Supply chains are not broken, at least not everywhere

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The world is worried about the disappearance of global supply chains and the threat of de-globalization, as the United States tries to draw manufacturing activity home – or at least closer.

Yet supply chains have actually evolved for the better in some places – particularly in Asia – despite all the challenges since 2020 as Covid disrupted global trade.

The problem is not that the long-standing globalized operations of major industrial companies have collapsed or that a decoupling of trading partners is underway, or that China is just looking after itself. It is that Asian companies have been more resilient to geopolitical changes, focusing instead on building up the stocks they need and diversifying their products, while maintaining harmonious trade relations. The dismal state of US manufacturing combined with resilient Asian supply chains has shed light on the crucial global role of industrial giants like South Korea, China and Japan.

The flow of high-tech products, industrial machinery and capital goods between South Korea and China exceeded $300 billion in 2021, the most since the two countries forged an economic relationship in 1992, according to Bank of America Corp.

For American companies, it has not been so simple. Since late 2020, a slew of S&P 500 companies have consistently complained about supply chain pressures in their earnings calls and reports. Just this month, executives of US conglomerate Dover Corp. said they had prepared their customers for delays “on many deliveries in terms of the supply chain”.

His peers in Japan and South Korea raised the issue far fewer times during this period. Hitachi Ltd., one of Japan’s largest industrial companies with huge business in China, noted in its latest earnings call in July that there were “no supply chain disruptions” in the first quarter. . Other large companies spoke about the steps they have taken to reform or reorganize trade flows.

As the scale of trade in Asia has increased, interdependence has also increased. Raw materials, components and processed and consumer goods circulate freely and in large quantities between countries. And as Chinese demand for higher-value products grows, its trading partners have changed what they export. The Herfindahl-Hirschman(1) index, a measure of market concentration, shows that South Korea sends greater volumes of specialized goods to its western neighbor giant. Industrial equipment, precision machinery and semiconductors accounted for nearly 40 percent of South Korea’s exports in the first six months of this year. Japanese exports of machinery and electrical equipment to China have also increased.

The reality is that supply chains don’t come and go; they expand and deepen. They work best when economies of scale kick in when manufacturers produce more and better goods, as has happened in China, Japan, and South Korea. Industrial firms specialize their products over time as the needs of their trading partners change, more suppliers and countries are attracted, and different commodities are traded.

Ultimately, corporations want to do business, not geopolitics. The opportunity costs of acting on mercurial political rhetoric by changing production lines and moving factories are far too high. That’s part of the reason why we continue to see what should have been short-term issues in the supply chain turn into protracted issues – companies aren’t making huge long-term changes to the basis of the latest political declarations.

But companies — particularly in Asia — are choosing to adapt, adding product lines and cutting others, among other measures. Relocations are rare because they do not “resolve most risks,” as the Asian Development Bank’s annual report on global value chains notes. The strength of supply chains lies in their ability to adapt to changing macroeconomics, as they always have.

For the United States to hope that one day the great American supply chain will emerge is a mistake. The Biden administration’s Curbing Inflation Act and Chips and Science Act are intended to support efforts to build manufacturing capacity in the country. Yet the United States risks isolating itself from large swaths of global suppliers and creating greater dependence on its North and South American trading partners. It would be wise to woo his Asian friends as well: their supply chains may stretch a bit further.

More from Bloomberg Opinion:

• If the factories don’t come back now, they never will: Thomas Black

• Don’t believe the predictions. China is fine: Anjani Trivedi

• The West needs friends, not relocation: Adrian Wooldridge

(1) Footnote: Herfindahl-Hirschman Product Concentration Index, according to Bank of America analysts

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.

More stories like this are available at bloomberg.com/opinion


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