There has been much talk of shifting manufacturing supply chains away from China. Other countries want to cut their reliance on the world’s largest factory floor, wary that Beijing is wielding too much power over the global economy. However, replacing China is not so easy. Creating highways and production lines that work like clockwork with a network of suppliers is a huge task.
Over the past two decades, Beijing has pampered global manufacturers with its meticulously built infrastructure and abundant industrial supplies. The country’s grip on production processes, even in areas it does not dominate, means it has rapidly increased in importance. Loans state-owned firms built the highways to ensure that logistics and supply chains run smoothly. There are undoubtedly a lot of economic imbalances in China, but its dominance in the world economy will not change anytime soon.
Countries ranging from America and India to Vietnam and Indonesia are trying to present themselves as alternatives. The $53 billion Chips Act was an effort by the White House to reclaim chipmaking, as is the national blueprint for building a lithium-ion battery supply chain by the end of 2020. For electronics, Vietnam has been considered a viable option. Even Indonesia, the largest producer of nickel, a key component of electric vehicle (EV) batteries, wants to move up the ladder and capture the value addition in EVs from global change.
Some parts of the supply chain may be away from China, but for now, no country can come close to building a complex network of factories across such a wide range of areas. Changing agreements and suppliers is not an overnight process, nor is setting up tasks that have been going on for years.
Vietnam makes a good test case. Just as Apple’s suppliers such as Hon Hai Precision Industry Co., then known as Foxconn, are planning to expand capacity, sending industrial land prices to new highs, global manufacturers are feeling That Vietnam could easily fall into the trap of scarcity. Right now, building materials like aluminum window sills are hard to come by in China.
This is because Vietnam, along with the rest of Asia, imports a lot of basic industrial products such as chemicals and plastics from its northern neighbors. Even though its economy has been open since March, as long as China continues its COVID-zero lockdown, the Southeast Asian nation will continue to suffer from supply chain bottlenecks. The delivery time index of Vietnam’s PMI suppliers, which captures supply chain delays, remained in contraction in July.
Over the years, China’s ambitions to climb up the value chain meant shifting its production toward high-end equipment and industrial goods. It has a vast manufacturing sector that supplies a large portion of the components that go into the final products. It is now the top global exporter of such parts in terms of value.
This means that taking the country’s manufacturers out of the equation will cause a headache in Asia, and inevitably become a problem for industrial companies in the US as well.
Say what you will about China’s debt-fueled expansion, it has built an extensive transportation network including rail, seaports and airports as well as 5G base stations, including those borne by local governments and state-owned enterprises. Most are financial burdens to be carried. According to the latest Global Competitiveness Report, while China does not rank well on governance or institutional transparency, it has distinguished itself in aspects critical to hard-tech supply chains such as roads, shipping lines and airport connectivity. It has also spent heavily on research and development. By comparison, the US attempts to create an EV supply chain that only highlights its infrastructure challenge. Kansas recently brought in Panasonic Holdings to build a $4 billion battery facility. One of the draw cards for the Japanese company was a push to upgrade the state’s infrastructure.
Businesses don’t have enough patience to restart operations and then wait for infrastructure. New areas of manufacturing may emerge, but logistics will not be as efficient for global operators that China is used to. Will they pay to rebuild what isn’t broken? On a recent trip to Vietnam, an entrepreneur lamented that an express mail package from Hanoi to Ho Chi Minh City could take up to four days.
All of this has come at a high cost for Beijing, including corporate debt and ineffective debt of more than 200% of the country’s output. It has paid off to build it all and foreign companies are, in practice, getting a free ride on its smooth supply chain. It should come as no surprise that foreign businesses continue to invest in China. Are the dangers of becoming dependent on China increasing? Sure, but such risks exist in other places, such as Vietnam, Turkey or Malaysia. It’s just the cost of the business.
Anjani Trivedi and Shuli Ren, respectively, are Bloomberg Opinion columnists covering industrial companies in Asia and Asian markets.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.