Decoder with Nilay Patel
00:01:57 · Nilay Patel
[00:01:57] S2: Hello, and welcome to Decoder. I'm Nilay Patel, editor in chief of The Verge, Decoder is my show about big ideas and other problems. Today, talking to Willy Shih, an economist, a professor of management practice at the Harvard Business School, and the author of the upcoming book, Where Does My Stuff Come From? The Powerful Economics Behind Global Supply Chains. Willy is one of my all time favorite Decoder guests. His way of looking at the world through supply chains is a fasting way of making sense of the global economy. I actually first met Willy in 2019, while The Verge is covering Foxconn's promises to build an LCD plant in Wisconsin. That obviously never happened, but Willy called it right away because he could see the supply chain to support an LCD plant simply wasn't in place. We also had Willy on the show in 2021 to talk about what was then the pandemic era chip shortage. Now, five years later, we're in the middle of another manufacturing mess as we stand in the middle of a worldwide fight over whether globalization itself is coming to an end. Trump's tariffs keep changing. The factories that were supposed to reshor manufacturing in America mostly haven't materialized. And AI is devouring the planet's computing resources during an unprecedented infrastructure build out. Willy's new book is all about the economics underlying these complex systems, which our politicians and regulators seem to insistently ignore. You'll hear us talk about why supply chains and markets have been so resilient in reacting to all these disruptions in the way they have, and why China remains a global manufacturing powerhouse even though every other country knows that's so risky. I loved this conversation. It's deep in the weeds, and Willy really knows his stuff. Before we get going, do me a favor and subscribe to Decoder on YouTube where we put out new episodes every Monday and Thursday. Okay. Econnist Willy Shih on his new book, Where Does My Stuff Come From? Here we go. Willy Shih, you're an economist. You're a professor of management practice at Harvard, and you're also the author of the new book, Where Does My Stuff Come From? The Powerful Economics Behind Global Supply Chains. Welcome back to Decoder.
00:03:50 · Willy Shih, Nilay Patel
[00:03:50] S3: Well, thanks for having me back. [00:03:53] S2: I am very excited to talk to you. You and I first started talking ages ago when The Verge was covering Foxconn in Wisconsin, and you are a reliable source of information on what it takes to actually build an LCD plant anywhere, not just in Wisconsin. [00:04:06] S3: You know, the Foxconn in Wisconsin thing was kind of funny because, you know, I I tend to go on first principles on these things. Once I knew they weren't going to build a glass plant across the street, it's like there's no way there's going to be a factory. Now, what happened afterwards, of course, is people heard your show and then I started getting calls from people who live in the community, okay, and they would go to the zoning hearings, you know, in town and then they send me the plans and they say, is this going to be a panel factory? I said, no, I told you it's not going to be a panel factory. You know, so they send me the plans. I said, well, there's not enough concrete to make this a panel factory, Right? Because, you know, for a panel factory, you need the stability. So you gotta have all this structural steel and you have to have all this concrete.
00:04:49 · Nilay Patel
[00:04:49] S2: My favorite part of this Foxconn story, and I don't mean to reaction it. It's just fun to talk to you about it again, is when you said there's not enough concrete in steel. It's great. We should actually talk about LCD manufacturing a little bit. There's an entire chapter in your book about why all of it is in China and China's investment in that. But I wanna just take a big step back for a second. It seems to me that you've written a a book about the end of globalization in one particular way. We had big global supply chains. The pandemic came, shocked the just in time manufacturing system to its core, and then the Trump administration in the second round has imposed a whole bunch of tariffs. And I've had a number of guests on the show, straightforwardly tell me, we're deglobalizing the economy. That's what's happening here. We can't rely it anymore. Your book as you read it is a some... A little bit of reaction to that. But you're also pointing out this is this... Globalization is one of the smartest ways to do it just based on first principles economics. Tell me about the state of the world and the state of our supply chains right now and from your point of view.
