China and the Current State of International Travel - June 30th, 2020

The London Brief

China and the Current State of International Travel

June 30th, 2020

Today’s brief comes from South Korea. On the flight over, I read Walter Isaacson’s biography on Benjamin Franklin. One of his achievements was playing the role of conciliator during the Constitutional Convention. “Franklin realized that they had succeeded not because they were self-assured, but because they were willing to concede that they might be fallible… Compromisers may not make great heroes, but they do make great democracies.” In this polarized world, it does seem like this art of compromise and seeking middle ground has been lost. Issues we should unite around like fighting off the coronavirus or rising against injustice become partisan battles. As a result markets feel like they are in stasis, waiting for the next major event.

This month I’ll cover who China would likely want as the next U.S. president, describe the current state of international travel through anecdote and comment on June’s M&A activity.

China Relations

Bloomberg interviewed nine current and former Chinese officials. They report there is a shift in sentiment towards Trump as it would benefit the continued erosion of America’s post-war alliance network. “If Biden is elected, I think this could be more dangerous for China, because he will work with allies to target China, whereas Trump is destroying U.S. alliances,” said Zhou Xiaoming, a former trade negotiator and former deputy representative in Geneva[1]. The more liberal wing of the Communist Party seems to be out of favour. “Trump has destroyed a lot of goodwill. At the start of the trade war, there were a lot of people who were pro-U.S., but they are now sympathetic to the hard-liners,” said Wang Huiyou, an advisor to China’s cabinet. Gao Zhikai, former Chinese diplomat for Deng Xiaoping even says, “The U.S. as we know it may no longer exist.”

A webinar I saw with the former Assistant Secretary of State for East Asia, Kurt Campbell, supports the points raised in the Bloomberg article. He noted that the carefully crafted post-Mao checks and balances that existed within the Chinese system have been overturned by one-man rule, which creates great risks for the future. However, he believes that the U.S. cannot stand alone against China and must build a strong set of alliances with its partners. According to Campbell, a Biden administration would put Asia as its top foreign policy priority. Rebuilding a strong relationship between Korea and Japan are top of mind, along with increasing ties to countries like Vietnam and India. The idea is that when China takes actions that are not in the best interests for democracies, such as stealing technologies, penalizing a country for political reasons or taking military action in the South China Sea, it would be met with a coordinated alliance partner response.

Biden’s potential approach also fits in with a white paper written by Bridgewater CEO David McCormick in May. He was U.S. Treasury Under-Secretary for International Affairs in the George Bush administration. He also had a post on the National Security Council and in the Department of Commerce. He notes the following:

· “By most measures, the U.S. still enjoys pre-eminence: It maintains the world’s most powerful military and is the global leader in technological development and innovation. It possesses unrivalled strategic power, due both to its reserve currency and to America’s role in having shaped the principles of the global order and of international institutions. Its network of the like-minded allies and partners has endowed it with a unique ability to influence international affairs. And a vibrant, strong economy has sustained the growth of American power, helped along by America’s unique political values and culture, and its standing as a symbol of democracy for the world.”[2]

· “At the same time… America faces serious headwinds, including high levels of debt, reduced economic mobility, political discord, and the emergence of a rising power. The emergence of Asian economies as the driver of global growth and the rise of China has also challenged American pre-eminence.”

· There are three trends that are going against America: increasing economic interdependence and a shift in the geography of the global economy towards Asia; the international development of transformational, dual use technologies like AI and 5G; and the increasing importance of cyber-space.

· China is competing for greater leverage and jurisdiction and is attempting to re-establish its primacy in Asia from more than a thousand years ago.

· 5G appears to be a winner-take-all sector where control of the infrastructure equates to control of data. Huawei has outpaced its competitors in developing 5G in part because of massive state subsidies and favourable financing to customers. This threatens the long-term stability of America and its allies.

· America’s leadership in AI and quantum sciences is not guaranteed; whoever takes leadership in their development will set the standards and gain competitive advantages.

