Moving up
In economics, “moving up the value chain” refers to a desirable increase in the per-unit value of the products and services offered by companies or countries over time. Creating this evolution is often considered the primary goal of national-level economists and corporate strategy. The pattern is ubiquitous;
GE started off selling lightbulbs and now makes everything from jet engines to medical devices, and was for a time the world’s most valuable company. Yes, we know about the various corporate splits and decades of stagnation, stop yelling.
Amazon found market traction by taking advantage of long-tail consumer dynamics in book sales, and now hosts a material portion of the internet via AWS.
Ireland was primarily an agricultural economy until the 1980’s, and then a set of robust government programs initiated the change to its current, booming sectors in tech, medical devices, aviation, and the hosting of EU headquarters for a host of international corporations.
The United States became the world’s largest economy by deliberately establishing leadership and becoming the home of innovation across a host of high-value sectors, until….
We are, obviously and as per usual, simplifying a complex story. There are counter-examples, and plenty of them. Australia has grown to become one of the world’s wealthiest and most developed countries primarily as a mineral exporter, and more corporations than we can count have achieved wild success by producing and selling commodities, services, etc. More power to them.
A trade deficit occurs when a country imports more from a given partner than it exports to the same party. This is common when one country has successfully gone up the value chain, and is therefore buying raw materials that it can transform into higher-value products, stick into parts of data centers, or generally do a number of other worthy activities for a developed economy. It’s not a bad thing!
That said…. If someone was pretending to regard trade deficits as problematic, which again they are not, and want to “fix” that issue… they would likely try to send their country crashing down the value chain, thereby lowering the need to import, and further lowering the cost of exports.
We are, obviously, talking about the US, and the infuriating / destructive / stupid / lots-of-words-we-can’t-use-because-our-families-read-this tariffs imposed by the Trump administration last week, which resulted in the single largest act of value erasure since, well, basically ever. Here’s Commerce Secretary Howard Lutnick talking about the endgame the administration sees coming.
And look, it’s tempting to dismiss the concept of iPhones (or anything else) being made domestically as the incoherent rantings of a man with more digits in his bank account than points in his IQ, and it assuredly is that. But, let’s take the premise seriously for a moment. What would this actually look like?
Significant reductions in the US minimum wage. Among the primary arguments for offshoring production, even net of shipping and logistics costs, is that labor is so much cheaper overseas. Apple’s margin ain’t going to make itself.
Clear line of sight to eventually automating the above through robotics and AI.
Apple having conviction in the state of economic play to spend 5+ years and many billions of dollars standing up domestic manufacturing, which would require certainty of Trump or a similarly bent lunatic being President beyond 2028.
Factories, lots of factories. These need to be sited and built, and housing situated nearby to hold workers. Oh good, new company towns. Those worked out great the first time around. Just ask anyone in, say, Pennsylvania, Ohio, or Michigan.
Energy. No one company bringing manufacturing back to the US will break the grid. But, all of them together? I wonder if anyone with a minor interest in AI or crypto invested in any fusion companies that might be able to help, for a modest profit of course.
We think it’s becoming more and more clear what the government and Thiel / Andreesen / Musk techno-mafia is really aiming to accomplish. First, crash the economy in order to drive Americans to the point of accepting subsistence wages and low-level jobs in manufacturing and service. Remove the social safety net to make the citizenry completely reliant on their employers for anything resembling healthcare or sustenance. Second, use tariffs as the world’s largest protection racket. Force companies to onshore production, with no choice but to use AI and robotics, which of course the techno-mafia sells. Third, install their various companies as the prime government contractors in aerospace, defense, energy, health, etc. Get ready for policing by Anduril, internet from SpaceX, healthcare by Bryan Johnson, etc. Fourth, use the levers of government and the judiciary to ensure that they don’t lose elections…. Pretty much ever again.
Add a dash of civil unrest to drive adoption of theoretically untraceable payment technologies (#bitcoin) and…. Profit.
This is all pretty bleak. And perhaps we’re wrong about parts of it. Hopefully! But, if it looks like a duck and quacks like a duck, sometimes it’s just a bunch of malevolent idiots who stumbled into control of the government and really, truly need to be stopped.
So, what can we do?
This will sound trite, but call your lawmakers. Like, a lot. Save their numbers in your phone, and call them constantly. Tell them how much you’re being hurt by the tariffs, how much your bills have gone up, and ask them to use every lever they have available to slow down the damage and take fiscal control back to congress. And, to start and support impeachment proceedings against the president and cabinet immediately. This is really the only solution. Congress has the power to stop all of this bullshit in its tracks.
Sell your cryptocurrency holdings in full, if you still have any.
Private enterprise has an even bigger role to play. If you’re in a position to do so, announce that 1. You will not be hiring in the US until tariffs are lifted, 2. You’ll be immediately working to offshore production and selling only outside the US, and 3. That you’ve banned the use of generative AI from inside your company. Make usage of these products drop like a stone. It will hurt.
What we’re doing
As much as we can, as quickly as possible, and mostly focused on slowing down the damage to the climate tech ecosystem. This is taking many forms, from helping companies pivot their business models, mapping out potential acquirers and, in some cases, wind things down and get jobs. There’s no shame in playing defense temporarily, protecting your family and livelihood, and continuing the work in whatever way you can.
It’s going to be a rough few years, but there are wedges of opportunity. Companies that built onshore supply chains from day 1 are well-positioned, and we’re seeing a few successfully raise capital and continue to scale. The valuations and terms aren’t what they were a few years ago, but nobody should be overly focused there at this stage.
And, generally, we’re working to figure a lot out for ourselves, our family, friends, colleagues, and more. There’s a book to be written someday, and a good one, about the process of trying to launch a company into the teeth of the 2024 presidential election. Short version, we’re still very much doing it, but probably overseas and in a slightly different form than initially expected.
Investors; We have a lot of A+ founders and founding teams ready to work on generational climate companies, but who need a paycheck and safety for their families for a year or two before they’re ready to spin out. Hit us up and we’ll make intros. No charge, no terms, we don’t make a dime.
Reading
This J.P. Morgan report on the state of the insurance industry is fascinating, chilling, and vital, and echoes our experiences while moving out of fire-prone central Oregon last summer. In short; The industry needs a lot of help, really quickly, and isn’t going to get it from a government run by malevolent morons. We continue to see huge opportunities for alternative business models, prefabricated fire-resistant homes, firebreak landscaping, and more.
Microsoft is slowing down their investments in data centres, especially those intended for OpenAI, in which they’re an investor, to train new models. We think Satya Nadella is one of the smartest capital allocators in tech, and someone with approximately all the data on upcoming AI demand. If he doesn’t think the demand will stay durable….
This, from Nick Van Odsol of the brilliant Keep Cool, is the best thing we read on the internet this week. It’s about justice and the judiciary, malfeasance and rage, and a particularly heinous pardon issued by Trump. And so much more than that, but we’ll spoil no further.
A16Z is raising an unholy crapload of money to invest in AI, the demand for which technology remains deeply uncertain. A gentle reminder to LPs; In order for you to generate alpha on a particular investment position, you should be looking for greater than 10% annualized returns, and a 5-7 year fund cycle. Are you going to get that from AI startups at 150X ARR?
Until next time…
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Wow. Deeply dystopian and 8.0 on the Richter Scale.....