because exporters can be substituted”. This fracturing will accelerate as Covid-19 has laid bare supply chains’ monolithic dependence on China.

Resilience is bought at a cost to efficiency.

In hardware, companies face impossible dilemmas. They depend on China’s vast market and its unparalleled manufacturing base in mobile technology.

US chipmaker Qualcomm has supplied Huawei with chips for its phones. Whether it will be able to do so with the latest 5G models is unclear, given the new rules.

If it does, it will be sharing cutting-edge US technology with a company that stands accused of appropriating American intellectual property and which has close ties to China’s military.

If Qualcomm cannot supply Huawei, it will cede market share to foreign rivals and lose billions in revenue (Huawei shipped 240m smartphones last year, more than Apple). This will inevitably reduce its research budget. US leadership in tech will be eroded. China may respond.

Authorities have revived the idea of an “unreliable entities list” for companies such as Qualcomm, Cisco, Apple and Boeing — the equivalent of the commerce department’s “entity list” of companies posing a risk to US national security.

“Scalps are going to be taken on both sides — there is no way to avoid this,” says the chief executive of a US multinational with a long history in China. Other than keeping their heads low, making their case to officials, and diversifying, there is little companies can do but hope.

But they should not pin those hopes on Donald Trump losing November’s election. The president is not the cause of the bad relations, even if his rhetoric gives them an ugly face.

In its actions China has never shown any intention of participating in the international model of open economies, independent companies, global rules and respect for intellectual property. It will not start thinking win-win now.

Nor will the US military allow their supply of the best communications technology to depend on a geopolitical rival. “Semiconductors are the most important national security industry of the 21st century, and the Department of Defense does not want it to move offshore — yet much of it already has,” says Peter Lichtenbaum, a lawyer who helps companies navigate US trade restrictions.

US hostility to China has roots in deep economic imbalances. As Peking University economist Michael Pettis argues, the issue is not a trade imbalance that can be solved with tariffs, but the fact that China and other countries force their excess savings into the open US capital market, forcing up the dollar, US debt and inequality.

While in a post-Trump world the dialogue may be “less stupid”, he says, “these problems are not going away”.

Global companies cannot leave China. But they should prepare for a two-track world.

Sino-American economic relations are bad and are set to stay that way.

Coronavirus Hits Peru Hard Despite Strict Lockdown

The country is now fighting one of the worst outbreaks in Latin America outside of Brazil

By Ryan Dube 

     Katherine Rivera, a chicken vendor at the San Felipe Market.

LIMA, Peru—This country implemented one of the Western Hemisphere’s strictest lockdowns to slow the coronavirus pandemic, but the measures weren’t apparent in April as throngs of women jostled around Katherine Rivera’s small chicken stall.

They were all buying food on one of the few days allowed after President Martín Vizcarra, in an effort to keep people mostly indoors, ordered that women and men could leave their homes only on alternating days of the week, with no one leaving Sundays. The result was large crowds of women, who in Peru do most of the grocery shopping, heading to the markets on the designated days.

Women shopped at a market in Lima in April. Peru’s president ordered that women and men could leave their homes only on alternating days of the week. / PHOTO: SEBASTIAN CASTANEDA/REUTERS

“They bought so much it was like the world was going to end,” said Ms. Rivera, who said she came down with a fever and diarrhea after catching the coronavirus at Lima’s San Felipe Market, where 40% of workers have tested positive for the disease as of early May. “It was horrible. We were definitely not prepared.”

Three months after Mr. Vizcarra deployed soldiers to the streets and shut almost all business, Peru is grappling with Latin America’s worst outbreak outside of Brazil. But unlike Brazil, whose president played down the dangers and never instituted a national lockdown, Peru was applauded for swiftly implementing strict policies to keep people home.

On March 16, when Peru had 71 coronavirus cases and no deaths, the government sealed its borders, prohibited domestic travel and banned all nonessential business. It detained thousands of people who violated a nighttime curfew. It fined others for not using face masks or going for a drive without permission.

Peru’s plight underscores the struggles facing developing nations now bearing the brunt of the pandemic. It shows how broad measures like a lockdown can be undermined by structural problems.