· China has a 2025 Plan that sets out its global domination vision; the U.S. needs a plan too that encompasses innovation and technology. Chinese actors will have an advantage from state support.

· Closing off Chinese market access might end up lowering R&D spending in the U.S. Trade policy has to be well defined on what technologies the U.S. needs to protect versus technologies that don’t need protection.

· America has innovated through immigration. It needs to attract high skilled talent from other countries and promote home-grown efforts in STEM. First generation immigrants and their children have founded 50% of Fortune 500 companies and account for 25% of all new high technology companies from 2006 to 2012. 45% of STEM under-graduates and 50% of STEM graduates are foreign-born. However, America is losing in its battle to get these high skilled immigrants[3]. Additionally the poor state of schools is a national security challenge.

· The U.S. strategic advantage is its partnerships with a vibrant private sector: Palantir and SpaceX are examples

The recommendations in the paper make some sense. Another podcast I listened to with an expert in drone technology talked about how 5G could change the balance of power. If China attacked Taiwan, U.S. missiles would be the primary defence. But drone swarms powered by 5G could theoretically knock out these missiles. Nuclear missiles could also be thwarted. AI is still nascent, but Silicon Valley is worried about the “singularity” where an AI might be able to achieve an exponential rate of innovation that changes the balance of power. We may even have rival AIs between AI-democracy versus AI-autocracy.

In India, there was a conflict on the Ladakh border with China where troops assaulted each other with barbed wire clubs. Indians created an app called “Remove China Apps”, which alerts users to any Chinese-made apps on their phones. “USE WALLET POWER” said Indian engineer and innovator Sonam Wangchuk.

These are some deep and existential issues to think about. America First and related recidivist philosophies could give techno-autocracy a frightening lead. The future geopolitical volatility also stresses the importance of investors having a global, big picture perspective as forces play out in the years to come.

The Current State of International Travel

My family and I travelled to Korea in this COVID period. Some of you have inquired about what it was like so I included a travel blog in this month’s brief but make some conclusions about international travel at the end. An overview of Korea’s protocols is also instructive given the different approach taken in the U.S. and the UK.

The lack of traffic made Heathrow Airport look eerily deserted. From the time we entered the airport to the time we left Incheon Airport on the other side we were required to have face masks on. Before entering the terminal, passengers need to provide verification of flight details. Then it’s through the double doors where there is a sanitizer station. We were required to wipe down the luggage cart handle and sanitize our hands.

Only a small number of check-in counters were open across Terminal Two. South Korea has a two-week quarantine requirement for foreigners. If you have family there, as we do, you can quarantine in a family members’ house while your family stays at a hotel at a government subsidized rate. The check-in procedure includes putting your address on a number of documents as well as questions around your health. This attenuates the process, but given the number of passengers on the flight was only 35% of normal capacity there was no waiting to get a check-in desk. There was also no queue at the security check. I have three young children and this is normally a nightmare experience as my wife usually leaves something in the luggage that triggers inconvenient scrutiny. But the light number of travellers made this a passable experience. Even when we were inevitably flagged (children’s scissors and mislaid toiletries) it was not stressful.

Going into the airport, you are struck by the ghost town nature of the concession area. Only Boots (pharmacy) and WH Smith’s (newsstand) were open. There are a noticeable number of unutilized gates. Normally there are about 20 direct flights or so a week from London to South Korea; now there are only three all flown by Korean Airlines[4]. Despite the empty gates, we still had to walk a half mile to our gate. You would think that perhaps British Airways might be a bit creative and lease their closer gates to Korean Airlines for a few months, but they seem to find it a better value proposition to focus on terminating their staff. Boarding was on time and took only a few minutes given the relatively small number of passengers. We received a final thermometer wave of the head and moved on.

Once on board, we were greeted by a flight crew that looked like a scene from Outbreak. Only window and aisle seats were allocated except for families like ours. Although where we sat was somewhat distant from others, it’s hard to maintain adequate distancing, so you have to hope everyone is healthy. At least we knew that no one was symptomatic.

