The Global Supply Chain is changing… Finally.
China is losing ground in the global manufacturing landscape. Global supply chains are having to adapt in consequence. Big change is on the horizon, but at what cost to shippers and logistics service providers?
As far as global manufacturing goes, China is the world’s factory. From consumer electronics to clothing items, the “made in China” label is something with become accustomed to. As with all things, nothing is immutable. China has evolved from a manufacturing paradise for foreign brands to a potential supply chain nightmare.
Businesses appreciate predictability in the Supply Chain
Supply chains are unpredictable by nature. There are so many moving parts and stakeholders, each of which has the potential to cause problems, usually increasing costs. Businesses prefer to keep the unknowns to a minimum and work in an environment that keeps them in a false sense of control and security.
China doesn’t offer this sense of security anymore.
China’s evolution didn’t happen overnight. Although change has been accelerated in recent times through decisions made by the powers that be both in China and the USA.
The recent tariff trade war started by former President Trump was a potential step too far for many manufacturers. The new tariffs erasing profit margins and causing logistical headaches for 3PLs and other logistics service providers.
Adding the extra costs to import goods with the increase in production costs due to labour cost increases… It’s not the same picture it used to be, especially when cheaper alternatives exist.
Finally, the world has seen the impact one man can have on global supply chains through Putin’s war in Ukraine. The Chinese regime has not hidden its intent regarding Taiwan, which has global microchip manufacturers looking to establish themselves elsewhere, and governments scrambling to welcome them.
Global supply chains need to break the status quo now more than ever
This relationship with China has been one of convenience, rather than appreciation. It has been convenient for the major consumer markets such as North America and western Europe to use China as a factory, and with it export their CO2 emissions. It was convenient for China to accept foreign money in order to increase the standard of living for their extensive middle-class population.
What happened to that convenience?
A global pandemic and some dodgy driving.
The Suez canal blockage disrupted about 9 billion USD worth of goods per day. The knock-on effect was felt for many weeks after, with ships rerouted, shortages, and an all-hands-on-deck approach to finding solutions. You can’t feed consumers their consumerism if your goods are stuck in transit.
This was just one of many events that led to the world realizing the logistics implications of having the majority of global manufacturing on the other side of the world. Convenience? Yes. But at what cost?
China’s reaction to the Covid-19 pandemic and outbreaks in key locations such as Shanghai highlighted the obvious: China has Chinese interests at heart, not foreign consumers’.
A perfect storm
What we’ve been through since early 2020 has been like a perfect storm of destructive creation. Schumpeter-esque change that the wildest theory crafters couldn’t have come up with. The outcomes in the logistics world have been a thing of nightmares for some, and a dream situation for others.
- Ocean carriers turned to profiteering and kept the rates as high as possible for as long as possible
- Manufacturers learned that “voluntary surcharges” are anything but voluntary
- Relationships were destroyed
- Carriers exacted revenge on everyone in the supply chain for the many decades of razer thin margins they have been operating on
The story is still being written today, as shippers now attempt to drag margins back down to the abyss, perpetuating a cycle of hate that has no place in the global supply chain.
But one thing became evident for manufacturers: having all your eggs in one Chinese basket is an awful idea.
How are things changing?
The shift away from China is not new. Pre-Covid, Japan was already trying to encourage national brands to leave China with strong incentives for reshoring or nearshoring. Today’s sentiment seems to continue leaning in that direction, with recent Gartner research indicating that as many as 1/3 of leading brands plan to move at least some manufacturing out of China.
A third may not seem like a drastic amount, but there are huge implications to moving manufacturing from a country that is designed for it, to somewhere where everything needs to be built.
China has the advantage of not only having experience and a large number of factories and partners to choose from. Their infrastructure is built and works. They have half of the world’s largest container ports and the manpower and machinery to make everything work (when they are not in strict lockdown).
If a third of companies move a portion of their manufacturing efforts to other locations, it means that the logistics elements have to follow. You need key infrastructure, which doesn’t necessarily attract investment in normal times, as infrastructure is far less sexy that SaaS solutions with huge potential returns. Ocean carriers seem to be hedging their bets and investing heavily in SEA and other potential future hubs:
- CMA CGM have invested in Vietnam and SEA
- MSC have acquired Bollorés African operations
- Hapag have just acquired a number of Chilean port operations
Maybe the relationships they destroyed with shippers in order to accumulate the wealth for these investments wasn’t all for nought afterall.
Sentiment and concrete action
The writing is on the wall as far as China is concerned. Attractivity is down, as are most business indicators. Moving everything out of China is unreasonable, and we’re more likely to see diversification, as well as a push towards some form of self-sufficiency when it comes to key products.
For example, the microchip shortage was a major event that impacted every industry you can imagine. By incentivising companies to manufacture chips in the US through the US CHIPS and Science Act, the US is taking a step towards electronic self-sufficiency. They are also potentially going to become a global manufacturing powerhouse for electronics, something that can happen thanks to advances in manufacturing techniques and robotics. Pharmaceuticals are another key industry that may end up “coming home”.
As far as what has already happened:
- Apple have moved some production of their iPhone away from China for the first time. A portion of the devices are being manufactured in India. Is this a trial of something potentially bigger, or just diversification? Time will tell.
- Samsung and LG Electronics have moved away from China, partly to get around the new US tariffs.
- Hasbro also moved manufacturing away from China because of the tariffs, looking towards SEA and India.
- Unsurprisingly Google manufactures their devices in SEA and Taiwan, as their products are all but banned in China anyway.
There is a desire to leave China. It is happening. The question is now how to make it happen and at what scale? There are implications for global logistics that go beyond simply redirecting ships to new ports.
Will we simply rebuild manufacturing operations elsewhere and repeat the same mistakes?
Or can we build upon this change to redesign how manufacturing (and consumerism) works, potentially helping out planet out at the same time.
Time will tell.
