China Important to Global Supply Chain Even as Diversification Looms
It takes a lot for companies to move supply chains, said John Murphy, U.S. Chamber of Commerce senior vice president-international policy, on a Flexport webinar July 14. National security concerns about such items as 5G could spur such action, Murphy said, but strong government action requiring companies to move supply chains would be limited to “a few select sectors.”
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For consumer electronics manufacturing, East Asia remains “the hub,” Murphy said, noting some movement out of China to Thailand, Malaysia and Mexico: “But it hasn’t really been a great rush.” He cited a recent Wall Street Journal article and said, “If anything, some companies in some sectors are doubling down on China; China remains this remarkable, huge consumer market, and companies can’t afford to not be there.”
The primary driver for global supply chains “is how cheap it’s become,” Flexport CEO Ryan Petersen said. “It’s absolutely mind-boggling -- we just take it for granted -- that you can ship a container, a truckload of products, from Shanghai to Long Beach for a couple of thousand dollars.” That’s a price reduction of more than 90% from 50 years ago, he said.
For manufacturers, producing in China was a way of “wringing costs out of the supply chain,” Flexport Chief Economist Phil Levy said. Competitive price pressures have only intensified, Petersen said: “Consumers are always going to want the cheapest thing, and if anything, the internet’s made price pressure insanely competitive because consumers are in control now.” They can “go find the cheaper thing from whoever’s got it, wherever they might be.”
Whether refiguring the supply chain is the way of the future depends on the industry, Petersen said. Companies that can move out of China to avoid a costly tariff rate are doing so. That’s easier for products with low complexity where labor is the main cost, he said.
In some cases, factories in Vietnam are owned by the Chinese company manufacturers are moving away from, “and the Chinese company just asks, ‘Where do you want to manufacture this stuff?’ That’s a very interesting thing which policymakers have to get around,” Petersen said: “If all the profits flow back to the same company in China, have we actually achieved our goal?”
“There’s no other country that can replace China,” Petersen said. “It’s too big and important.” He envisions a “multi-polar” world where companies will manufacture in different countries and distribute to many sites in a global e-commerce economy.
Asked about the prospects for a national industrial policy, Murphy referenced a bipartisan bill introduced last month by Sens. John Cornyn, R-Texas, and Mark Warner, D-Va., that would incentivize U.S. semiconductor manufacturing, provide more federal support for research and development, and secure the supply chain. “This isn’t the U.S. becoming China,” Murphy said, comparing the initiative to efforts in Singapore, Ireland and Israel.