In Peru, those include a rundown health system, a huge informal economy in which 70% of the workforce has no social safety net and deep inequality that means most people don’t have bank accounts or refrigerators, with many others lacking running water. Those realities persisted in Peru despite years of robust economic growth that won praise on Wall Street.

As a result, critics now say that some of the policies backfired, driving crowds to markets and banks that became hotbeds for contagion in the early weeks of the lockdown when there was still a chance to control the pandemic.

“The severity of the lockdown was actually counterproductive,” said Carlos Ganoza, a public policy expert and former high-ranking government economist. “You can have people in their homes 99% of the time, and the other 1% you have them all mixing up together. That would be a terrible policy, and that is basically what the Peruvian lockdown did.”

Peru’s president deployed soldiers to the streets and shut almost all businesses in an attempt to slow the pandemic.

The result is that stern measures similar to Peru’s that worked in wealthy Milan and Madrid proved far less effective here. In Italy, the number of new cases peaked 14 days after it implemented a national lockdown. Peru posted its biggest daily increase almost 80 days after enacting similar measures.

Today, this country of 30 million people has 220,000 confirmed cases, more than France and on track to pass Italy in the coming days, according to Johns Hopkins data. Peru’s official death toll is over 6,300, but like other countries the real number is likely much higher. In April and May, 36,020 people died in Peru, more than twice as many as the average number during the same period from 2017 to 2019, according to Health Ministry data.

So far, the lockdown hasn’t reversed the coronavirus curve. Hospitals remain overwhelmed with patients, while their relatives desperately search for scarce oxygen tanks. Some authorities have accused companies that supply oxygen of treason for price gouging amid soaring demand.

Experts fear a virus now disproportionately hitting poor and crowded urban neighborhoods will spread further as the government reopens an economy that the World Bank expects to contract 12% this year, the worst in South America.

“There is nothing to indicate that the situation is going to improve,” said Ricardo Fort, a researcher at Grade, a Lima-based think tank. “The entire system is almost made for a disaster in a pandemic like this.”

Officials here say the tough measures slowed the pandemic’s growth, providing time to stock up on ventilators and add hundreds of new intensive-care beds. It also allowed health officials to ramp up testing, giving Peru one of the highest per capita rates of testing in Latin America. Without a lockdown, the number of cases would be five times higher, said Health Minister Victor Zamora.

“That allowed us to save lives, a lot of lives,” he said.

Relatives of Covid-19 patients lined up to refill oxygen tanks on June 11.

But the government also recognizes that some policies were a mistake, including the order determining what days women and men could leave their homes, which was shelved in April.

Peruvians backed the stern rules, with pollster Ipsos reporting that 95% of Peruvians approved of the measures. Data from Google showed people stayed home more than residents in Latin America’s other major nations as Lima’s chaotic traffic disappeared overnight.

When people did go out, they often went to the same place. Massive lines formed outside of banks as people waited for government payments intended to help poor families survive the lockdown and shelter at home. About 60% of Peruvians don’t have a bank account, according to the World Bank, forcing them to physically go to a branch to get the cash.

Food markets, where the majority of Peruvians buy their food, became another petri dish for the virus, which spread quickly among poorly ventilated, narrow aisles. Unlike in Europe and the U.S., most people here often buy just enough groceries for a day or two, partly out of custom but also due to a lack of money. Many also can’t store meat and dairy for long in a country where half of homes don’t have refrigerators, according to the government statistics agency.

Instead of managing crowds by extending market hours or creating smaller, temporary places to buy food, authorities limited the time and days to shop, sometimes with little notice.

A couple of days before Easter, Mr. Vizcarra announced a total shutdown over the holiday, catching people off guard as they rushed to markets. Authorities had prohibited delivery services and closed restaurants, even for takeout.

“People were desperate,” said Claudia González, a vendor at a Lima fruit market where 80% of workers have tested positive for Covid-19 as of May, according to the government. “They were jumbled all together and didn’t take precautions to maintain distance.”

