The reconfiguration of the global supply chains
Published: 03:06 PM,Jun 29,2024 | EDITED : 07:06 PM,Jun 29,2024
The global supply chain, a dynamic and remarkably adaptable system, has steadily gained prominence since the latter half of the 20th century. Its evolution has been shaped by globalization, trade liberalization, reduction in trade barriers, technological advancements, accelerated communication speed, cheaper transportation, offshoring, and outsourcing.
The production process becomes fragmented, and input goods travel across the global value chain before the final product is manufactured and sold to the customer. This is the worldwide supply chain, a system that continues to evolve and grow with time and the dynamic global climate. Over the years, China has played a significant role in the global supply chain, earning the title of the “manufacturing hub of the world” due to its cost competitiveness. However, with paradigm economic developments, escalating geo-political tensions, the trade war between China and the USA, Covid-19, the Russian invasion of Ukraine, and the escalating war between Israel and Palestine, the global supply chain has shown changes by adapting to these structural changes.
First, to understand the rise of structural changes, let us see how China became the world's manufacturing hub. China’s World Trade Organization (WTO) membership in 2001, reduction of their import tariffs, FDI attraction, a vast pool of cheap labour, and plow back of massive savings into the championed sectors led to the rise of China to the center of the global value chains.
China’s role as the “world factory” was not limited to finished products but included intermediary goods. This huge comparative advantage worked in their value until foreign investors realized they could not access China’s domestic market, resulting in asymmetries in the functioning of the global supply chains. Contentious relations between China and the USA played a key role and inevitably led to shifts in the global supply chain. The USA restrictions and impositions of trade barriers have made it expensive for US businesses to operate in China.
Many countries like Japan, the USA, the EU, and the Republic of Korea have introduced legislation that impacts international trade. With the growth of the Chinese middle class, there is a demand for higher wages and better working conditions. This eroded the once-enjoyed comparative competitive cost advantage of low labour and production costs. The impact of geopolitical tensions on the global supply chain is urgent and cannot be ignored.
The Covid-19 pandemic served as a stark reminder of the vulnerability of the global supply chain. Beyond its health implications, the pandemic proved a significant cost for companies heavily reliant on a single-location supplier. This realization underscored the critical importance of supply chain diversification in building a resilient supply chain capable of absorbing unexpected external shocks. The need for diversification has become a key learning point in the evolution of the global supply chain, emphasizing the urgency of this strategy.
Globalization has driven rapid global trade flows and has now experienced a slowdown, pause, or potential reversal. This is the first time in 20 years that Mexico has officially surpassed China as the largest importer into the USA. The US has seen a 5% increase in imports from Mexico from 2022 to 2023 and a 20% drop in Chinese imports, reflecting a shift in the import of finished and intermediary goods.
Many companies have adopted the 'China plus one' strategy to enhance the resilience of their supply chains and mitigate the risks associated with economic and political factors. In this strategy, companies maintain their presence in China while investing in other countries to reduce the risk and dependence on a single country. Companies explore strategies like reshoring, near-shoring, friend-shoring, and diversification. Regionalization will reduce the risk between markets, mitigate the risk of trade wars and protectionist policies, and improve political relationships between regional neighbours.
The Southeast Asia region is emerging as an ideal alternative. India, the second largest economy in the area, is an attractive alternative to China as a primary supplier. Emerging countries like Vietnam, Malaysia, and Indonesia have low labour costs, low manufacturing costs, and a young, energetic workforce, making them attractive as a manufacturing destination. Bangladesh also offers competitive labour costs, a large workforce, and duty-free market access to many countries.
Bangladesh shows strong potential as a manufacturing alternative to China, especially in textiles and electronics; it must address challenges like lack of diversification, energy dependence, and skills gaps. Some African countries, like Ethiopia, have made many policy changes like tax breaks, infrastructural developments, and investments in industrial parks to attract foreign investors.
