On January 21, 2020, Reuters tweeted that economic integration between the U.S. and China is irreversible. Trade wars started the decoupling, and the Corona crisis intensified it.
Both events set in motion actions that will change today’s global supply chains.
By early March 2020, 75 percent of companies surveyed by the Institute of Supply Chain Management reported Coronavirus-related supply chain disruptions.
Now continued decoupling seems likely.
With the U.S. economy suffering an unprecedented shock, diversification looks sensible, if not wise.
As with any crisis, there will be winners as well as losers. And the endgame remains to be played out.
Let’s look at what recent actions the U.S. and China have taken to decouple their supply chains.
Recent Actions Taken to Decouple U.S.-China Supply Chains
Let’s drill down into how the technology and manufacturing sectors are decoupling.
- The U.S has blocked the purchase of Huawei’s 5G products on national security grounds
- China has responded by mandating to make itself independent of U.S. technology
- Apple is considering the move of 15% – 30% of production out of China
- Google and Microsoft are looking to move some hardware production out of China (Viet/Thai)
- In late 2019, Hasbro, L Brands (Bath & Body Works) announced their intent to move production out of China
- HP and Dell Technologies might move as much as 30% of production out of China
- Google is moving production of the Pixel smartphone out of China
- Nike and Ashley Furniture have already moved some production out of China
Plus, more supply chains have shifted or plan to shift operations out of China. According to a BofA survey, “… companies in 10 out of 12 global industries, including semiconductors, auto, and medical equipment, have shifted, or plan to shift, at least part of their supply chains from current locations”.
China’s dominance as the world’s factory is diminishing.
Diversification’s Winners and Losers
The list of winners, countries that stand to gain from diversification out of China, is long. Geographically, SE Asia, Asia, North and South America stand to benefit from diversification.
In Southeast Asia, Vietnam, Cambodia, Singapore, Malaysia, South Korea, the Philippines, and Taiwan stand to win lost business from China. In Asia, India is the big winner. In North and South America beneficiaries include Mexico and Brazil.
Now let’s look at the losers.
Not surprisingly, China and the Communist party are the biggest losers. China’s handling of the Coronacrisis will cost it political and economic capital. Politically, the Communist Party’s reputation suffered by its attempt to suppress information. Economically, its industries and workers suffered as the virus wreaked havoc, shuttering factories, stores, restaurants, and hotels.
China recognizes this and changed course to salvage its image. To help manage the crisis, China has donated money, equipment, supplies and medical/scientific expertise.
But the damage has been done and decoupling is well underway.
Supply chain diversification seems inevitable in a post-Coronavirus world. That doesn’t mean, however, that the U.S. and China will decouple entirely. Both economies are too big and too interconnected to undergo total decoupling.
In short, they still need each other. Expect the U.S. and China to work out some accommodation out of expediency. They will likely work out an uneasy peaceful co-existence.
That said, key manufacturing and sourcing capabilities will move to other countries. But the moves won’t occur easily or quickly.
It’s taken China 40 years to develop its manufacturing and sourcing base. China developed first class logistics infrastructure and technology. It also developed reliable financial and governmental support. Furthermore, China developed long-term relationships over the years.
All of this promoted sustainable and reliable global supply chains.
Now, decoupling will challenge supply chains. New trading partners must have modernized infrastructure. They must develop and integrate technology. They must provide dedicated financial support. They must have robust governmental support. Finally, they must develop lasting relationships quickly.
In the short-term, risk and uncertainty will spike in the shift from over reliance on China. A post-Coronavirus world will demand seamless execution in new supply chains.
- Supply chains will require more advance planning by shippers and carriers alike.
- Supply chains will require more detailed planning.
- Supply chains will require increased collaboration.
In addition, technology must support end-to-end visibility. Companies maintaining the status quo may suffer reduced stability, responsiveness, and profitability enjoyed prior to the Coronacrisis.
In the long-term, companies that have strategic partnerships will prevail. These companies will make capital investments to diversify their supply chains. Over time, diversification should lead to increased stability, responsiveness and profitability.
Post-decoupling, global supply chains will be more evenly distributed. Global supply chains will handle disruptions with greater ease and flexibility.
The China-centric trade regime has exposed the fragility of the U.S. China supply chain.
As the shift from China occurs, we can expect increased change, uncertainty and complexity. American Global Logistics is well-positioned to help companies navigate the coming volatility.
Contact American Global Logistics to learn how you can thrive in a post-Coronavirus world.