China’s effect on the Global Supply Chain

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There have been many articles in the popular press about the perceived growing dominance of China on the global supply chain (e.g. China will be the largest economy in ten years, China will lead the world in patent filings, etc.). There are many writers that have held this up as “the sky is falling” and evidence that what appears to be our (the United States) increasing dependence on a single source of supply is going to be the downfall of American Industry.

Over the last few years, companies have used Chinese production for the low end of manufacturing – high labor content goods. There has been some expansion into more complex manufacturing, but there is a good chance that this will not happen at a rapid rate rate. It appears to me that this trend is likely to slow down even further because of some serious developing risk management issues associated with depending upon China as a primary source of supply. From the standpoint of physical supply chain issues, the two looming issues for China are a shortage of energy and a highly fragmented transportation and logistics system. The energy shortage in China has been reported by Chinese authorities – the State Grid Corporation of China, the largest electric power transmission and distribution company in the country, has said that 26 provincial-level regions under its management would suffer from a shortfall of about 30 gigawatts over the next six months. The energy shortage is expected to hit most seriously in those provinces with the most heavy industry and is being fueled by the increasing cost of coal (80% of China’s production capacity is coal-fired) and disruptions to hydro-electric power (to give an idea of scale, one gigawatt can power 1 million homes or would equal the full power output from one of the largest nuclear reactors currently in use).  From the standpoint of manufacturing transportation and logistics, China is believed to have approximately 700,000 transportation companies with an average of three trucks per. This situation is even worse when one considers food manufacturing and transport, particularly for perishable food stuffs. As an example, where the U.S. has nine refrigerated trucks per 10,000 consumers China has two.

The situation with regards to the financial supply chain displays similar issues. The factors operating here are – a gradual increase in Chinese wages, inflation, increasing trade protectionism, and the increasing value of the renminbi.  The CEO of Li & Fung, a major Hong Kong based trading company, has indicated that Chinese wages will probably increase by 80% over the next five years.  Increasing social and labor unrest makes this highly likely. Fung even predicts that the “one-child” policy that has been in effect for many years is likely to result in spot labor shortages, particularly for skilled labor required by more complex manufacturing processes. Trade protectionism is operating on both sides of the Pacific. While it is well-known that Congress and industry have pushed for anti-dumping tariff legislation in the U.S., it has been less widely reported that the Chinese have responded in kind. In addition, some of the compliance laws recently put in place by the Chinese is designed to either stem the outflow of raw materials from China to other parts of the world, or to reign in the growth of operations that simply assemble parts made elsewhere in favor of increased high complexity manufactured goods completed in China and then exported. The value of the renminbi is also being driven by global politics. Congress passed a bill last September imposing tariffs on imports from countries whose currency appears to be undervalued.  China continues to keep the value of their currency artificially low but has had to allow some increases due to US and other international pressure.  Other factors driving companies to do business elsewhere are product safety and quality issues and the security of intellectual property.

How are companies dealing with these developing issues in the Chinese supply chain?  Anecdotal information and some surveys (Global Sources, for one) are showing that many companies that previously sourced from China are starting to source from other countries. The big winner in this is India (57 percent of buyers indicated that they would switch their sourcing to India), but Vietnam, Thailand, the Philippines, and Malaysia are also seeing increases in global sourcing.

Our conversations with manufacturers indicate that, more and more, they see increasing value to multiple sources of global supply. In addition, this is driving more interest in the advantages of collaborating with suppliers on things like R&D, production efficiency, logistics, etc. instead of focusing solely on cost. As evidenced by the China example, costs in the long run are likely to even out globally while sustainable competitive advantage is likely to rest with those companies that have unlocked the secret of value-based global supply chains.

So, what is your company doing to diversify its global supply chain?, how is your company coping with the cost increases that it is starting to incur in its existing China business?, What countries are on your radar as additional sourcing partners?

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Anne Kohler
Anne has been leading consulting and financial management organizations for over 25 years. She has extensive expertise in Strategic Sourcing, change management, contracting & contract management (both the buy side and sell side) organizational design and supply chain management. Anne has a passion for collaborating and educating her clients while helping them to uncover hidden value in their organizations. In addition, Anne has been named by Supply & Demand Chain Executive as a “Top 100 Provider Pro to Know” every year since 2007 and a 2013 Top Female Supply Chain executive.

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