The US-China relationship can be described as a glass both half full and half empty. However, the US strategy of developing resilient, more independent supply chains could have unintended consequences for the environment and domestic consumers.
Before the Asia-Pacific Economic Cooperation (Apec) summit in San Francisco earlier this month, the meeting between US President Joe Biden and President Xi Jinping in Woodside, California, provided a glimmer of hope that both countries could manage their relationships effectively.
Xi hinted at the possibility of sending new pandas to the United States after three beloved pandas from the Smithsonian National Zoo returned to China. He also said that “Planet Earth is big enough for the two countries to succeed.” Meanwhile, Biden emphasised that the world expects both countries to manage competition responsibly to prevent it from escalating into conflict.
Their amicable discussions resulted in several significant positive steps. The revival of communication channels between the Chinese and US militaries – which were suspended after US House speaker Nancy Pelosi’s trip to Taiwan last August – brought a sigh of relief from many. It was also comforting to see China take steps to help curb the fentanyl crisis in the US, agreeing to curb the shipment of materials used to manufacture these drugs in Latin America.
There was a sense of disappointment among some US business leaders that Xi made little mention of trade and investment during his speech at a dinner in San Francisco. However, this omission was understandable given the context of US and other firms shifting production from China to countries such as India and Vietnam.
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‘Door to China-US relations will not be closed again’: Xi Jinping offers assurances to US businesses
‘Door to China-US relations will not be closed again’: Xi Jinping offers assurances to US businesses
In the wake of the prolonged product shortages during the Covid-19 pandemic, both the US government and American firms have shifted their focus towards developing resilient supply chains to ensure a stable supply of critical products.
However, an examination of 17,000 different commodities by The Economist revealed that most supply chains functioned normally, even during the pandemic. This suggests the push to diversify away from China might be driven more by concerns over dependence on its supply chains than actual supply chain disruptions.
The tension between the US and China presents an opportunity for Southeast Asian countries, as seen during the Apec summit. High-profile appearances included Microsoft CEO Satya Nadella in a session with three Southeast Asian leaders, PwC’s International Global chairman Bob Moritz alongside Malaysian Prime Minister Anwar Ibrahim and Uber CEO Dara Khosrowshahi with Philippine President Ferdinand Marcos Jnr. Indonesian President Joko Widodo also expressed a warm welcome for foreign direct investments in sectors such as electric vehicles and clean energy.
Meanwhile, Indian Prime Minister Narendra Modi has set an ambitious goal to transform his country into one of the world’s top three economies within five years. To attract foreign investment in the manufacturing sector, India has introduced its Production-Linked Incentive scheme. In an effort to attract up to US$2 billion in investment from Tesla to set up a local factory, the government is developing new policies for electric vehicles to lower import taxes from 70 per cent to 15 per cent.
A number of US firms have diversified their supply chains beyond China in recent years. Dell said it would move at least 20 per cent of its laptop production to Vietnam. Apple could shift 18 per cent of global iPhone production to India, while HP intends to move more laptop production to Thailand.
While shifting production away from China aligns with US government goals, it could lead to unintended consequences. For starters, diversifying beyond China might not enhance supply chain resilience – at least not in the foreseeable future. China has spent four decades developing end-to-end supply chain solutions. While Southeast Asian countries can offer low-cost labour for assembly operations, they depend on importing raw materials and components from China.
For instance, in the first seven months of 2022, Vietnam imported US$14.63 billion worth of electronic products and components from China. In the financial year 2022-23, 30 per cent of automotive component imports in India were sourced from China. As Southeast Asian countries continue to rely on China, the resulting supply chains could become even more complex and vulnerable to disruption.
Second, sourcing from suppliers across multiple countries will increase carbon emissions because of additional ocean freight or ground shipping operations. This diversification strategy is counter to ongoing efforts to combat climate change.
Employees clean solar panels at Premier Energies Solar on the outskirts of Hyderabad, India, on January 25. India has been touted as a possible alternative for firms looking to diversify their supply chains away from China, though questions remain about its industrial capacity and skills base. Photo: AP
Third, diversifying beyond China could amplify operational risks because of the complexity and opacity of global supply chain operations. According to a 2021 McKinsey survey, only 2 per cent of companies reported visibility beyond their second-tier suppliers, or those who provide materials and parts to their direct suppliers.
This lack of transparency exacerbates the challenges of communication and coordination across suppliers in various countries, creating obstacles for companies striving to maintain consistent product quality and timely delivery. In the event of a product recall, complex and opaque supply chains would pose a major challenge for the firm to trace the source of the problem and take corrective measures quickly.
Finally, diversifying beyond China could raise total production costs. The involvement of more suppliers across multiple countries will escalate the cost of managing increasingly complex supply chain operations. While there could be some cost savings amid lower import tariffs and government subsidies, these incentives are artificially created as short-term measures. In the long run, consumer prices are likely to increase as firms try to recoup these extra costs.
Unless there is a coordinated effort to simplify global supply chain operations by sourcing from a few countries capable of providing end-to-end solutions, the plan for US firms to diversify beyond China risks falling short of its goals. In supply chain management, simplicity is a virtue.
Christopher S. Tang is a distinguished professor at the UCLA Anderson School of Management