In conclusion, the structural reconfiguration of the global supply chain has begun to eclipse China’s competitiveness and attractions, with the emergence of alternatives in Southeast Asia, the Indian subcontinent, and Africa. The China market is still huge and has considerable purchasing power. China is also attractive for advanced manufacturing. The reconfiguration of the global supply chains away from China, which remains a major manufacturing powerhouse, will take time and unfold gradually.
The production process becomes fragmented, and input goods travel across the global value chain before the final product is manufactured and sold to the customer. This is the worldwide supply chain, a system that continues to evolve and grow with time and the dynamic global climate. Over the years, China has played a significant role in the global supply chain, earning the title of the “manufacturing hub of the world” due to its cost competitiveness. However, with paradigm economic developments, escalating geo-political tensions, the trade war between China and the USA, Covid-19, the Russian invasion of Ukraine, and the escalating war between Israel and Palestine, the global supply chain has shown changes by adapting to these structural changes.
First, to understand the rise of structural changes, let us see how China became the world's manufacturing hub. China’s World Trade Organization (WTO) membership in 2001, reduction of their import tariffs, FDI attraction, a vast pool of cheap labour, and plow back of massive savings into the championed sectors led to the rise of China to the center of the global value chains.
China’s role as the “world factory” was not limited to finished products but included intermediary goods. This huge comparative advantage worked in their value until foreign investors realized they could not access China’s domestic market, resulting in asymmetries in the functioning of the global supply chains. Contentious relations between China and the USA played a key role and inevitably led to shifts in the global supply chain. The USA restrictions and impositions of trade barriers have made it expensive for US businesses to operate in China.
Many countries like Japan, the USA, the EU, and the Republic of Korea have introduced legislation that impacts international trade. With the growth of the Chinese middle class, there is a demand for higher wages and better working conditions. This eroded the once-enjoyed comparative competitive cost advantage of low labour and production costs. The impact of geopolitical tensions on the global supply chain is urgent and cannot be ignored.
The Covid-19 pandemic served as a stark reminder of the vulnerability of the global supply chain. Beyond its health implications, the pandemic proved a significant cost for companies heavily reliant on a single-location supplier. This realization underscored the critical importance of supply chain diversification in building a resilient supply chain capable of absorbing unexpected external shocks. The need for diversification has become a key learning point in the evolution of the global supply chain, emphasizing the urgency of this strategy.
Globalization has driven rapid global trade flows and has now experienced a slowdown, pause, or potential reversal. This is the first time in 20 years that Mexico has officially surpassed China as the largest importer into the USA. The US has seen a 5% increase in imports from Mexico from 2022 to 2023 and a 20% drop in Chinese imports, reflecting a shift in the import of finished and intermediary goods.
Many companies have adopted the 'China plus one' strategy to enhance the resilience of their supply chains and mitigate the risks associated with economic and political factors. In this strategy, companies maintain their presence in China while investing in other countries to reduce the risk and dependence on a single country. Companies explore strategies like reshoring, near-shoring, friend-shoring, and diversification. Regionalization will reduce the risk between markets, mitigate the risk of trade wars and protectionist policies, and improve political relationships between regional neighbours.
The Southeast Asia region is emerging as an ideal alternative. India, the second largest economy in the area, is an attractive alternative to China as a primary supplier. Emerging countries like Vietnam, Malaysia, and Indonesia have low labour costs, low manufacturing costs, and a young, energetic workforce, making them attractive as a manufacturing destination. Bangladesh also offers competitive labour costs, a large workforce, and duty-free market access to many countries.
Bangladesh shows strong potential as a manufacturing alternative to China, especially in textiles and electronics; it must address challenges like lack of diversification, energy dependence, and skills gaps. Some African countries, like Ethiopia, have made many policy changes like tax breaks, infrastructural developments, and investments in industrial parks to attract foreign investors.
In conclusion, the structural reconfiguration of the global supply chain has begun to eclipse China’s competitiveness and attractions, with the emergence of alternatives in Southeast Asia, the Indian subcontinent, and Africa. The China market is still huge and has considerable purchasing power. China is also attractive for advanced manufacturing. The reconfiguration of the global supply chains away from China, which remains a major manufacturing powerhouse, will take time and unfold gradually.