Supply chains are becoming supply webs

Companies, especially tech companies, are questioning the orthodoxies of the past 50 years of globalization. Those orthodoxies include always seeking out the lowest-cost manufacturer, no matter how distant, and never carrying surplus inventory or parts. The results of the shift currently under way could include the movement of jobs and manufacturing representing hundreds of billions of dollars in economic activity in the decades to come.

For many companies, the pandemic-fueled pause in globalization is turning into a broad effort to figure out how to make supply chains more robust by adding more factories, suppliers and sources of materials.

Ever since the adoption of the shipping container in the 1960s, supply chains for most goods have grown ever longer. Making transoceanic and transcontinental shipping cheap and reliable meant manufacturing could move to wherever wages were lowest. This, in turn, meant most factories moved to the opposite side of the world, principally to China

Gadgets, which tend to have more parts sourced from more places than almost anything save automobiles and complicated industrial equipment, have turned out to be especially dependent on three features of global trade:

• The first is that raw materials would always be cheap and widely available
• The second, that shipping would always cost a fraction of the value of the goods being moved
• The third was that this shipping would always be reliable

The U.S.-China trade war beginning in 2018 made it apparent to many manufacturers that these assumptions might not hold true. Then the Covid-19 pandemic drove home, making issues with globalized supply chains chronic.

All those materials and goods still have to come from somewhere. In logistics, this shift from supply chains to webs is known as “multiple sourcing,” says Nathan Resnick, president and co-founder of Sourcify, which helps businesses find and manage factories in Asia. With the most recent trade wars, more companies, even small and medium-size ones, have been forced to do the hard work of setting up more factories and synchronizing the quality of goods across them, he adds.

Willy Shih is a professor at Harvard University and a member of a committee advising the U.S. Commerce Department on how to shore up domestic supply chains. In a recent essay, he described how the pandemic has been a wake-up call for managers, and how the world seems to be moving toward companies and countries figuring out how to relocate supply chains within regional trading blocs of politically allied countries.

Governments also are focusing more on safeguarding access to key goods for national-security reasons, these policies go by many names. In China, this move toward self-reliance is known as “dual circulation.” In the European Union, the portion of this philosophy that deals with tech has been christened “Technological Sovereignty.”

Manufacturing of batteries, especially for electric vehicles, is currently dominated by China. But dozens of new “gigafactories” for EV batteries are going up all over the U.S. and the world—basically, just about anywhere there is a robust automobile-manufacturing infrastructure.

The iPhone, that icon of the world’s longest and most complicated supply chains, continues to arrive on time in part because of coordination of Apple and Foxconn, its main contract manufacturer. Even before the pandemic, Foxconn took advantage of generous subsidies to redistribute manufacturing of the iPhone, splitting production of the device and many others that it makes between Shenzhen and western China.

Southeast Asia in particular has become a hotbed of regional “nearsourcing” of tech manufacturing, whole Chinese factories are copied and dropped into countries like Vietnam and Thailand, which remain close to parts and materials that are still manufactured in China, but where labor costs are lower. Samsung Electronics, for example, makes the majority of its smartphones in Vietnam, as well as its smart appliances.

Policies from countries

With most countries in Southeast Asia attempting to maintain geopolitical neutrality, the region has the potential to remain a supplier to pretty much every nation in the world, says Dr. Shih. That won’t stop companies from trying to copy some elements of what is currently accomplished in this region—like the packaging of microchips, a step that comes after their manufacture, in the U.S. and Europe. The result could be regional manufacturing, where countries try to assure that, even if they don’t make something themselves, they can source it from an ally, he adds.

Even if we wanted to, trying to reproduce the whole of electronics supply chains in the U.S., from raw materials to finished goods, would be extraordinarily difficult, if not impossible, says Lauren Dudley, a research analyst focused on competition with China at Rhodium Group.

America may have at one point or another made almost all of the components that go into modern gadgets, but a great deal of that knowledge has been lost, as factories were shipped overseas, engineers and technicians retired, and no one was trained to take their places, says Dr. Shih.

Trying to achieve in the U.S. something like EU officials’ goal of tech sovereignty would be a mistake, says Ms. Kilcrease - director of the energy, economics and security program at the Center for a New American Security. While it makes sense for chips and electronics that will go into defense systems to be made here, that remains a tiny fraction of the total that are manufactured every year. “We should not forget the lessons we learned about how really complex globalized supply chains can lead to innovation,” she adds.

Source:  https://www.wsj.com/articles/how-sanctions-on-russia-war-in-ukraine-and-covid-in-china-are-transforming-global-supply-chains-11648267248

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