00:05:54 · Willy Shih
[00:05:54] S3: Well, know, I think the point about first principle economics is actually spot on. Okay. And I often tell people, it's like my father was an economist and I used to see him come home from work and I thought, I never want to do that, you know. And I'm going to go into science and technology, right? And so I go into science and technology and take all these engineering classes and I'm in product businesses only to discover, to my horror, if you don't get the economics right, then it doesn't matter about the science and technology. Okay. And the book is really, you know, the subtitle is The Powerful Economics Behind Global Supply Chains. And I talk about all these principles behind global supply chains, but they're all actually driven by economics, okay? And in fact, what you see today is, you know, market forces responding to all this stuff. Okay. So, for example, when we put tariffs on stuff coming out of China, then manufacturers say, okay, let me move that supply chain and I'll do my assembly in Vietnam or I'm going to do my assembly in Mexico or let me find some way to circumvent these tariffs. Okay. And that's really what I find is like when you look at how these supply chains are structured, why do, you know, cashew nuts say they come from Vietnam when they were actually grown in the Ivory Coast or Ghana. Right? It's like, well, there was an economic reason for all of these things. It's like, why do frozen fish, you know, that are caught off the coast of Alaska go to Qingdao, China for processing before they come back? Well, again, it's because it's cheaper to do it that way. So when we put up these trade barriers, you know, the first reaction tends to be, you know, it's like, how can I circumvent that? Okay. And we saw a lot of that, especially last year, you know, I remember Liberation Day was April 2, Right? And if you look at the quarter right before, people knew stuff was going to be happening, you know, so we had this circumvention going. And that's why, you know, first quarter twenty twenty five, all time record imports from Ireland. And then the first half of twenty twenty six kind of slow imports from Ireland. That's because we're burning off all the stuff we imported in the first half of twenty twenty five. And it's... It all gets down to economics. I'm getting all these TV set ads because the holiday season is coming up, right?
00:08:24 · Willy Shih, Nilay Patel
It's like, great. You know, and they're all coming from Mexico. It's like, how can they all be coming from Mexico? Because I know the flat panel factories that supply all these TV sets these days are all in China, right? And they're all in China because the plants have been subsidized so heavily or because of industrial policies that have encouraged those plants to be there. If you watch the trade lanes, you'll see this stuff. What happens is there've been all these new shipping routes from China to Mexico over the last two years. Direct ocean container service from China to Mexico. It's like, I wonder what that's about. I'll tell you what it's about. It's moving parts and components from China to Mexico so that I can assemble them in Mexico and then bring them in under the USMCA agreement. Right? So, what you're actually seeing is these supply chains are organized the way they are, you know, partly because some place... Sometimes it's because some places have the capabilities, okay? But more often than not, a lot of these are just responding to economic forces. If I'm going to throw on tariffs or am I gonna make it more expensive to ship something between two points, the market will find a way around that. [00:09:41] S2: That's something I wanna come back to several times in this conversation. It's cheaper was a real driving force of globalization. Americans like cheap things. They like cheap flat panel TVs. The fact that I can go to Costco right now and get a 50 inch TV for $300 is a miracle of the modern supply chain and of modern manufacturing. Manufacturing.
00:09:41 · Nilay Patel, Willy Shih
[00:09:41] S2: That's something I wanna come back to several times in this conversation. It's cheaper was a real driving force of globalization. Americans like cheap things. They like cheap flat panel TVs. The fact that I can go to Costco right now and get a 50 inch TV for $300 is a miracle of the modern supply chain and of modern manufacturing. Manufacturing. [00:10:00] S3: It is a miracle. Right? And it's cheaper and it's because there's a place that for better or for worse can make it cheaper. Okay? And by the way, American consumers benefit from that. [00:10:12] S2: One of the reasons that we pursued free trade and globalization so heavily in The United States is we thought that creating economic ties between all these various countries would reduce the potential for an armed conflict. There's a lot of lot of ways to think about that. But in general, if you tie the economies together, the price of having a war shoots up, and also then you won't have free or cheap TVs, and maybe the public won't like that. That is under pressure now. Right? I mean, we're sitting here in the middle of an AI conversation where China's routinely invoked as the great threat that will rise up if they get to AI, AGI before us. We are putting up tariffs particularly on China. In In The United States, the policy administration is to bring manufacturing back to The United States through the use of tariffs. Your point of view is that simple economics will provide enough contortions to avoid that blunt outcome.