Supply Chain Dominance of China

A “Made in China” label has always been problematic in the U.S. In the early years of globalization, companies worried that customers would see Chinese goods as inferior in quality and stay away from it. Political leaders, meanwhile, worried that the sudden ubiquity of the label would expose the scale of the loss of manufacturing jobs in the U.S. These concerns were more than offset by what Chinese manufacturing brought to the table: For price-conscious shoppers, it meant a new golden age of consumption. For companies, outsourcing often meant staggering profits. Bilateral trade allowed both countries to focus on their comparative advantages: China became “the world’s factory.” The U.S. focused more resources on the cutting edge. But the original concerns never went away. Rather, as middle-class wages in the U.S. stagnated, an anti-globalization backlash began to brew. And as China grew richer and more assertive in the pursuit of its core interests, a “Made in China” label began to spark new concerns. U.S. businesses chafed at China’s use of state funding, state-backed technology theft, protectionist trade barriers, and its diplomatic muscle to capture markets and develop home-grown competitors in advanced sectors. U.S. security officials started to worry about things like Chinese telecoms gear being used to spy on Americans or cripple essential networks. The Pentagon began to wonder if China was using U.S. tech to alter the military balance of power. The U.S. public began to wonder if buying from China meant entrenching a dictatorship, funding Uighur concentration camps, and empowering a military rival bent on overturning the U.S.-led order.

The COVID-19 pandemic merely poured fuel on the fire. It underscored the risks of having so many supply chains concentrated in one place. It also sparked a surge in anti-Chinese sentiment in the U.S. Thus, the buzzword in Washington these days is “decoupling.” The U.S. government is urging U.S. companies to leave China for good — and rolling out a mix of sticks and carrots to encourage them to do so. Disentangling the U.S. and Chinese economies will be a messy and painful process, at best. Simply put, China has made itself indispensable to global supply chains. And its advantages aren’t going away. To understand why to consider what goes into making one of the U.S.’ most iconic products: the iPhone. China’s first advantage is the staggering depth of its labour pool. It’s no longer just about low-skill labourers willing to toil away in sweatshops, either. Chinese universities pump out more than nine times the number of STEM graduates each year than the U.S. The foremost reason why Apple doesn’t make its phones in the U.S. isn’t wages; it’s the reality that there aren’t enough U.S. engineers to meet the company’s production needs. China’s second advantage is its tight integration with a vast ecosystem of suppliers — most of them in East Asia — that’s needed to produce something as complicated as the iPhone at scale. In other words, an iPhone has microchips from Taiwan, camera technology from Japan, flash memory from South Korea — plus a zillion other components made in and around China. Apple needs these to be able to ensure delivery of such components in vast quantities on incredibly tight production schedules, so geographic proximity matters. And China is peerless when it comes to providing the infrastructure required to make it all happen.

An estimated five million jobs in China are dependent on Apple’s supply chain alone. A single factory where iPhones are made employees nearly 250 thousand people — larger than all but 83 U.S. cities. So Chinese provincial and local governments, locked in a zero-sum competition with one another to attract big foreign firms, are both incentivized and empowered by Beijing to move entire neighbourhoods seemingly overnight to build whatever they need. Finally, the lure of China’s consumer market compels foreign firms to put up with all sorts of headaches and do whatever is necessary to stay in Beijing’s good graces. While much of China is still very poor, nearly 200 million Chinese people had more than $16,000 in disposable income last year. This was more than double the number just a decade ago. If — and this is a big if — China can avoid an economic collapse, Chinese consumption will quite likely become the foremost driver of the global economy within the next two decades.

It’s no surprise, then, that in 2019, more than 17 percent of Apple’s revenues came from China — and this was a down year due to the trade war. To stay out of the U.S.-China crossfire and make their supply chains more resilient to disruption, many companies and their suppliers are pursuing what is known as “China plus one” strategies — building redundant supply chain links in alternative low-cost manufacturing hubs. Even before the pandemic, Apple, for example, was reportedly mulling moving between 15-30 percent of its hardware production to places like Vietnam, India, Mexico, Indonesia, and Malaysia But no country, or even combination of countries, can replicate China’s advantages altogether. Thus, companies are reluctant to leave. The U.S. and other Western governments have good strategic and economic reasons to at least try to make them reconsider. They can use tools like tariffs, subsidies, and regulatory controls to alter companies’ cost calculations — even if these invariably risk doing more harm than good to U.S. interests. And the growing risks of things like nationalist boycotts and government coercion in China will make foreign firms more willing to pull up stakes. Just don’t expect a mass exodus — or for “Made in China” to disappear from American shelves for good.

 

Reference:

https://geopoliticalfutures.com/category/regional-directory/south-asia/

https://9to5mac.com/2019/02/12/opinion-apple-gone-wrong-china/

https://www.researchgate.net/figure/Chinas-supply-chain-cities-in-apparel-Source-David-Barboza-In-roaring-China-sweaters_fig3_228225090

http://www.supplychain247.com/topic/tag/Tariffs/P75

https://siteselection.com/investor-watch/covid-19-suffocating-the-global-medical-supply-chain-while-breathing-life-into-its-future.cfm#gsc.tab=0