Everyone has a story to tell about the supply chain problems that have affected the global economy, from the beginning of the pandemic through to the disruption caused by the war in Ukraine. From shortages of Ikea furniture and Christmas turkeys, to the dearth of computer chips that sent the cost of secondhand cars soaring, the dislocation of a once smooth-running system has caused havoc in the global economy.
But while predictions about the easing of bottlenecks have come and gone without any improvement, it has become clear the disruptions of the past two years or more are spurring fundamental changes to the world economy that could have yet more profound impacts on our lives.
In Washington this week, a hearing has been convened by the government’s China economic and security review commission to examine how to ease America’s reliance on China’s massive manufacturing base for goods, spare parts and materials of all kinds.
Anxiety in the US about dependence on China has been building for years and led to the Trump tariff war against products from its superpower rival. But the pandemic disruptions – still rumbling on thanks to China’s drastic zero-Covid strategy shut down the economic hub of Shanghai for two months this year – have prompted a major rethink of how companies should organise themselves. Amid the buzzwords such as “reshoring” and “diversification” is the basic need to make western economies less reliant on China and other far-off manufacturing centres.
US president Joe Biden said at the opening of the summit of the Americas on Wednesday night that the region had to invest in ensuring that supply chains were more secure and more resilient.
His administration has already legislated for a $250bn fund to boost US manufacture of computer chips, the shortage of which was one of the first visible signs of problems in the wake of the pandemic shutdowns of factories in the far east. Samsung has acted as well by announcing a $17bn chip factory to be built in Texas as the company aims to ease the problem of supplying US customers from its east Asian manufacturing bases.
The hearings in Washington will seek to push the urgency of the situation, especially in relation to the defence industry, and will take evidence from management experts from Harvard, champions of reshoring (AKA bringing manufacturing back to the US or Mexico from Asia) and Biden administration officials such as Deborah Rosenblum tasked with securing the “industrial base”.
Harry Moser, founder and president of Reshoring Initiative, will tell the commission that the “growing inequality, government deficits and the need to secure defence supply lines” make the repatriation of industry an imperative. The reforms that are needed to fix the problem include a better-trained workforce, a lower US dollar in America’s case and greater investment by companies, he will say.
In Britain, a recent survey of retailers found that 87% of those questioned do not believe things will go back to how they were before the crisis began and that costs will not return to the levels seen before the pandemic. John Foster, director of the policy unit at the UK business group the CBI, said retailers were seeing “medium- and long-term” challenges arising from the global supply chain crisis around materials, labour and changing consumer behaviour.
Supply chain diversification ‘critical’
The exclusion of Russia from global supply chains has exacerbated existing problems and sent energy prices soaring. Brandon Daniels, chief executive at Exiger, which has developed software to analyse and reshape supply chains, says companies need more transparency through open-source data to seek alternative supply lines. He believes the clock is now ticking for the famed just–in-time delivery systems pioneered by Japanese carmakers such as Toyota and Nissan in the 1980s which helped transform the global economy.
“The diversification of our supply chains is critical to our economic prosperity and national security,” says Daniels. “I think you will see substantial revisions to just-in-time delivery models, leading to better warehouse management and longer stockpiles that mitigate the risk of material shortages.”
Flavio Romero Macau, a supply chain expert and associate professor at the School of Business and Law at Edith Cowan University in Western Australia, warned in December that the problems in the supply chain could take another two years to fix and says there is still some way to go thanks to China’s “inevitable” lockdown problems.
“In a nutshell, we are not out of the woods yet,” he said. “That China would go down with Covid at some point was inevitable. Some learned their lessons, some were pinned and couldn’t do much, some will live it all again.”
On the other side of the ledger, there are signs the disruption may not be as drastic as feared. The data firm FourKites analyses trade flows in China, and although it said in its most recent report that it continues to see a tepid recovery from the big-city lockdowns, the number of shipments being delayed out of China to the US had plateaued at 35%.
Glenn Koepke, general manager of network collaboration at FourKites, said companies were becoming accustomed to dealing with delays at Chinese ports despite what economists at JP Morgan called the “jerking up and down” of the Chinese economy.
“The bottom line is that, while China’s reopening might increase volume, it is unlikely to result in the type of disruption that we saw last year.”
When the experts convene in Washington this week they might find what analysts at S&P have identified as a major problem with recasting supply chains, namely that “it is easy to say but hard to do”. Despite the lockdowns and higher wages eroding one of China’s key competitive advantages, its position in the global supply chain could be more entrenched than some think.
“Vast markets, entrenched production infrastructure, proximity to suppliers and large pools of skilled, trained labor make major relocations unattractive,” says S&P China analyst Charles Chang. “These factors are long term in nature and are likely to remain at play beyond current lockdowns.”