For the past two decades, Beijing has pampered global manufacturers with its meticulously built infrastructure and abundant industrial supplies. The country’s grip on production processes, even in sectors it does not dominate, has enabled it to rapidly gain importance. Debt incurred by state-owned companies to build highways ended up keeping logistics and supply chains running smoothly. China, no doubt, has a lot of economic imbalances, but its dominance in the global economy won’t change anytime soon.
Countries ranging from the United States to Vietnam and Indonesia are all trying to present themselves as alternatives. The $53 billion chip bill was an attempt by the White House to reclaim chip manufacturing, as was the national plan to build a lithium-ion battery supply chain by the end of the decade. For electronics, Vietnam was hailed as a viable option. Even Indonesia, the largest producer of nickel, an essential component of electric vehicle batteries, wants to climb the ladder and capture the added value of a global shift to electric vehicles.
Parts of the supply chain may be moving away from China, but for now, no country can come close to building a complex network of factories across such a wide range of industries. Changing agreements and suppliers is not an overnight process, nor is setting up operations that have been in place for years.
Vietnam is a good test. Just as Apple Inc. suppliers such as Hon Hai Precision Industry Co., better known as Foxconn, plan to expand capacity there, pushing industrial land prices to new heights, global manufacturers are seeing that Vietnam can easily be trapped in shortages. At present, building materials like aluminum window sills – which are abundant in China – are hard to find there.
Indeed, Vietnam, like the rest of Asia, imports many basic industrial products such as chemicals and plastics from its northern neighbor. Even though its economy has been open since March, as long as China continues with Covid-zero lockdowns, the Southeast Asian nation will continue to suffer from supply chain bottlenecks. Vietnam’s supplier lead time PMI, which reflects the extent of supply chain delays in an economy, remained in contraction in July.
Over the years, China’s ambitions to move up the value chain meant shifting its production to high-end industrial equipment and goods. It has built up a large manufacturing sector that provides a large share of the components, or intermediate goods, that go into final products. It is now the world’s leading exporter of these coins in terms of value.
This means that excluding the country’s manufacturers from the equation will cause a headache in Asia and will inevitably become a problem for industrial companies in the United States as well.
Say what you will about China’s debt-fueled expansion, it has built a comprehensive transportation network including railways, seaports and airports, as well as 5G base stations, with a much of the financial burden borne by local governments and public enterprises. According to the latest Global Competitiveness Report, although China does not rank well on governance or institutional transparency, it has excelled in aspects important to high-tech supply chains, such as roads, shipping lines and airport connectivity. It has also invested heavily in research and development.
By comparison, attempts by the United States to create an electric vehicle supply chain only underscore its infrastructure challenge. Kansas recently tapped Panasonic Holdings Corp. to build a $4 billion battery facility. One of the Japanese company’s draw cards was a push to modernize state infrastructure.
The reality is that companies are not patient enough to relocate operations and then wait for infrastructure to be built. New pockets of manufacturing may emerge, but logistics simply won’t be as efficient for global operators accustomed to China. Will they pay to recreate what isn’t broken? On a recent trip to Vietnam, an entrepreneur lamented that an express parcel post from Hanoi to Ho Chi Minh City could take up to four days. These kinds of delays just don’t happen in China.
All of this has cost Beijing dearly, including rising corporate debt to more than 200% of the country’s gross domestic product and inefficient credit. It paid to build it all, and foreign companies are, in effect, getting a free ride on its smooth supply chains.
It is therefore not surprising that foreign companies have continued to invest in China this year. Are the dangers of depending on China increasing? Certainly, but such risks also exist in other substitutes such as Vietnam, Turkey or Malaysia. It’s just the cost of business.
More from Bloomberg Opinion:
• Don’t believe forecasts. China is fine: Anjani Trivedi
• Vietnam posted growth of 7%. It can do much better: Shuli Ren
• The whole world needs a first iPhone: Tim Culpan
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. Previously, she was a reporter for the Wall Street Journal.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.
More stories like this are available at bloomberg.com/opinion
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