Chain Reaction
In the light of the COVID-19 pandemic, companies need to re-examine their supply chains and devise contingency plans.
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Department of Information Systems, Business Statistics & Operations Management, HKUST Business School
Before the pandemic, globalization had led to the world becoming flat, and value chains ran across many countries. This meant that supply chains were stretched and extended to include many more mutually dependent links. But the existence of more links in supply chains means that the chance of errors and risks goes up. Strong mutual dependency also made the stability of each link (or each cluster of links) a prerequisite for business viability. Yet absolute stability is nothing but a dream, so when all one’s eggs are put in one regional or national basket, no matter how safe that basket may appear to be, it is a only matter of time before something will rock it. So reorganizing the supply network to create multiple sourcing should be on the agenda of every multi-national company.
Nevertheless, it is painful and time consuming to move large parts of a value chain away from China. There are several reasons. First, that China became the “Factory of the World” is not the result of anyone’s smart planning, or any one visionary leader’s policy. It is by and large the result of organic growth over several decades. Second, parts of the value chain that are outside of China have been optimized to work with the China Factory in order to derive higher profits. The downside of a system optimized for maximum profits under a given condition—that the China Factory is used and kept working—is that the system is incapable of a quick adjustment when that condition is no more due to reasons of international politics.
As it took decades for manufacturing to move into China, it will take a considerable amount of time for manufacturing to move out of it. Apple Computer is a good example. Most iPhones are made in China, not because of its cheaper labor, but because clusters of supporting industries, and a vast multitude of highly qualified engineers, are readily available. It will be extremely hard to replicate this humongous organically grown structure in India, or elsewhere, in just a few years.
The garment and fashion industry is another example. For many fashion brands, shifting garment sourcing from China to alternative countries of production in Asia is not a viable solution for a number of reasons. These are mainly connected to matters of materials, capacity, and capability. First, the textile and apparel supply chain in Asia is highly reliant on China’s supply of fabrics and garment accessories, and other inputs. Second, many neighboring countries are already facing capacity constraints (e.g., Vietnam’s capacity is currently full). This is because US retailers have been moving some of their production to these countries in order to reduce exposure to sole-sourcing from China since the China-US trade war. Third, skill-sets, craftsmanship and product offerings of some other producer countries such as Bangladesh and India are still unable to match or substitute for those available in China.
National Security and Political Health