The world is about to face a divided supply chain

Chen Gong and Song Junjie

China has to rethink ways to make its business environment conducive and sustainable for foreign investors

China has to rethink ways to make its business environment conducive and sustainable for foreign investors

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Yuji Miura, a senior researcher at the well-known Japan Research Institute, has recently noticed a phenomenon where “the global market may be divided into ‘China’ and ‘non-China’. This is a striking statement as it would be expected that the global trade can be isolated and divided into different sections in the era of globalisation.

Trade protectionism

In the context of a US-China trade war, the concept of industrial transfer has begun to change. In the past, the supply chain transfer was dominated by horizontal integrations to gain competitive advantages. However, studies have shown that the global supply chain is favouring vertical integrations due to the increasing trend of trade protectionism. Take the US-China trade war as an example. In the past year, the US has imposed high tariffs ranging from 10 percent to 25 percent on Chinese exports. This has greatly affected companies that consider the US as an export market, which is the industrial transfer’s biggest intention. To better gain an intuition on this scenario, let’s consider the supply chain of mobile phones. An iPhone is primarily designed upstream by mobile phone and semiconductor companies in the Silicon Valley such as Apple Inc and Qualcomm Inc. Then, other important mobile phone components such as microSD cards and mobile processors are produced in countries like Taiwan, Japan and Korea. A
ll these components and designs will be sent to mainland China for manufacturing, and the final product is shipped back to the US for sale. Hence, China is the last player in the chain of production, and the US plays the role of an export market.

It is without a doubt that the global supply chain is greatly affected by the China-US trade war. The Japan Research Institute has conducted a study to investigate the total value of countries and regions included in China’s exports to the US. The result of this study has shown that, as of 2015, South Korea, US, Taiwan and Japan have reached a value of about one trillion yen each. This shows that China’s assembly of electronic products has utilised a huge number of overseas components. As a result, several enterprises have developed strategies to reduce their dependence on China due to the economic pain that stagnates product circulation in China. According to recent data, 50 companies worldwide have publicly indicated or discussed the need to move their product manufacturing due to the China-US conflict. Although many of the situations are still under active discussions, most companies are expected to retain China’s production base and transfer US operations targeted by tariffs overseas. Data has also shown
that investment in China’s neighbouring countries like India and Vietnam is growing by 10 percent to 30 percent.

On the other hand, China still has great potential as a consumer market. According to the United Nations Statistics Division, China’s total consumption accounts for 26.35 percent of the global market, second only to the US. Therefore, the supply chain brought by the Chinese market is undoubtedly important. The supply chain subsystems play an important role in the context of US-China conflict. Although certain companies such as chip manufacturing leader Taiwan Semiconductor Manufacturing Co Ltd can maintain relations with both China and the US, many other companies are forced to pick a side. Reuters previously reported that Tokyo Electron Ltd, the world’s third largest semiconductor manufacturing equipment supplier, will not sell their products to Chinese companies blacklisted by the US government.

Technology barriers

The executives of Tokyo Electron have stated that they may be in deep trouble if they utilise the US export ban to expand their businesses with China. In other words, manufacturers in Japan, South Korea and Taiwan who are competing with US companies will face challenges in selecting the country to side with. Terry Gou, the founder of Foxconn Tech Group (Hon Hai Precision Industry Co Ltd), has moreover said that the US will establish barriers to technology equipment and components so that China will have to readjust their product manufacturing strategies. There will eventually be a need to re-establish the supply chain in different regions, and this supply chain will be divided according to the US and China markets.

How should China overcome the division of supply chain? The researchers at Anbound have presented three suggestions. Firstly, the framework of foreign investments should be improved to attract foreign investors into businesses, productions and sales in China. Aside from tax reduction and subsidies, China must create opportunities for foreign investors to a create business environment. However, if the local finances are not up to standard, such methods of attracting foreign investments will only increase the pressures on local finances. Hence, Anbound emphasises the importance of transparent and predictable policies that reduces the complexity of applications and assessments, strengthens the communication with foreign companies and focuses on the cultivation of consumer markets. In the midst of US-China trade war, there are still many companies that choose to stay in mainland China for production in order to target China’s consumer market.

Hong Kong’s South China Morning Post and Taiwan’s Business Weekly have reported that some electronics and textile manufacturers in Taiwan did not leave mainland China in the midst of a global economic turmoil. Instead, they have chosen to maintain the current structure of supply chain and target the Chinese market. Therefore, the consumer market has a great impact on the future of global supply chain. Finally, throughout an industry life cycle, some enterprises will eventually need to move out of China. The government needs to monitor and guide the movement of Chinese enterprises and capital instead of restricting them. To maintain China’s supply chain, her market potential must be fully utilised.

Final analysis conclusion

Due to the US sanctions in the midst of US-China trade conflicts, the global supply chain will be divided into “China” and “non-China”. To overcome this situation, China must reform the business environment and cultivate the domestic market to attract foreign investments. At the same time, the government must guide enterprises and capitals that are moving out of China.

Founder of Anbound Think Tank in 1993, Chen Gong is now Anbound chief researcher. Chen Gong is one of China’s renowned experts in information analysis. Most of Chen Gong’s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

Song Junjie, graduated from Tsinghua University with a master’s degree in economics and is an assistant researcher at Anbound Consulting. Anbound Consulting is an independent think tank based in Beijing. It was founded in 1993 and specialises in public policy research

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