For at least four decades, Silicon Valley was quite happy to keep Washington bureaucrats in the dark about what was going on in this high tech Mecca of the world. Their position was “what they don’t know will not hurt them,” and that was their fundamental approach to Washington until 1995-1996.
That position changed dramatically with the birth of the Internet. Silicon Valley leaders, led by then Cisco CEO John Chambers, and Venture Capitalist John Doerr, realized that the Internet was not just the next “big thing” but that it had the potential to be a world-changing technology that would impact just about everything in the future. These leaders went to Washington to make them aware of the impact the Internet would have on business and government and how it could impact consumers over time.
Their original door into Washington was provided by Vice President Gore, who was one of the more savvy politicians when it came to how technology could impact government. As a Senator, he had a hand in funding Arpanet, which became the backbone of the future of government communications. Very soon, the concept of the Internet, known then as Information Highway, made more straightforward to use via the Netscape Browser began to catch on with government officials and business leaders.
One of the downsides of Silicon Valley’s reaching out to Washington was that the Tech world began to come under their regulatory eyes. That was the number one reason that for decades, Valley leaders wanted nothing to do with Washington unless it was related to government and military contracts.
Sure enough, around 2001, the US government went after Microsoft in the famous browser antitrust case, ironically spurred on by John Doerr and Netscape Browser investors. They believed Microsoft’s bundling of their browser in Windows would give them a monopoly in browsers and thus began the first antitrust severe case on a tech company since the Ma Bell era.
Since then, US Government officials have realized that technology, and Silicon Valley specifically, has become a significant force that drives significant economic value in the US. The overall tech market brings in over $3 trillion in worldwide revenue every year. Moreover, tech companies are coming under greater regulatory scrutiny as they become more prominent and more powerful.
One other area that the government has extended their reach in the tech world is that it has now become one of the pawns the government uses in its battle with China over tech piracy and China’s quest for technological dominance at America’s expense.
The current round of tariffs has the potential to deliver a significant impact on many tech-related products. While the administration has had much feedback on this from the leaders of many tech companies like IBM, Dell, ATT, and more, Apple CEO Tim Cook appears to have become Silicon Valley’s non-appointed designated diplomat to the Trump administration, especially on the issue of Chinese tariffs.
Tim Cook exudes southern charm and is one the easiest CEOs to talk with. I spoke with Steve Jobs many times over the years, and while he could be charming at times, more than once I was witness to his volatile management style and sometimes abrasive commentary. Cook is the exact opposite of Jobs in that sense.
Tim Cook is a brilliant operations guy and a superb CEO, given the value he has driven for Apple shareholders and customers, who don’t seem to get rattled and approaches every decision with intelligence and logic. He seems very well suited to argue against these tariffs with the current administration to try and stave off future tariffs on tech products and try even to reverse them if possible.
Last Friday, Cook had dinner with President Trump to discuss the issue of tariffs, and according to one of the presidents tweets he said: “He made a pretty compelling case and I now have to think about that.” While we don’t know exactly what they talked about, besides the reported angle that tariffs could impact Apple’s ability to compete fairly with Samsung, it appears that the focus of Cook’s discussion with Trump was around how these tariffs could impact tech companies in particular as well as any companies impacted by all of the tariffs in effect to date.
However, I sense that there was another issue on tariffs that pushed this meeting to happen now. Trump and team delayed the 10% tariff on smartphones and other tech products until Dec 15. A 10% tariff is probably manageable even if Apple had to pass some of that to their customers.
But the lurking threat of pushing another 15% tariff on top of the 10% tariff that goes into effect Dec 15, could be disastrous for Apple and almost all of the companies impacted by this higher tariff. Nomura Securities released a report a few weeks ago that predicted that the full 25% tariffs fees could happen by the end of the year.
Trump delayed the 10% tariff on some of the $300 billion of goods until Dec 15, 2019, but Nomura and others still maintain that unless there is a major breakthrough on the trade front with China, it will be inevitable that a 25% tariff increase could come after the first of the year.
Simple math suggests that if this happens, an iPhone priced at $1000 coming from China would now cost $1250 based on a 25% tariff penalty. While Apple might be able to absorb a 10% tariff, a 25% tariff would force them to push most if not all of that cost onto their customers.
How successful Cook will be on convincing Trump and team to reverse their position on new tariffs is hard to predict. But Tim Cook is perhaps the best person from Silicon Valley and the tech world when it comes to trying to convince President Trump to change his position.
Let’s hope he succeeds. If not, we in the tech world may face a difficult position with customers willing to pay more for tech products in 2020, something that could have a negative impact on tech companies bottom line in the new year.