The Economist - USA (2019-07-13)

The EconomistJuly 13th 2019 Special reportGlobal supply chains 7

2 His firm is looking seriously at shifting its sourcing for the global
market from China to India, but finds Indian vendors “unreliable”.
It thought about dividing between India and Mexico, but saw that
its supply base would lose economies of scale. The winner will be
Mexico, he says.
A longer-term force that could turn automotive supply chains
upside down is electrification. The Edison Electric Institute, a
think-tank, estimates that the share of electric vehicles (evs) in
new car sales in America will rise from 2% in 2018 to over 20% in

2030. That could reduce trade in parts dramatically, since evs have
      many fewer moving parts than conventional cars. Ford calculates
      that a shift to electric would reduce the value added by branded car
      manufacturers from 30% to 10%.
      Dyson, a British engineering firm, is now designing and manu-
      facturing its new evs in Singapore to be close to China. This is not
      just because the mainland is the biggest market for such vehicles.
      It is also the beating heart of global electronics production.

Innovation nation

Half the world’s electronics-manufacturing capacity is based on

the mainland. Its strengths go beyond sheer scale to diversity and

sophistication of products. The pace of hardware innovation in

China’s Pearl river delta is unmatched even in Silicon Valley. So,

too, is its unique blend of scale and agility. This is why most of the

world’s technology giants make their kit in China.

Rising costs led some electronics firms to consider moving out

a few years ago. Most notably, Samsung has built a huge smart-

phone-manufacturing complex in Vietnam. Now the political

risks associated with sourcing from China, especially the Huawei

crackdown, are causing others to consider

leaving. GoPro, which makes rugged digi-

tal cameras, is shifting much of its produc-

tion to Mexico. Stanley Black & Decker, a

big toolmaker, is moving production of its

Craftsman brand of tools back to America.

Sweden’s Ericsson is scaling up American

manufacturing in anticipation of a boom

in 5gtelecoms-equipment sales.

Many firms are discovering that leaving

China is not so easy. John Kern is the head

of supply chains at America’s Cisco, a telecoms-equipment com-

pany. Because of the concerns of customers in America and India

who want non-China sourcing, it has upgraded its Mexican oper-

ations. But it still has many global customers without such con-

cerns. He says China is a big manufacturing base for Cisco and

“will remain so for many years to come”.

George Yeo of Kerry Logistics, which has lorries and men all

over Asia, has noticed an uptick in clients investing in South-East

Asia. Vietnam and Cambodia are the biggest beneficiaries, he re-

ports. But labour productivity is a big problem across the region

and infrastructure can be ropey. Much of the investment he sees is

going into labour-intensive industries like textiles. In electronics,

Mr Yeo thinks the exodus is limited to low-end kit. “Thanks to

automation and high value-add, Shenzhen is still king.”

Scrutiny of these three sectors suggests a messy path forward

from globalisation. Making this challenge more acute, mncbosses

are now faced with a double threat. Not only must they make sup-

ply chains shorter, they must make them faster. 7

Many firms are

discovering that

leaving China is

not so easy

Which way out?

How firms making clothes, cars and computers would respond to an all-out trade war

L

lamasoft, a supply-chainanalytics

firm, looked at representative Ameri-

can mncs in clothing, cars and electronics

to assess the impact of America’s threat-

ened imposition of a 25% tariff on all

Chinese imports. It assumed firms would

move sourcing and manufacturing out of

China only as much as economic logic

dictates. The analysis recognised the costs

of moving production and the benefits of

reduced inventories, cheaper logistics and

shorter cycle times for inventory from

positioning supplies closer to consumers.

The clothing industry would see total

costs jump by 11% after such tariffs. Sourc-

ing costs would rise by 23% and manufac-

turing costs by 43%, but nearshoring

would improve average cycle times from 19

to 14 days. Overall costs in the car industry

would increase by less than 4%, but that

would mask powerful counter-currents

from the shift to regional hubs. Manufac-

turing costs would shoot up by 21%, but

sourcing costs would drop by 25%. With

cycle times falling from 127 days to 95,

inventory and logistics costs would be cut.

The electronics sector, which has

strong roots in China, would see an in-

crease in total costs of only 2%. Because

making such kit outside the mainland is

much pricier, even the modest amount of

nearshoring assumed sends manufactur-

ing costs shooting up by 28%. However,

the reduction in cycle times from 35 days

to 28 days would cut logistics costs and

inventory costs dramatically.

The price ofwar

Source: Llamasoft

*Flows of raw materials to manufacturing plants fromsuppliers †Representative multinational firms with headquarters inAmerica

‡Number of days it would take to satisfy a customer order if all inventory levels were zero

Impact on costsif USimposestariffsof25%onallChineseimports,2019,$bn

Clothingindustries† Automotiveindustries Electronicsindustries†

Pre-tariff

Post-tariff scenario

no adjustments

Post-tariff scenario

shift in sourcing

Sourcing* Manufacturing Logistics

Inventorycarryingcost Tariffs/taxes

0 0.5 1.0 1.5 2.0

19

19

14

Cycle‡

time

012345

127

127

95

Cycle‡

time

0 0.5 1.0 1.5

35

35

28

Cycle‡

time