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supply chain

Supply chain

American hardball and localization are reshaping global supply chains

Published 13 July 2021 in Supply chain • 4 min read

What has been happening to global supply chains, especially those running in and out of Asia?

COVID-19 exposed extensive single-source supply chains for many kinds of vital goods, so anywhere with those is looking for ways to having those chains diversified and replicated.

But there are also other forces at work. On the geopolitical side, there’s the strategic decoupling arising from the US weaponizing supply chains through its use of sanctions and restrictions to choke companies such as Huawei, Hikvision and other big Chinese tech companies. This decoupling is also happening around data and human capital. The days will soon come where in advanced programs for quantum computing at Cambridge or MIT people are not going to work with top Chinese scientists and programmers. They’re going to say sorry, you’re not welcome. We’re not there yet, but we will be soon.

Then you have climate change. That’s bringing really strong incentives to localize production whenever possible, so you don’t have to send away for things or transport them backwards and forwards as happens with many high-tech goods. As the technology becomes available to automate manufacturing without needing a factory in, say, Vietnam, we’ll soon be at the point where much production can be done locally, where products are sold.

This seems to be upsetting some people.

There’s definitely this crowd out there saying, “Oh, this is terrible. We have to have globalization for growth and development.” But it’s not. It’s just a different set up, with production of strategic goods moving somewhere else.

For anything to do with capacity building for this, you’ve got the hard infrastructure that has to be built, you’ve got the service sector that gets pulled in, you’ve got logistics, you’ve got academics, you’ve got these public-private partnerships which are going to play a huge role in shaping supply chains. It doesn’t stop – it just happens somewhere else.

We’re seeing this with the US government pushing really hard on Samsung, TSMC and Intel to build new capacity in the US. Japan is doing the same thing. So is India, which despite all of its problems and historic issues is shaping up to be a very promising place for tech manufacturing in the future.

One thing to come out of this will be new strategic partnerships. With the US, you’re going to see new public-private partnerships to build secure supply chains with secure geo-fenced manufacturing ecosystems. All of this is well underway.

Strategic decoupling means there’s a tough road ahead for China
- Alex Capri

What other changes do you foresee?

I like to talk about a trifurcation of global supply chains. You have the strategic supply chain, which we’ve just discussed, then you have a gray zone with a lot of dualuse technologies, and then the bottom zone for everything else.

The gray zone I call the danger zone, because even the most seemingly innocuous technologies – medical technologies, cars, consumer electronics, anything to do with the Internet of Things, connectivity – though they’re commercial, they’re also dual-use technologies, meaning they could have military applications. So you have this thick band of the danger zone that from one day to the next could get bumped up to being strategic. From a supply-chain standpoint, companies will really need transparency – to be able to screen their end users, know all their sub-contractors and have information and data for every moving part that goes through their supply chain.

Trade and reg tech will be the name of the new game in this new super-high-risk world. Without full transparency and traceability in your supply chain, you’ll basically be flying blind, meaning you could slam into a mountain without any warning.

We’re also going to see “glocalization”, with international companies becoming specialized local players in local ecosystems. It’s going to be in China for China, in North America for North America, in Europe for Europe.

Who will be the losers?

Strategic decoupling means there’s a tough road ahead for China, but it should continue to do well overall. Its dual circulation strategy supports the development of its domestic markets, which foreign companies will want to serve with their “in China for China” strategies. The real losers will be the less-developed economies, especially once manufacturing facilitated by automation takes off and the richer countries can make much more locally.

Is there anything that surprised you over the last 18 months?

One thing: the naiveté [of many companies]. I come in contact with many executives and I don’t think much of the corporate world fully understands the magnitude of the change taking place – that this is a paradigm shift. There’s this delusion that people can just ride this thing out – that it will be a bumpy ride, but things will eventually get better. No. We’re going to see a continuing shift driven be strategic decoupling.

In this regard, I’m surprised that Wall Street remains so bullish on China. It’s investing in an environment that has virtually zero transparency, where it’s impossible to know your customer. In a country with a military-civil fusion that involves virtually every big company and many smaller ones, what happens if somebody comes along and says “We’re auditing – show us your KYC data and convince us that this company you’re investing in isn’t tied to the Chinese state or the Chinese Communist Party.” If the US government wanted to play hardball, that would cause a lot of problems, I’m surprised at how bullish Wall Street remains.

Authors

Alex Capri

 Research fellow at the Singapore-based Hinrich Foundation

Alex Capri has more than 20 years of experience working in global business and international trade as an academic and professional consultant. He is a research fellow at the Singapore-based Hinrich Foundation and a senior advisor at BowerGroupAsia. Until this year, he was a visiting senior fellow at the National University of Singapore Business School and the NUS Lee Kuan Yee School of Public Policy. From 2007-12, he worked in Hong Kong as Partner and Regional Leader of KPMG’s International Trade & Customs Practice in Asia Pacific. His book, Techno-Nationalism: How it’s Reshaping Trade, Geopolitics, and Society, will be published by Wiley in January 2022.  

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