Decoupling of Supply Chains

September 21, 2022

“Covid-19, Russia’s invasion of Ukraine, and rising geopolitical risks in Asia have thrown a wrench into global supply chains,” writes The Wall Street Journal (Sept. 20, 2022). That has reinvigorated the push to put key supply links back onshore—particularly those currently located in China. A full “decoupling,” meaning the breaking of economic links with China, remains unlikely, but supply chains would become less integrated than in the past.

Two proposed laws in Europe are the latest case in point. The EU just set forth a ban on products made using forced labor. (It doesn’t name China but forced labor in the Xinjiang region is clearly a main target.) Recent U.S. legislation puts the onus on importers to prove that products from Xinjiang aren’t made with forced labor—an incredibly high bar. Such rearrangements could be challenging in some cases: For example in the solar supply chain, which is dominated by China. Xinjiang is a major producer of polysilicon, a crucial precursor of solar cells.

Another proposal from Europe tries to directly address such dominance, which also extends to the processing of lithium and other minerals critical for green energy applications. That law would attempt to speed up domestic production, processing and recycling of such raw materials. “Lithium and rare earths will soon be more important than oil and gas,” said EU’s Commission president. China processes almost 90% of rare earths and 60% of lithium.

All of this follows similar moves in the U.S. A recent law provides incentives for domestic manufacturing of clean-energy products such as batteries and solar panels. The U.S. is also implementing policies to encourage the onshoring of semiconductors and biotechnology. Such onshoring will take years and a full-scale relocation of manufacturing jobs back to the West is unrealistic. Friendlier or closer countries such as Vietnam and Mexico will probably be big beneficiaries—particularly those that already have free-trade agreements with the U.S. or the EU.

The rapid globalization of the past few decades seems likely to take a pause. Businesses, consumers and governments will gain a measure of reliability and peace of mind—but they should be prepared to pay up too.

This post provided courtesy of Jay and Barry’s OM Blog at www.heizerrenderom.wordpress.comProfessors Jay Heizer and Barry Render are authors of Operations Management , the world’s top selling textbook in its field, published by Pearson.

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