Challenges to a Diversified Supply Chain
Some are calling it "the Great Diversification" as companies around the world now feel an overwhelming imperative to create redundancies in their supply chain. Although the Covid-19 pandemic and related supply shocks dramatically accelerated this trend, investment by American companies in China had already plateaued and begun to decline even before 2020. Now with the added pressure of trade wars and inflation, the impetus is clear: strengthen supply chains now, or face certain disruption in the not too distant future.
But while everyone wants a more diverse supply chain, achieving it will take a lot of capital investment - and time. The Wall Street Journal recently highlighted some of the challenges.
“There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” says the co-chief executive of Velong Enterprises Co., which has six factories in mainland China and serves big retailers and consumer brands such as Walmart Inc. and grill maker Weber Inc. Yet “there’s nothing like China,” he added. “We’ve built this supply chain for 30 years to work like a Swiss clock. There’s just nothing like it.”
Decoupling from China will be slow, difficult and expensive for companies beginning to rethink their dependency on the world’s second-largest economy.
And the problem isn't just a matter of business size or access to available capital. Take Apple, for example, with over $80 billion in cash reserves. The pandemic, and China's Zero Covid policy, have drastically curtailed iPhone production and cost the company revenue. But it will take Apple "years to diversify from its Chinese factories, even as the country presses on with its zero Covid policy which is hurting iPhone production, according to Counterpoint Research’s Jeff Fieldhack." source
Even at the governmental level, the issue is contentious and extremely challenging. Germany, the fourth largest economy in the world, has invested heavily in its relationship with China to facilitate the growth that put it into that top position.
At a recent trade conference in Singapore, German Chancellor Olaf Scholz put it bluntly: Deglobalization is not an option for any one of us.
“The reality is that we are moving toward a multipolar world, one characterized by a wide diversity of both overlapping interests,” he said.
“Germany does not want to decouple from China, which remains an important business and trading partner for Germany and Europe. And that’s very much is Singapore’s view too and the views of many countries in ASEAN.” source
In addition to diversifying their supply chain, some companies have opted to try and rebuild their entire supply chain locally. This method of "onshoring" faces the most pitfalls of any other option. Not only is it time consuming and costly, there are so many unknowns to the manufacturing process that many companies simply don't know what they don't know. From the NY Times:
Challenges remain for small businesses, however, including labor availability and costs; a patchy, opaque system of suppliers and manufacturers that is reliant on word of mouth; and a lack of capital innovation, automation and sometimes just knowledge.
“I can’t stress how few companies, even big companies, really know where their materials come from, all the way back to the earth,” Ms. Broglin-Peterson said. “You’ve got to understand your supply chain. You’ve got to understand your raw materials, your components. Can you even get them locally?” source
Onshoring, Nearshoring, China plus one, and other strategies will continue to rollout - slowly, and with great effort. Southeast Asia and India could potentially continue to develop the policies and infrastructure to support these options in a meaningful way. But for now, companies need to navigate increasingly uncertain times - with China as their primary supplier.
As companies explore how to diversify their supply chain, it has never been a better time to keep a closer eye on your existing infrastructure and partners in China. Improving your existing supply chain resiliency with access to critical Chinese company data is the most immediate, cost effective and proven way to ensure supply chain continuity in the near to medium term future.
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