Taking off from Heathrow usually requires a half-hour of queue time, but we pretty much took off shortly after boarding. The flight crew served meals twice with beverage service, but that’s it and there were no wine top-ups. So we relied on our ad hoc snacks. But otherwise the flight experience was fairly similar.

Then you land. As background, Korea has some of the most impressive statistics in the COVID era. As of June 30th, it had a total of about 12,757 cases and 282 deaths out of a population of 52 million. Because there are so few active cases the population lives a more or less normal life. Korea’s GDP decline was 1.4% in the first quarter versus a 20% decline for the month of April in UK and a predicted 10% GDP decline for the year. If Western leaders had contained the virus early like Korea, the hit to GDP would have been much more limited.

In Korea, the only vulnerability to higher case counts is international travel. Therefore, Korea has created a health gauntlet to incoming travellers. Step one is filling out a large number of documents. People with weak wrists beware. These are passed to a person who either sends you to the next part of the gauntlet, or puts you in to the foreigner without connections line. I’m not sure where this line goes, but they are supposedly sent to government quarantine facilities at the Holiday Inn. If you have three young kids, it would probably not be a pleasant experience. Before we passed into the next area, we had a temperature check.

The next stop was the COVID app download area. According to South Korean regulations, you must have a smartphone. When someone comes down with the virus, Korean authorities can then track the patient’s location and stops made in the previous days to help in contact tracing. Genial members of the military helped us download the app (the military men don’t look like military; no guns, tasers or clubs; I could only tell because they have T-shirts on saying, “it’s fun to be in the military”). I went into the app and registered key information. During our mandatory quarantine period we filled out a health check and took our temperature twice a day and entered it into this app. The app also pings health authorities if you are violating your quarantine. Potential imprisonment and a $1,000 fine wait if you do. People believe in the system; the cooperation and unity allows for normality so people are willing to make sacrifices. For instance, our relatives loved us, but they still wanted us to go through the government quarantine.

The military man then tells you a code and we were good to go to the next part of the gauntlet, address verification. They called our driver (you have to arrange special transport from the airport to the self-isolation facility). They also called my wife’s sister to verify the address information and details. In the next area, we filled out extensive documentation for the immigration authorities who have their own health questionnaire. My wife was filling out forms for about twenty minutes. Then we went to the immigration officer who did further address verification and required us to show a marriage certificate and other documents to make sure she was not taking in a foreigner that belonged in the Holiday Inn line.

Our bags were patiently waiting at baggage claim. We went through customs and then went through a final check from someone in the military who we passed on a document we received from the last area. This member of the military looked like an American police officer so we were very polite. Then we were free to go into the arrivals area of the airport. In contrast to Heathrow, Incheon Airport was lively.

We got into a special van with the interiors covered in plastic. Given I had to sit next to the driver, I’m not sure all that plastic made a big difference but it looked quite COVID official. We then had a four hour drive from Incheon to Ginmae where we were staying. The following day we were picked up by health officials and brought to a parking lot where they had four tents for COVID testing. The tests involve mouth and nose swabs. We tested negative so I didn’t experience what happens on the positive scenario tree, but there was a case of a foreigner who tested positive as all of Ginmae was alerted on their app. He was at a hospital. We then had to finish our two week quarantine, to guard against the scenario that we could have gotten the virus on the airplane.

This procedure is very helpful to achieve a normal domestic environment such that GDP doesn’t get eviscerated. However, it is also a death sentence for international travel in Korea until there is a vaccine. The gauntlet took us 1.5 hours to navigate and while our two week isolation allowed me to catch up on Billions it’s probably not what most people want to do for their holiday (note there is a business carve-out where if you are visiting for a short period, the government will work with companies on special arrangements so you can avoid the two-week quarantine; this could allow you to do due diligence or visit a factory for instance).

