China – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: Taking Nerf Guns Away From China

Nerf guns. Monopoly board games. G.I. Joes. Some of Hasbro’s bestselling toys are getting pricier as the U.S. implements stiff tariffs on Chinese imports. So Hasbro, and others like Barbie maker Mattel, are negotiating with suppliers and considering design changes. The threat of new taxes on toy imports comes amid a long-term shift in the industry away from China, spurred by rising labor costs in that country. Manufacturers have spent years trying to make fewer toys and games in China by relocating to factories in other countries, including Vietnam and India.

Across industries, U.S. companies have been diversifying their supply chains, prodded in part by tariffs implemented during both the Trump and Biden administrations, writes The Wall Street Journal (Nov. 18, 2024). Makers of everything from steel and semiconductors to auto parts are rejiggering supply lines to source components from other countries. Sharpie and Yankee Candle maker Newell Brands, for example, is moving more factory work to the U.S.—the desired result of the tariffs.

Hasbro’s current target is for roughly 20% of its U.S. sales to come from China-made products within four years, down from about 40% today. The challenges the company has faced in achieving a long-held goal underline the pressure facing toy makers. While lower-cost locations are easy to find, switching to a new factory with similar product-quality and safety standards can be a challenge in the toy industry.

Unlike in some industries, automation has yet to make major strides in parts of the toy-making process. Assembly for many toys still relies on skilled workers to put together the latest action figure or hand-paint details. Shifting to a different country requires training a new generation of craftspeople. Smaller factories in South and Southeast Asian countries also might not produce enough units to easily replace Chinese facilities.

Hasbro’s shift away from China is part of a $750 million cost-cutting push that includes negotiating lower prices from suppliers or changing designs to make them cheaper to build, such as Jenga blocks that now use a single type of wood. The change lowered costs and had the added benefit of making the pieces slide more smoothly out of a Jenga tower. Meanwhile, the Chinese government has been pushing for the country to graduate from being a hub for lower-cost work, such as toy making.

Classroom discussion questions:

What other products have been moving away from China?
Have the tariffs been successful?

OM in the News: The Rare-Earth Supply Chain Issue

The U.S. and Europe would love to cut their dependence on China for rare earths, reports The Wall Street Journal (July 16, 2024). Standing in the way of that ambition are low prices and Beijing’s willingness to throw its weight around to keep the market down.

Rare earths are a set of 17 metallic elements that are an essential part of many high-tech devices.

Rare-earth prices have plummeted this year and are now hovering at 3-year lows. The price of neodymium, a silver-gray alloy, has fallen by almost 20% this year to $50,000 a metric ton. Other rare earths are down even more.

Today, these neodymium minerals are mainly used in permanent magnets for a range of essential household items such as TVs, refrigerators and headphones. Increasingly, though, the magnets also help turn motors in electric vehicles, wind turbines and robots. By 2030, such high-tech products are expected to account for 2/3 of demand for neodymium permanent magnets.

Yet despite the promise of soaring demand driven by the energy transition, prices of rare earths have spiraled downward since 2022. A glut of Chinese supply is one problem. In recent years, Beijing has ramped up production of rare earths. In 2024, China ordered its state-owned miners to produce 135,000 metric tons of rare earths, up 13% from the quota in 2023.

At the same time, demand for rare earths hasn’t lived up to expectations. EV sales, for example, have slowed globally amid wavering consumer sentiment.

China’s overproduction, with its increasingly negative impact on industry profits, only makes sense as part of a broader economic strategy. The country produces 60% of the world’s mined rare-earth minerals. In recent years, it has also tightened its grip on the entire magnet supply chain: It controls 91% of refining activity, 87% of oxide separation and 94% of magnet production.

One theory is that Chinese overproduction is designed to stymie efforts to develop alternative sources of supply. Low prices of rare earths have squeezed margins for Western producers. This situation has long worried the West. The U.S., European Union, U.K., Canada and Australia have all drafted “critical mineral” strategies. To stand a chance of loosening China’s grip on rare earths, the West will need to deploy the country’s own tactics: unprofitable production and long-term thinking.

