First things first, what is a supply chain? A supply chain is a network that connects a corporation with its suppliers to manufacture and deliver a specific product to the end-user. Different activities, people, entities, information, and resources are all part of this network. The supply chain also refers to the stages involved in getting a product or service from its initial state to its final destination. Companies create supply chains to decrease costs and remain competitive in the marketplace.
So, imagine the whole world as a marketplace; with all the nodes in these supply chains connected to one single country in the world. Imagine how great of leverage it is for that nation. It can use both as a deterrent as well as a tool for great power competition in extreme cases; as well as a tool for political and economic coercion.
These are the factors that have become magnified in the pandemic and therefore are making countries look for alternatives. After decades of globalization, the pendulum appears to be swinging back. Trade difficulties and the COVID-19 epidemic are causing economies to reduce their global interconnectedness and concentrate on their own countries and neighbours.
And at the centre of all this is China.
The concentration of Supply Chains in China
China’s development into a global manufacturing powerhouse has been astounding. It was a tiny role in the world industrial arena when it joined the World Trade Organization (WTO) in 2001. However, following years of modernising its economy to focus on exporting goods, its formal entry into the WTO boosted its output. It has positioned itself as the world’s low-cost factory in the years thereafter, producing labour-intensive products like textiles, toys, clothing, footwear, and furniture for businesses and, ultimately, customers all over the world.
These industries served as a springboard for China’s economic development, allowing it to move into more modern manufacturing of commodities such as electronics, as they had previously done for economies such as Hong Kong and South Korea. In addition to these natural trends, one catalysing factor has been the pandemic and the supply chain problems faced along with it.
Several causes are contributing to the disruption, including rising worldwide consumer demand, stringent supply chain policies aimed at preventing the spread of the coronavirus, a scarcity of container ships and air freight capacity, and even the residual effects of the Suez Canal blockade. It’s not surprising that worldwide demand is strong, but all the above factors combined with China’s zero-COVID policy are forcing countries to find a permanent solution and diversify.
The necessary spark
The topic of supply chain disruption is an excellent illustration of the growing demand for diversification. Despite escalating political tensions between Beijing and Taipei, a shortage of semiconductors in China has resulted in an increase in imports from neighbouring Taiwan. Orders for Taiwanese chips from China and Hong Kong increased by 47 per cent in the first quarter of 2021 compared to the same period the previous year.
Meanwhile, due to rising global demand for consumer electronics, household appliances, and autos, the global chip shortage is worsening. Companies in China are said to be stockpiling chips in case of a shortage. Furthermore, Chinese enterprises are believed to be anxious about the possible impact of further US penalties.
Overall, the chip supply chain issue is anticipated to have a detrimental influence on the global supply of mobile phones, autos, and household appliances, perhaps resulting in major price increases. Some prices have already begun to rise. According to Taiwan’s largest semiconductor supplier, the global shortage would not be rectified until 2022.
Diversification push: a work in progress
Companies based in the United States and Europe have reduced their reliance on China for sourcing over the last two years, according to a new survey of 700 global manufacturers. According to the poll, companies based in the United States identifying China as one of their top three sourcing nations decreased to 77 per cent in the first quarter of 2021, down from 96 per cent in 2019.
This figure declined to 80% in Q1 2021 for enterprises based in Europe, down from 100% in Q1 2019. Despite this, China’s influence on global supply networks remains enormous. It remained the top sourcing site for the enterprises polled.
Diversification of supply chains and a shift away from China had been underway for some years before COVID-19, but the epidemic has expedited the speed of change. Businesses are formulating strategies around how to build better resilience ahead of the next disruptive global event, and supply networks are in the limelight. The extent to which UK businesses shift and how much production is ‘re-shored’ is largely determined by the level of risk that each company is willing to take.
Fear of trade disruption due to protectionist actions, pandemic-related evidence that supply chains are susceptible, rising labour costs in China, and low labour costs in Vietnam and elsewhere are all driving diversification away from China. With the disruptions only increasing, as well as the business atmosphere in China turning intensely gloomy, we can expect the movement of the supply chains, encompassing all its facets, to move away from China but, will it lead to multipolarity vis a vis supply chains and how long they maintain will decide the future path the world will follow.
