There’s a trite expression that perfectly encapsulates how corporate leaders should now be viewing their intense dependence on Chinese production: Fool me once, shame on you. Fool me twice, shame on me.
After Covid-19 first struck in China, shuttering factories there before disruptions spread around the world, executives kind of knew it was a bad idea to have their supply chains concentrated in just a few key geographies in one nation. However, within a year China was all but up and running and the rest of the globe was struggling. At that point, it was reasonable to believe that maybe this centrally planned, authoritarian and efficient system of government was the perfect regime under which to place your manufacturing and logistics systems after all.
Allegations of human rights violations, and restrictions on freedom of movement and expression don’t tend to bother industry titans. Apple Inc., for example, still gets most of its devices made in the country and is going deeper into the supply chain with reports last month from Bloomberg News that it’s about to add Yangtze Memories Technologies Co. to its lineup of memory-chip providers. Beijing has repeatedly denied the abuse claims, which relate concerns over the country’s treatment of the Uyghur ethnic minority.
Images out of Shanghai, where residents under strict lockdown complain about lack of supplies and access to food, remind us that even China isn’t perfect. Despite the burden on citizens and its impact on economic growth, the government is sticking with its Covid-zero policy. Still, both President Xi Jinping and the Communist Party have felt the pressure of people’s discontent. They are not alone. Governments around the world have messed up their pandemic responses, often with tragic consequences. There have been more than 6.1 million deaths globally, thousands of them due to mismanagement, health-care decisions driven by politics rather science, and underlying socio-economic problems.
There are ways to track superior performers. Bloomberg’s Covid resilience ranking gives an insight into how countries have coped over time. But even if we had a crystal ball and could predict such scores into the future, such comparisons don’t eliminate the underlying fact that there’s value in diversity.
So the debate about which nation is handling the pandemic better, and whether Covid-zero or targeted lockdowns plus robust vaccination programs are superior policies, are a distraction from the bigger issue: concentrated supply chains are a bad idea.
The impact from the latest wave in China could hit global industry hard. Quanta Computer Inc., which makes MacBooks, suspended operations in Shanghai due to pandemic prevention measures. Fellow Apple supplier Pegatron Corp. announced similar measures earlier in the week.
And the troubles have spread to different industries and geographies. A survey by the Shanghai Solar Energy Society found that equipment makers had cut production while shipping delays and staffing problems were also hurting the industry. Tesla Inc., which makes cars in Shanghai, closed its facility. In Japan, Mazda Motor Corp. said it would halt work at two factories because of a shortage of parts from China.
Ongoing containment measures have struck logistics, too, meaning that even if a plant could operate normally its output can’t be sent across the country to the next factory that uses those parts. Access points for inter-provincial highways were shut off in at least 10 coastal provinces, Beijing-based consultancy Trivium China wrote in a recent note.
Industry isn’t totally ignorant of the need to “de-concentrate.” Apple just started production of its fourth smartphone model to be made in India, with the iPhone 13 being built in Tamil Nadu. And Intel Corp. chief executive officer Pat Gelsinger has been banging the diversity drum for the past year, with a recent trip to India coupled with continued calls for government assistance to make more chips in the US and Europe.
But for as long as one nation plays host to 70% of the world’s solar cell production, most computers, more than half of the planet’s smartphones (including two-thirds of all iPhones), and has an outsize share in everything from commodities processing to children’s toys, then a shift is sorely needed.
We were reminded of this fact when Covid-19 first broke out. With renewed struggles two years later, that message is finally starting to spread. Let’s hope global industry leaders don’t get complacent a second time.
Bloomberg