Experts say authorities were slow to address the risks at markets, waiting weeks into the lockdown before they started testing workers. Initially, there were few efforts to manage crowds, which increased in the streets outside the markets that attracted throngs of people who had lost their jobs and were selling face masks and vegetables.

Naomi Aquino, 19 years old, backed the tough measures, however she wasn’t able to stay home for long. Early into the lockdown, she began selling avocados from a box outside a Lima market to support her parents, younger sister and grandparents.

“Every day that I don’t sell avocados is a day that there isn’t food in the house,” said Ms. Aquino, wearing a red face mask.

Infected markets were shut down and scrubbed clean in May, and allowed to reopen only after implementing rules to maintain social distancing.

The San Felipe Market recently restarted business. To enter, shoppers now need to wash their hands and get their temperature taken by a worker. Inside, they follow arrows directing people. Signs remind them to stay a meter away from others.

Jessica Balbín sells pasta and eggs behind a plastic sheet that separates her from shoppers. She tested positive for the virus, but didn’t have symptoms. After self-quarantining, she returned to work in late May, wearing a face mask, gloves and hairnet.

“We don’t know how many people are really sick,” she said. “If they would have done this from the beginning, it would have been better.”

Shoppers lined up outside a market in Piura, Peru, at the end of April.

The Limits of Extreme COVID Monetary Policy

Just because the major central banks can continue to introduce increasingly unconventional measures doesn't mean that they should. The current economic crisis demands primarily a fiscal-policy response, whereas extreme monetary policies carry high risks and produce adverse side effects.

Paola Subacchi

subacchi30_XinhuaTing Shen via Getty Images_USfederalreserve

LONDON – With output having collapsed as a result of the COVID-19 pandemic, many are wondering how far monetary policy can be stretched to support the economy. For the US Federal Reserve, negative interest rates appear to represent an effective limit, not because such a policy is technically unfeasible, but because it would be politically unacceptable.

Yet for the European Central Bank, the Bank of England, and the Bank of Japan, there appears to be no limit.

The ECB has long since cut rates into negative territory, and BOE Governor Andrew Bailey is reportedly “looking very carefully” at that option for the United Kingdom. Likewise, BOJ Governor Haruhiko Kuroda, while deeming the BOJ’s current policy mix appropriate for current conditions, has not ruled out further monetary easing or another increase in asset purchases.

The question is whether it makes sense to go further down the road of extreme monetary policy. Former ECB President Mario Draghi’s famous promise to do “whatever it takes” to support the euro has now become the mantra for all policymakers confronting the current crisis. But wouldn’t expanding fiscal policy be a better way to fulfill that commitment?

To paraphrase Fed Chairman Jerome Powell, central banks have lending power, not spending power – and spending is what is needed.

In the current crisis, it is imperative that money reach those most in need as quickly as possible. Unemployment is at a record high in many countries – more than 20 million people in the United States lost their jobs in April alone, pushing the US unemployment rate to 14.7%, and putting it on track to reach 20-25% this year.

Under these conditions, what the US and most other countries need is a broad, sustained fiscal-policy push, undertaken in coordination with monetary policy. Without that, a prolonged recession and sky-high long-term unemployment will become much more likely.

A fiscal expansion should have two primary objectives. First, it must help individuals, households, and firms weather the crisis. In this respect, the fiscal-policy measures adopted in the US and other advanced economies have been on the mark.

In late March, the US Congress approved a $2 trillion stimulus package to support households, firms, and health-care providers, and Democrats in the House of Representatives have now passed another package proposing $3 trillion in additional spending.

Meanwhile, in the European Union, budget rules have been suspended, allowing member-state governments to pursue more ambitious discretionary fiscal measures, from spending increases and tax relief to wage support and subsidies for small and medium-size enterprises.

The second objective of fiscal expansion is to drive economic recovery by supporting domestic demand. Here, unfortunately, the policies on offer have fallen far short, raising the risk that we will repeat the mistake made after the 2008 global financial crisis, when fiscal stimulus was withdrawn too soon.

On that occasion, relying on fiscal policy to stimulate demand was declared politically unfeasible. Although the downturn was still considered large enough to warrant exceptionally loose monetary policies, the political establishment in the US, Britain, and much of Europe coalesced around austerity, smothering the recovery in its cradle and setting the stage for rising inequality and social discontent.

