APPLE’S WARNINGS THAT its revenues are likely to fall short of expectations this quarter because of the impact of the coronavirus Covid-19 is a blunt reminder that supply chains, as well as sales, have been no more immune from disruption by the outbreak than any other aspect of the economy.
In truth, the economic disruption of the coronavirus is likely to be temporary, and firms cannot reconfigure overnight their supply chains nor the skillsets and relationships that underpin them. However, it offers foreign firms that might already be re-evaluating their supply chains in China one more excuse to pull back.
Reasons for doing so are various, from worries about the Trump administration’s protectionist trade policy to environmental concerns over carbon footprints and concentration risks from being over-reliant on a small set of suppliers in one country. Diversifying and shortening supply chains, even to the point of re-shoring production in the case of companies selling into the US market, makes sense to mitigate all those risks, even if it may bring new ones in the form of more complex and demanding management requirements and more possible points of failure and IP theft.
Regionalisation or domestication of global supply chains would be in line with the current trend of ‘deglobalisation’ but not without consequences. For one, it would solidify emerging regional trading blocks and patterns of trade. An East and Southeast Asian trade region with China as its hub is already coalescing. It would also weaken the interdependency between China’s economy and the United States.
In the pre-Trump era, trade was considered a matter of commerce and not national security. China provided manufacturing capacity, production engineering expertise, logistics capabilities and, decreasingly, low-cost labour in return for superior US intellectual property, design and innovation skills, branding and, decreasingly, an end-market. This equilibrium has been disrupted by both sides’ emphasis on national security and economic nationalism and the heightened role of technology as a dimension of the two nation’s contestation.
It is not unfair to say that the West underestimated how China’s ability to transform from fast follower to frugal innovator would be followed by its rise as a frontline innovator. That, the theory went, could not happen in authoritarian regimes where the government, not the market picked commercial winners, rote learning stifled innovative minds and, to use a Japanese phrase, the nail that sticks out gets hammered down.
However, that was not true for Japan at a comparable stage of development and is proving not to be the case with China, especially in areas such as artificial intelligence and quantum computing.
This is to the consternation of many in the United States where the assumption that US technological superiority is unsurpassable dies hard. China hawks in the Trump administration are consequently pursuing a range of initiatives to crimp China’s technological progress.
The campaign against Huawei, tightened further last week with more charges against the company of industrial espionage, is the most visible aspect. Yet this is just the spearhead of a range of initiatives to keep US technology, especially advanced and emerging technologies, from falling into Chinese hands by legal and illegal means.
Beijing’s response has been to accelerate the development of indigenous technology, both civilian and military, although the distinction is becoming less and less. The Made in China 2025 programme is the poster child for this.
Huawei has already shown it can produce smartphones without US chips. The bigger question that will be answered over the next couple of years is whether Chinese companies more broadly will be able to design and manufacture competitive end-products.
The risks to the United States are twofold. First, the loss of their Chinese markets to indigenous products would cut so deeply into their sales that it crimps their ability to spend on R&D needed to stay innovative. This would be amplified if China then dominated emerging third-country markets.
Second, and more seriously, this technological decoupling would be asynchronous: China would become innovative on par or better with US firms, but US firms would not necessarily regain their lost manufacturing and production engineering skills.
Reskilling a workforce is the unglamourous slog of long-term public policy-making for which the current US administration has little appetite.
Tim Cook, chief executive of Apple, once famously remarked that if he called together all the manufacturing production engineers in China, it would fill a couple of football stadiums; the same meeting in the United States wouldn’t fill a couple of rooms.
In an extreme but not inconceivable scenario, China’s reliance on the West could become the West’s reliance on China.