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  May 29th, 2024 | Written by

Complete Decoupling from China in Supply Chains Is Unfeasible

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Post-Pandemic Supply Chain Realities

In the wake of the COVID-19 pandemic, the era of seamless supply chains has ended, necessitating a shift to just-in-case strategies where companies maintain higher inventory levels to buffer against disruptions. However, restructuring supply chains is a complex and costly endeavor, and a complete decoupling from China is virtually impossible due to its integral role as the world’s manufacturing hub, asserts GlobalData, a leading data and analytics firm.

Read also: U.S. Tariffs on China: Echoes of History and New Supply Chain Challenges

GlobalData’s latest report, “Thematic Intelligence: Supply Chain Disruption,” examines strategies for enhancing supply chain resilience, such as relocating production closer to home, diversifying supply sources, digitalizing networks, and adopting a circular economy model.

Geopolitical and Economic Shifts

Carolina Pinto, Thematic Analyst at GlobalData, notes that supply chain disruptions are worsening due to geopolitical tensions, climate change, and demographic shifts. Trade restrictions are a primary driver behind efforts to relocate manufacturing. Despite these efforts, China remains a dominant force in producing consumer goods, electronics, solar panels, batteries, and 5G infrastructure.

China’s economic growth has altered the factors that initially made it a prime manufacturing destination. The country now faces higher labor costs, a shrinking population, and increased scrutiny amid the US-China trade war, which raises the regulatory and reputational risks for businesses operating there.

China’s Technological Investments

The Chinese government’s foresight in investing billions in digital and clean energy technologies has solidified China’s critical role in the global supply chain, especially in the context of a fast and cost-effective energy transition.

Exploring Alternatives to China

Companies must carefully evaluate new locations for production and supply chain operations, considering factors such as infrastructure, workforce, and industrial environment. Options include relocating to the home country, a neighboring country, or an allied nation to mitigate geopolitical risks.

Western governments and China are both heavily subsidizing efforts to reshore critical industries. Despite these subsidies, reshoring remains expensive due to high production costs and labor shortages. Therefore, many Western companies are more likely to nearshore (relocating operations closer to the final consumer) or friendshore (moving operations to allied countries) to reduce transportation costs and adhere to trade restrictions without incurring high labor expenses.

Latin America as a Nearshoring Destination

Latin America presents a promising nearshoring opportunity for US tech companies. Countries like Argentina, Brazil, Colombia, Costa Rica, and Mexico offer strong engineering talent and expertise in cloud computing, AI, and cybersecurity. Outsourcing to Latin America provides access to a large talent pool, lower labor costs due to lower wages and high inflation, and geographical proximity to the US.

In conclusion, while a complete decoupling from China is unfeasible, companies can enhance their supply chain resilience by exploring strategic alternatives and leveraging regional strengths.