When Napoleon commented that "the pain of precautions often outweighs the dangers that need to be avoided", he may not have foreseen the complexity of the semiconductor chain. However, even two centuries later, his observations remain relevant. At present, countries** and companies have expressed a desire to protect themselves from various disturbances, whether it is the unavoidable changes in the global market or the deliberate manipulation of the market by capital. There is widespread concern among foreign companies that at any time, China may adopt a similar strategy to cut off essential goods or components from the West. However, from a practical point of view, efforts to overhaul the ** chain are expected to do more harm than good.
There is currently a set of fashionable phrases used to describe this strategy. Some foreign politicians are pushing for "decoupling" from China. Others, on the other hand, emphasize "risk reduction" and focus their attention on one-third of the total, which is labelled "strategic". Now there is also a new topic, namely "China Plus One", which suggests that companies should add a non-Chinese alternative to China's top business. In order to achieve these goals, "friendly shore" or "nearshore" schemes can be used. These initiatives aim to reshape the global system. In the years leading up to the pandemic, the global** system had been highly focused on efficiency, and it had succeeded in achieving this. In the UK, average cash** for durable goods such as TVs and tables fell by 15% between 2001 and 2016, most of which were imports. The affordability of consumer goods can help boost real incomes, especially for low-income populations. In addition, the range of available products has been significantly expanded.
There is a common belief that efficiency comes at the expense of resilience, but this statement is only partially accurate. Before the pandemic, the ** chain seemed to have become more resilient. The Economist analysed the volatility of about 300 U.S. imports from 2005 to 2019 and found that volatility decreased, measured by how much the cost of a commodity fluctuated over a six-month period. However, has there been such a wavering in resilience during the pandemic? In 2020 and 2021, shortages were experienced for everything from computer chips to natural gas, making it difficult for some companies to get the materials they needed. European Central Bank (ECB) President Christine Lagarde said last year that global chains have become more vulnerable to disruptions in the face of global shocks that affect multiple industries at the same time.
However, this view is fundamentally wrong. It's crucial to distinguish between a true chain crash and a delay caused by an unprecedented surge in demand. Hand sanitizer, for example, has few products that have been able to cope with such a surge in demand amid a massive increase in demand during the pandemic. In 2019, the UK imported 16,000 tonnes of hand sanitiser at a price of $2 per kg**$9. However, by the beginning of 2020, there was a shortage of hand sanitizer, but the market reacted quickly. Within a few days, the plant was in mass production. Throughout 2020, the UK imported 86,000 tonnes of hand sanitiser, with the average rising to just 3$50.
In 2021, shipments from semiconductor companies worldwide reached 12 trillion units, an increase of 15% over the previous year. In the same year, the actual amount of semiconductors imported by the United States increased by 30% compared to 2020. This raises the question of whether there is a real problem, or whether the industry has reacted quite effectively to the unusually unbeatable surge in demand. At the same time, food is **rapid** due to the bumper wheat harvest in 2022; And due to the Russia-Ukraine war, food ** soared for a time. Immediately after the war led to natural gas***, Europe began to switch from Russian gas to alternative energy sources.
China also has tight controls on many industries. China controls about 80% of the raw material production for solar cells. According to The Economist's analysis of 120 global manufacturing exports, in 2005, China already dominated 10% of them. In 2020, that number rose to 30%, a record high. China currently has a solid market share in about 20 industries, including communication equipment and optical instruments.
With the help of subsidies, Western businesses are working to reduce their dependence on China. One way to do this is to bring production back home. In the U.S., construction spending in the manufacturing sector has increased relative to GDP. Real spending on non-residential construction in Australia is 10 per cent higher than a year ago, and new industrial facilities are being built in the UK 50 per cent faster than in the 2010s. Another strategy is to move from a "just-in-time" production model to a "just in case" production model. Last year, companies in developed countries bought stocks such as spare parts, equivalent to about 1% of GDP, twice as much as before the pandemic. This can be used as an insurance policy in the event of a chain break. Some have also discussed "vertical integration," where companies acquire vendors to ensure the continuity of materials. Tesla, an automotive company, recently began construction of a lithium refinery facility in Texas. Vertical integration in manufacturing in developed countries is on the rise and reached a low point in 2012. [DL]: However, the most important developments are unfolding on the global stage. The company is looking for new partners outside of China. Between 2018 and 2021, Western countries' "strategic" imports from China, including ** systems, computer components and optical products, accounted for 33 percent of the total5% down to 319%。Chinese imports now account for 6% of the cost of sales of S&P 500 constituents, down from 8% in 2018. Some analysts expect Apple to soon shift 20 percent of its iPhone manufacturing from China to India. [DL]: Even if you agree with the idea that separation or risk reduction is necessary, there are three major challenges that rich countries will face when moving away from risk. First of all, the task is daunting. Like Germany, Australia is actively reducing its ties with China. However, on current trends, it will take another 35 years for China to absorb half of its total FDI. Keeping Western consumers away from Chinese-made products will be a long process, especially given the pervasive influence of Chinese technology in the West, especially in Europe. The second challenge is that many of China's alternatives are also undesirable. In 2022, Thailand and Vietnam combined to attract more FDI than China for the first time. Since 2019, Vietnam's merchandise exports to rich countries have increased by 50%. However, both countries are non-democracies. Even in India, where foreign direct investment is on the rise, democracy is under threat.
Western allies, who are considered strong and reliable, have not reaped significant benefits from the transformation of the ** chain. The trend of new investment in Mexico is sluggish. JPMorgan Chase said "domestic factors" such as low productivity are hindering the development of "friendly outsourcing" in Mexico. Manufacturing employment is growing no faster than it did before the pandemic. Since 2019, exports to rich countries have increased by 30% in dictatorships, compared to only 25% in democracies. From 2018 to 2021, the stock of foreign direct investment (FDI) by companies in democracies increased by 16 percent in authoritarian states, but only by 8 percent in other democracies. [dl]: The third challenge arises. Despite the decline in direct imports, the West is now importing a significant increase in goods from countries that are increasingly dependent on Chinese exports. For example, the U.S. import bill from Vietnam's computer industry is three times what it was in 2016. However, during the same period, China's imports of machinery to Vietnam for the manufacture of computers increased by three-quarters. The recent history of the chain reveals a crucial truth. When adverse events occur, the market can adapt very effectively. In contrast, as Napoleon recognized, preparing for the worst can be costly. Ensuring the resilience of any chain requires being able to potentially fluctuate in demand and be able to meet demand in a timely manner. In addition, measures need to be taken to prevent the adversary from breaking the ** chain at any time. Therefore, despite the discussion of the ** chain revolution, the world will remain largely interdependent. The more striking change will be the rising cost of doing business.
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