China and its unbeatable supply chains
Dial back
to early 2020, and the Western media was full of predictions that the global
supply chain would leave China because of Covid-19. That hasn’t happened… If
anything, Beijing is in a stronger position than ever.
Google just
made the surprise announcement that it will produce its new Pixel 6 smartphone
in China, after previously confirming it would be manufactured in northern
Vietnam. But as the latter battles with an extreme wave of the Delta variant of
Covid-19, requiring military assistance to enforce lockdowns, Google’s plans
have changed.
Instead,
parent company Alphabet Inc. has turned back to China, something that few would
have thought possible a year ago, given the incessant political talk in the
media and political circles over ‘decoupling’. This was the idea that
global supply chains would leave China altogether and look to other countries,
such as India and Vietnam, who have cheaper workforces and could feasibly
replace Beijing as the ‘world's factory’.
The
outbreak of the virus in Wuhan and its impact on global supply chains, as well
as President Trump’s tariffs on Beijing, encouraged these arguments. As investor
Mark Mobius tpñd CNBC in April 2020, “A lot of buyers and a lot
of the people depending on the supply chain in China are now having second
thoughts, and are beginning to diversify their supply chain as much as possible
to be closer to home.”
Yet 16
months later, that hasn’t materialized. With China announcing that it
has crushed the highly contagious Delta variant and reporting no new Covid
cases, it’s clear that the country remains the most resilient, stable, and reliable
supply chain in what continues to be an extremely uncertain world. Numerous
pundits and outlets, largely out of political bias, got it completely wrong.
The reality
is that Beijing has not lost its grip on the global supply chain through the
pandemic, but has in fact consolidated it. Misjudgements elsewhere have been
based on a lack of understanding as to how supply chains work, and wishful
promotion of other countries based on geopolitical preferences rather than
economic realities.
In
discussing this, it’s important to recognise what a supply chain actually is. Broadly,
it might be defined as an integrated network of companies and businesses
concentrated in one geographic region that complement each other’s needs in
making a given product.
For
example, if you are seeking to set up a car factory, where are you going to get
all the elements required to make the car? You need a comprehensive range of
parts, tools, and services. Logically speaking, you then choose the location
for your factory that has the best conditions to deliver this. That’s why you
wouldn’t set up in, say, Greenland, for example.
A supply
chain works like an orbital system, with lots of small specialised businesses
and services revolving around the primary business, which would not be able to
function otherwise. The viability of a supply chain is not determined by how
expensive the workforce is – it’s about a number of different elements, including
the quality of infrastructure, such as access to energy, roads, ports and so
on, all of which contribute not to just making a successful product but getting
it to the consumer. The convenience and accessibility of the supply chain add
to its affordability. As a result, building a successful supply chain is not
something done on a whim.
Now, amid
the current geopolitical climate, many people have increasingly argued that
supply chains should not be based in China, with Covid-19 often cited as an excuse
for moving them. Over a year ago, then-US Secretary of Commerce Wilbur Ross
actually said that the Covid-19 outbreak in China could “benefit jobs
in America” (before it struck the US).
The
argument was readily made that the crisis’ disruption of global supply chains
meant China was unreliable, before the debate descended into an outright
political onslaught. With Trump signalling a trade war and tariffs, it was
assumed that businesses would automatically move away to other countries.
Narendra
Modi, for one, promoted his “make in India” initiative in an attempt
to exploit anti-China sentiment, claiming he could win businesses over to
manufacture in his country instead.
But that
hasn’t happened. And the primary reason for this is that countries such as
India and Vietnam do not have the infrastructure, capabilities, skillsets or
even the resilience to compete with China at a serious level. Moving a supply
chain is not just about relocating a factory from one country to the next; it
is about building a whole new network from scratch, which is expensive and a
huge risk. A supply chain is weighted on cost, endurance and speed, and the
conditions in China have ensured its appeal has outlasted these political
shocks (even allowing for the escalation in tensions).
As 2021
arrived, talks of alternatives began to fade, primarily because the pandemic
has lasted longer than people anticipated. The enormous Covid outbreak in India
from April ruined Modi’s manufacturing impetus for one, and the current Delta
outbreak in Vietnam is doing the same. It says a lot that even Trump’s tariffs
– which are still in place – are not preventing China’s exports to
the US from growing, showing how the supply chain is about resilience and
capability.
Of course,
in normal times, places such as Hanoi and New Delhi do have the ability to
manufacture low-end items which do not require much sophistication, such as
fabrics, and can compete in terms of affordability. But the other side of the
coin is that China has continued to move up the supply chain in terms of
greater value products. Because manufacturing is not only about producing
goods, but also what you produce too – and here is where many people get the
‘Made in China’ stereotype wrong.
Tom Fowdy
23 Aug,
2021 12:14
https://www.rt.com/op-ed/532814-china-goods-covid-west/
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