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In the last of a series Using business school-style educational case studies, Professor Usha Haley examines the supply issues facing technology and electronics companies due to increasing restrictions on trade between the United States and the China. Readers are encouraged to read the article and related stories and think about the questions raised at the end.
China and the United States are intense rivals over national security and economic production. Yet the world’s two largest economies – accounting for 40 percent of GDP – remain equal partners in many respects.
So, under these circumstances, what should businesses do to manage global supply chains and geopolitical risks, and how does uncertainty affect the green economy and economic stability?
CIA Director William Burns argued that the answer for the United States is “not to dissociate itself from an economy like China’s, which would be foolish, but to wisely reduce risks and to diversify by ensuring resilient supply chains, protecting our technological edge and investing.” in industrial capacity. The August 2022 US Semiconductor (Chip) Production and Science Incentives Act reflects this view, with implications for supply chains, nanotechnology, energy clean, quantum computing and artificial intelligence.
In December 2022, China announced a $143 billion retaliation plan and, in May 2023, banned Chinese companies from purchasing from US chipmaker Micron Technology, reducing its sales by $3 billion. Then, in July, it restricted exports of two metals essential to the semiconductor, telecommunications and electric vehicle sectors.
In October, an update to the Chips Act limited U.S. sales of high-performance semiconductors and access to technologies that “could power breakthroughs in artificial intelligence and sophisticated computers.” This affected Nvidia (which gets a quarter of its chip revenue from China), Intel and AMD.
China is a major player in global supply chains, dominating the technology and electronics sectors. In 2020, its chip sales totaled nearly $40 billion, or 9% of the global market, and are expected to reach $116 billion this year. But this is changing. Kearney’s 2023 Relocation Index indicates that 96% of U.S. executives could relocate or have already done so, including Dell, Google, Microsoft, Intel, Apple, Amazon and Walmart. By 2023, China accounted for the smallest share of U.S. imports in 20 years. And, as global supply chains restructured, U.S. foreign direct investment in China fell to an 18-year low of $8.2 billion in 2022.
For U.S. and European companies, strategies for resilient supply chains now include:
Friendshoring and relocation
Foxconn and other major Taiwanese electronics makers have responded to customer demands by moving production from China to other Asian countries, Mexico and beyond. Companies have hedged their bets by using a “China plus one” strategy to maintain existing domestic operations while directing new investments elsewhere.
Many companies have “friended” or shifted their supply chains to political or economic allies such as India, Thailand, and Vietnam. In 2022, Dell announced it would move a fifth of its laptop production to Vietnam. Apple also announced that it was moving 18% of global iPhone production to India. American companies have “relocated” to Mexico and Canada to benefit from the United States-Mexico-Canada Free Trade Agreement, and have relocated their production to the United States.
“In China, for China”
Recipients of chip subsidies are barred from manufacturing semiconductors in “countries of concern” (including China) for 10 years. Thus, some companies now produce Chinese-made goods for Chinese domestic consumption only, although government-affiliated organizations must purchase Chinese brands. Investing in China has exposed foreign manufacturers to intellectual property theft and distorted competition from subsidized Chinese industries that obtain land, capital, electricity, raw materials and free or cheap access to technology. Businesses have also faced political harassment. As of October 2023, Foxconn has been the subject of tax investigations in four provinces.
Chinese investments in the United States
Chinese investments are at high risk of being subject to regulatory scrutiny on national security and competition grounds. For example, a China-linked company’s facilities in Wyoming were investigated by the Committee on Foreign Investment in the United States, after a report suggested that its proximity to a Microsoft data center and a US air base could enable intelligence collection. Some 33 U.S. states have now banned the Chinese government, citizens or companies from purchasing farmland or property near military bases, and this trend is likely to continue. Meanwhile, Chinese investment in U.S. shale gas has been found to distort the development of energy technologies, reduce U.S. patents, increase Chinese patents, but provide few benefits to local communities, according to research funded by the National Science Foundation.
Replacing China in supply chains will take time. It is the largest producer of key components in the production of batteries for electric vehicles. Over the next two years, manufacturing incentives provided by the US Inflation Reduction Act (IRA), amounting to $430 billion, offset a tenth of the cost of an all-electric vehicle. excluding battery contents and critical materials from “foreign entities of concern,” including China. But China has begun to circumvent the restrictions by creating joint ventures with the United States’ free trade partners South Korea and Morocco. The United States and China remain mutually dependent, even as they balance their economic and geopolitical interests.
How does the US-China relationship affect global supply chains?
Which companies and countries are benefiting from the current tensions between the United States and China – and which are losing?
What strategies can companies follow, including staying out of the Chinese market or withdrawing from it? What are the advantages and disadvantages ?
What business risks are associated with leaving or remaining in China, and how can these risks be managed?
What are the immediate, medium and long-term threats to global supply chains? And what are the threats to the green economy from changing supply chains?
What other issues do reshoring and “friendshoring” raise for American and European manufacturers? Is the solution worse than the problem?
How do you foresee tensions between the United States and China evolving in five years and in a decade? Which factors are most important in your scenarios?
Usha Haley is the W Frank Barton Distinguished Professor of International Business and Kansas Faculty of Distinction, Barton School of Business, Wichita State University.