If you hear “global supply chain”, Chinese manufacturing likely flashes through your mind. And for good reason; in 2018, more than a quarter of all global manufacturing happened in China. This domination has lasted for almost two decades, driven by cheap labor and optimized shipping lanes, but also built upon loosened state regulations and a desire to become a world industrial powerhouse.
As we enter 2021, there are changes afoot that may predict the demise of Chinese manufacturing domination. Last year brought about a perfect storm of problems. This began with the US trade war and ended with the COVID-19 pandemic and its associated geopolitical tensions. Such issues may disrupt the earlier ‘Made In China 2025’ plan, a broad industrial proposal designed to boost China’s technological and innovative manufacturing capabilities.
Here’s how these forces may play out, and what it will mean to your future sourcing.
Lessons from 2020 and COVID-19
Global supply chains began to feel pandemic effects in earnest by March 2020. Third and fourth-tier suppliers, anonymous and reliable, brought chaos to worldwide supply chains through unexpected closures. Supply chain stability, traceability, and transparency issues were immediately exposed.
While supply chains remained problematic for several months, many companies turned to technology to calm problems. In fact, McKinsey analysts recently noted that pandemic challenges pushed many organizations to achieve five year’s worth of digital adoption in under two months.
These technological shifts helped companies respond to new pressures with innovative logistics and faster and cheaper sales-fulfillment options, using integrated cloud-based technologies, integrating sensor tech and blockchain technology, and harnessing advantageous IoT options like AI chatbots, knowledge-work automation(using computers for creative problem solving), and robotic process automation.
These technologies set the stage for 24-hour, hands-off manufacturing. Known as “lights out” manufacturing, this technology automates production with little to no human intervention. The same technologies are now creeping into the supply chain, improving end-to-end intelligence and traceability.
Technology, Theft, and Talent Recruitment
Even before 2020, some companies began pulling their supply chains from China. By the second quarter 2019, Google reallocated most manufacturing of US-bound motherboards to Malaysia and Taiwan to avoid high Chinese manufacturing tariffs. Other tech manufacturers like Foxconn, Invetec, and Quanta Computer also migrated their sourcing to other countries.
While increasing tariffs played a significant role in these decisions, other constraints played a part. In recent years, the US government has increased its scrutiny of American technology acquisition by China. China has used many avenues to access technology, including recruiting American talent or undertaking joint ventures with American companies who own desired technology. As the American government moves to block this information transfer, collaboration between Chinese and American companies has become more complex and, perhaps, less attractive.
Environmental Issues and Domestic Demand
More pressure is being exerted by the consumer and by worldwide regulating bodies to lower supply chain climate impact through decarbonization. According to the World Economic Forum, some sectors must take more responsibility than others; eight supply chains–including food, fashion, electronics, freight, and automotive–account for more than 50% of all global greenhouse gas emissions. As these pressures increase, supply chains will need to adapt through closer geographic sourcing, scaling for more efficient shipping, and other mechanisms.
While overseas shipping requires more energy than moving domestically produced goods, it must be noted China is currently the world’s largest solar and wind energy producer in the world. As a country, they have invested more in green technology than any other, though it still accounts for less than 25% of total output. And yet, localized goods can only improve their environmental impact if manufacturers turn to technology like renewables, virtual and augmented reality, and waste-reduction to improve their overall efficiency.
Companies like Tesla are investing in electric heavy-freight semi-truck technology. Daimler AG, Toyota, Volvo, and many others are also developing class 8 electric vehicles. This may reduce the environmental impact of moving domestic goods.
Production on the Tesla Semi begins in 2021 with deliveries expected by 2022. Such vehicles are expected to have lower operating costs than traditional diesel trucks while decreasing cross-country shipping’s environmental impact. However, battery technology for these vehicles is unproven, and supporting infrastructure is limited. Additionally, batteries may prove too heavy for economical long-range payloads.
Higher-income American consumers have made it known they are willing to pay more for domestically produced goods. However, while 70% of Americans felt buying US-made goods was important, many lower-income consumers were unwilling or unable to pay more for such products. Meanwhile, the new US administration has called for an offshoring tax penalty of 10% and a “Made in America” credit of 10% for some expenses that could significantly shift the competitive edge back to American manufacturers.
Conclusion
Many factors influence whether to localize or globalize a supply chain. Globalization has been the standard for many years, but it may not be the right answer going forward for some. Costs, demand, and long-term goals, as always, should guide your decisions.
About the Author
Technology writer Marla Keene works for AX Control, Inc, an industrial automation parts supplier located in North Carolina. She writes about AR/VR, drones, green tech, artificial intelligence, and how technology is changing our world. Her articles have been featured in Wind Power Engineering, Food Industry Executive, and on other industry sites. Before working for AX Control, Marla spent twelve years running her own small business.
