The dangers of ripping-off the global supply chain

The world is about to face a divided supply chain, a total ripping-off of an established order. The question is what are we going to do about it?

Yuji Miura, a senior researcher at the well-known Japan Research Institute, notices a strange phenomenon. It is an effective global market division into ‘China’ and ‘non-China’.

<<This is a striking statement because, with globalisation, trade should not be split into different sections or fall into isolation.>>

In the context of US-China trade war, the concept of industrial transfer is not the same anymore. Originally, the dominant factor in the supply chain transfer was horizontal integrations for competitive advantages.

However, studies have shown that the global supply chain is favouring vertical integrations because of trade protectionism.

Taking the US-China trade war as a backdrop we see the high tariffs imposed by Washington on Beijing’s exports.

The range of 10% to 25% tariffs has greatly impacted companies dealing with the US as an export market. It also impacts industrial transfer’s which is the biggest intention in such trade exchanges.

To gain intuitions on this scenario, let’s consider the supply chain of mobile phones.

Mobile phone and semiconductor companies in Silicon Valley such as Apple and Qualcomm are the primary designers of the iPhone. This is an upstream business. MicroSD cards and mobile processors produce the other components in Taiwan, Japan, Korea.

All these components and designs go to mainland China for the final product manufacture, for shipping to the US. Hence, China is the last player in the chain of production, the US plays the role of the export market.

But the China-US trade war has a great impact on the global supply chain. A Japan Research Institute study lists the total value, per countries and regions, involved in China’s US exports.

South Korea, US, Taiwan and Japan value is at JPY1 trillion each, indicating China’s massive usage of overseas components. The study dates back in 2015 but is important in determining the trend.

As a result, several enterprises are developing strategies to reduce their dependence on China. They are facing economic pains that stagnate the circulation of their products in China.

Recent data shows 50 companies worldwide made it public the need to move their manufacturing because of the China-US conflict.

But the US is losing here, with most of the companies deciding to retain their Chinese production base and transfer away from US operations. These operations are targeted by tariffs overseas.

<<Data has also shown that investment in China’s neighbouring countries like India and Vietnam is growing by 10% – 30%.>>

On the other hand, China still has great potential as a consumer market.

According to the United Nations Statistics Division, China’s total consumption accounts for 26.35% of the global market. This is second only to the United States.

Therefore, the role of China’s market plays in the supply chain is undoubtedly important. The supply chain subsystems play an important role in the context of US-China conflict.

Many companies are picking sides because they cannot afford not to. Unlike TSMC which is able to maintain relations with China and the US.

However, trends show the US will establish barriers to technology equipment and components. This will force China to readjust its manufacturing strategies.

Tokyo Electronics may be in deep trouble if they utilize the US export ban to expand their businesses with China. In other words, Japan, South Korea and Taiwan manufacturers competing with US companies will face challenges in picking sides.

Based on Terry Gou, the founder of Foxconn’s forecast, the need to re-establish the supply chain in different regions is necessary. This supply chain will be divided according to the US and China markets.

CHINESE REACTION

How should China overcome the division of the supply chain? Researchers at Anbound presents some suggestions.

China has to improve the framework of foreign investments to attract foreign investors into business, production and sales in China.

Aside from tax reduction and subsidies, China must offer opportunities for foreign investment to create a business environment.

Standards must improve to avoid pressures from foreign investments on the local finance industry in China.

Hence, Anbound emphasizes the importance of transparent and predictable policies that will enhance the cultivation of consumerism in China.

Due to the US sanctions in the midst of the trade conflicts, the global supply chain will be divided into “China” and “non-China”.

To overcome this, China must reform the business environment and cultivate the domestic market to attract foreign investments.

At the same time, the government must guide enterprises and capitals that are moving out of China.

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