This time around, the major central banks have been quietly pushing for “additional fiscal support” in order to “avoid long-term economic damage” and bring about a “stronger recovery.” Such support is also needed to alleviate the pressure on central banks. Meanwhile, there are good reasons to avoid going down the road of more extreme monetary policy.

For starters, extreme monetary policies tend to limit the scope for future policy signaling and reduce the effectiveness of interest rates, which, under normal conditions, are powerful tools for influencing output and employment.

Second, they could exacerbate the pre-pandemic vulnerabilities that were already threatening the world economy, not least the build-up of debt, the misallocation of credit, and excess liquidity in the corporate sector (where too many firms have problematic balance sheets).

These concerns lead to the third point: the further easing of credit conditions and expansion of public-supported credit programs could push more debt onto firms that are in no position to turn it into value. Bankrupt “zombie” firms would be kept artificially alive.

Even if such measures preserved jobs for now, that doesn’t mean they are the most effective use of financial resources. Japan’s “lost decade” should serve as a cautionary tale. The longer zombie firms stagger on, the greater the losses will be when they eventually collapse.

Finally, relying on monetary policy when fiscal policy would be more appropriate risks reinforcing investors’ excessive preference for liquidity, thereby deepening the liquidity trap. It should go without saying that extreme monetary policies can generate extreme and unexpected consequences.

Though unconventional monetary policy has now become the norm, we still are not quite sure how it works, or how it affects people’s expectations and behavior.

To be sure, if the scope for monetary policy is limited, the space for fiscal policy is also narrow.

But the current emergency and the threat of a deep recession (or even a depression) undoubtedly calls for bold, “unconventional” fiscal policies supported by other tools, such as the European recovery fund that France and Germany recently proposed, and innovative capital-market instruments like perpetual bonds, which have also been proposed for the EU.

Exceptional times demand exceptional measures. But we must avoid repeating the mistake made in 2010, when governments slammed on the fiscal-policy brakes while keeping the monetary-policy engine in high gear. Now more than ever, it is imperative to prevent existing inequalities from deepening further. Only fiscal policy can advance that goal.

Paola Subacchi, Professor of International Economics at the University of London’s Queen Mary Global Policy Institute, is the author, most recently, of The Cost of Free Money.

From China to India

By: George Friedman

U.S.-China relations have been in decline for a long time. The United States had for years provided China with relatively free access to the American market. The United States wanted equivalent access to the Chinese market, but China was unable to grant this.

Its industrial base produced more products than the Chinese people could consume, in terms of quantity, price and the types of products produced. China was a compulsive exporter because only exports could sustain its industrial base and hence its economy and financial system.

Giving the United States broad access to the Chinese market, on the financial order of Chinese exports to the United States, would have undermined the financial foundations of the Chinese system – a system that had to a great extent funded the creation of China’s industrial system, and depended on both domestic consumption and foreign sales to balance it.

Under Pressure

China’s financial system had been under pressure since before 2008. And so the Chinese could not permit the U.S. to have equivalent trading rights, leading to the imposition of U.S. tariffs.

The Chinese were in no position to agree to America’s demands because of the financial consequences it would have, and the United States was in no position to drop the tariffs because of social realities within the U.S.

Many industries benefited greatly from reduced production costs and access permitted selectively to the Chinese market, even though Chinese imports had devastated some American industries. Each represented different social groups, and partly define the tensions in the American economy.

This was not a new story in the history of capitalism. From about 1890 until the late 1920s, it was the United States that held China’s place. In the late 19th century, the United States launched an industrial revolution that depended on access to foreign markets as domestic consumption was not able to support the industrial plant.

Cheap U.S. goods flooded Europe until after World War I, which shredded the market for the U.S.

The U.S. continued to try to surge exports but also to limit imports of, for example, Japanese textiles. In the end, the collapse of global demand for American goods led to essential but self-defeating foreign imports, and was a significant force in driving the U.S. into depression.