I doubt countries like Korea will change their rules until a vaccine is widely available. People want a low casualty rate; and the domestic economy is doing alright. One potential scenario is to link virus free areas together if one can ‘trust’ one another’s quarantine and health response procedures, but it’s difficult to do that with Western countries as the health response has been more ad hoc with much wider spread numbers.

In the U.S. and UK, the number of COVID cases is very large and international travel is an important industry. It is estimated that around 17% of London’s population has COVID antibodies and 5% of the wider UK population.[5] It’s probably too late for the U.S. and UK to adopt South Korea’s procedures now. If they had been quick to act though, we could have ended up with a much lighter hit to GDP and potentially allowed for a quicker restart to international travel by interconnecting with low case count countries.

We need to amend our global pandemic apparatus to fight viruses outside of the realm of politics. It shouldn’t be the Trumps and Boris Johnsons of the world making decisions but rather a pre-agreed script of how to handle a new virus when it starts to spread and run by health authorities in a globally coordinated way. This framework needs to be pre-agreed to and not budget cut in the years when we do not have a pandemic. There is no shortage of data now and several successful case studies on how to do it.

Mergers

Merger activity was generally muted in the U.S. and Europe during the month supporting comments from Morgan Stanley’s CEO, James Gorman, who said that M&A activity was “basically dead” for the second half of the year. “I’m not worried about that, that’s just a cyclical thing, that’ll flow through just fine in time.”

The Chinese delisting trend continued with privatization offers by BitAuto and 58.com during the month.

In Europe, Just Eat acquired Grubhub in an all-stock deal. Although the funding for loss-making ventures has declined, food delivery hit highs due to the lock-down and people feel more and more comfortable. There was a deal in Sweden for on-line casino technology.

In the U.S. there are an unusually large number of deal breaks going through the courts. Taubman will set precedents for Michigan. There are also a precedent in New Zealand being litigated, EQT’s abandoned purchase of Metlifecare. Advent and Forescout will help define more precedent in Delaware.

European telecom is looking interesting. First, the courts over-ruled the EU’s antitrust analysis that vetoed the Three/O2 merger in the UK. Then KKR offered to buy a 40% stake in Telecom Italia’s fibre network. This may ultimately merge with OpenFiber to create a pan-Italian fibre roll-out. Private equity’s takeover of Masmovil is likely a prelude to consolidation in Spain as it paves the way for Orange or Vodafone to acquire the fourth wireless player.

End Note

During my quarantine, I’ve also been reading Ted Goia’s How to Listen to Jazz. There was an interesting anecdote about Alan Greenspan. He considered a career as a jazz musician and was apparently well regarded at school growing up. But then he played in an amateur band with Stanley Getz, the famous tenor saxophonist. After comparing skills levels, he switched into economics.

This is a useful lesson that although Greenspan thought he could be a great jazz musician, at the end of the day he knew where his limitations lay and gravitated to a profession he could add much more value. This lesson could be born to heart by many of today’s politicians. From poor pandemic strategies to racial discord to a lack of consensus on climate change, there seems to be an absence of leaders who can help solve problems. Maybe some leaders should be like Greenspan and switch professions.

Omar Sayed

Ginmae, June 30th, 2020

[1] Bloomberg, “China Warms to Idea of Four More Years of Trump Presidency”, June 16th, 2020 [2] “Economic Might, National Security, and the Future of American Statecraft”, David McCormick, Charles Luftig and James Cunningham, Page 2 [3] According to a Hoover Institute talk with Condoleeza Rice apparently the HB-1 visa program is being redesigned to favour higher skilled workers, such as computer scientists, so that when the HB-1 visa program re-opens STEM-related immigration will continue [4] Note that BA seems to have resumed one flight since I left; maybe they want to get my business back. [5] This is according Matt Hancock; I can’t find the data that supports his statement so this may be wildly inflated. Obviously politicians would like for this number to be high as it would reassure the population that normalization is around the corner. Hide message history

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