The China story is an old one replete with social tension on all sides and the chance of war. Global capitalism, built on a global supply chain, doesn’t require but enjoys an efficient, low-cost producer of products. The name for it now is Supply Chain. The U.S. supply chain is critical to the functioning of a large part of the global supply chain. The same is true with China.

World War I constricted imports and hit the American leg of the supply chain. The same has happened to China as a result of the COVID-19 crisis. The damage to affected economies cut demand in most countries, leaving China in a difficult position.

But there was another dimension. The heightened demand for some products, such as pharmaceuticals, could not be met. The virus had also struck China, and its own internal supply chain was disrupted or redirected to Chinese needs. So as the loss of export markets staggered the Chinese economy, it was also being hit by importers’ realization that depending on one country for their supply chain was too risky.

China had been regarded as a reliable exporter, one of its main virtues. But even if it could offer products at a low cost, it was no use to importers if the products they needed weren’t available. It is not that trust in China is necessarily shaken; rather, it is that the lack of redundancy in the supply chain has revealed its risk.

The Best Alternative

Two questions arise. First, China has reached the political limits of an export-based economy with a range of tensions with the United States and wide distrust of the robustness of its supply chain. It has to do what the U.S. did, after two decades of depression and war, and create massive domestic demand to drive its economy.

Since global capitalism prefers a low-cost producer – or many low-cost producers – the question now is: Who will take China’s place? The obvious first option is India, a country with a massive, diverse and generally poor population, but which has a degree of discipline and entrepreneurialism, similar to China in 1980.

India, however, is not in a take-off situation. It is the fifth-largest economy in the world and is also a major exporter already. China exports $2 trillion a year, India only $345 billion. Exports account for 19 percent of China’s gross domestic product, and 14 percent of India’s. China has a population of about 1.4 billion, roughly the same as India.

When you look at these numbers, you can see a large, available workforce. More important, India is a nation much less dependent on exports to drive its economy, yet it is still poor. The basic characteristic of the U.S.-China model of development is a workforce that is paid relatively low wages but an existing political order with a demonstrable economic system.

Put simply, India has grown on domestic demand, and its next stage of growth should be a surge in exports. Thus at the very moment when China is in a deep and multidimensional conflict with its largest customer, India has a unique opportunity to charge its economy from these problems. And since India and China see each other as adversaries – there was a minor skirmish in the Himalayas last week – India has a strategic as well as economic interest in this move.

The Indo-Chinese confrontation, going back more than half a century, gives the United States an opening that would make economic alignment between the two more attractive. The United States, Japan, Australia and India are also developing a naval alliance called the Quadrilateral Security Dialogue. India in particular is wary of any formal alliance that requires any commitment.

Unable to see the forces that might change its future, the Indian navy has merely carried out maneuvers in the Western Pacific with its Quad allies. The Chinese have noted this, of course, but they have assumed that India would not be eager to do anything formal, and that no war plan in the Pacific would be created that did not have a formal commitment.

Opportunity Waiting

The United States as a nation, and many individual companies, now see that depending on a single country as the root of a supply chain is a mistake. The situation in any one country, including how a global pandemic might impact its economy and its demand for a critical product, cannot be predicted.

However attractive Chinese low-cost labor is to American companies buying from or producing in China, and however expensive redundancy might be, redundant supply chains are essential. India is the logical addition or alternative to China, and indeed already serves that role, although at an insufficient level as its export numbers show. But those numbers also show where we can expect India to demonstrate the greatest growth.

India has been a major economic power for a long time. But its historical goal is to move into the GDP ranks of Germany, Japan and China. The opportunity presented by the pandemic and China’s current poisonous relations with the United States means that U.S. companies are already choosing to move out, and India is clearly eager to host them. Inevitably, however, the economic move becomes entangled with the political and military.

China and India are already hostile toward one another, and the U.S. and China are increasingly hostile. The shift in supply chains is partly related to that hostility.

China would have more economic options were it not confronting the U.S. The fact that it is creates economic possibilities for India.

And India certainly knows that there are many other countries that could fill and want to fill that gap. Shifting the supply chain takes time in some cases. Deciding where to shift does not.