Classroom discussion questions:

What options do operations managers have with regard to the rare earth supply chain?
Will China’s strategy work?

OM in the News: Mexico, Nearshoring, and Manufacturing

The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), has played a crucial role in Mexico’s manufacturing growth (to a recent $374 billion), reports Industry Week (June 12, 2024). The USMCA (see Chapter 2 in your Heizer/Render/Munson text) establishes more significant regional content requirements and higher labor standards, encouraging local production.

Supply-chain relocation has benefited investment in Mexico, where there has been an unexpected increase in the demand for industrial warehouses. Foreign direct investment (FDI) is now over $18 billion and has been vital to technological advances and has strengthened the trade relationship with the U.S., Mexico’s leading trading partner in manufacturing.

The fact that Mexico displaced China as the U.S.’s top trading partner made world news. U.S. data shows an import value of $427 billion from China in 2023, down from $536 billion in 2022 and $504 billion in 2021. By comparison, Mexico’s import value to the U.S. in 2023 was $475 billion, up from $452 billion in 2022 and $382.5 billion in 2021. The trend continues in 2024, since during the first four months of the year, the U.S. imported $129 billion dollars from China compared to $162 from Mexico.

The main engine of the Mexican manufacturing economy is the automotive sector. In 2019, Mexican plants produced $94 billion worth of components; by 2023, that reached $121 billion, and this year, it is expected to reach $152 billion, an all-time high. Mexico is now the leading exporter of auto parts to the United States, with 42.5% of the U.S. market—well above Canada, with 10.5% and China, 8%.

In addition to its modernization, the USMCA now demands higher regional content, going from 62.5% under NAFTA to 75% in the USMCA. This motivates the narrowing of value chains and makes Mexico essential to the region’s productive structure.

Classroom discussion questions:

Why is this reshoring occurring?
How does this impact decisions the operations managers in the U.S. make?

Guest Post: Developing a Magnet Supply Chain in the U.S.

Dr. Misty Blessley is Associate Professor of Supply Chain Management at Temple University

The American war machine depends on tiny bits of metal, some as small as dimes. Rare-earth magnets are needed for F-35 jet fighters, missile-guidance systems, Predator drones and nuclear submarines.

Although crucial to many industries, the U.S. lacks a robust domestic magnet supply chain. A recent Wall Street Journal article underscores the significance of regionally producing or nearshoring magnet production. China holds 92% of the global market share for rare-earth magnets. This figure increases when considering magnets produced in other countries but containing materials sourced or processed in China.

The U.S. looks to establish ‘Mine-to-Magnet’ supply chain for rare-earth magnets

China’s dominance in the industry enables it to set prices so low that potential competitors are discouraged from entering the market. One U.S. company is set to mass-produce magnets, but at costs estimated to be 50% higher than the Chinese equivalent. Abiding by costly mining and processing regulations contributes to the disparity. In addition, the U.S. lacks expertise in magnet production.

Although regional or nearshore production is important for national defense and clean energy sectors, the prospect of higher-priced magnets poses challenges. Faced with higher costs, manufacturers in defense industries may witness reduced orders from customers unwilling to bear the increased costs. Similarly, major users such as electric vehicle and wind turbine manufacturers would need to be willing to accept higher costs in exchange for the benefit of having a supply chain decoupled from China. Currently, only General Motors has committed to purchasing the American-made magnets.

The U.S. Government is actively supporting efforts to develop a domestic magnet industry by extending support to domestic firms from mine to magnets. But after three decades of post-Cold War deindustrialization, rebuilding the industry—against China’s market heft—is an uphill battle, even with government help.

Classroom discussion questions:

What are the benefits and costs of regional or nearshore magnet production?
In Chapter 11 of your Heizer/Render/Munson text, Figure 11.1 is of a beer supply chain that exemplifies a multi-tier supply chain. Magnets produced outside of China may still contain material sourced or processed in China, demonstrating the importance of looking beyond tier-one suppliers. What do you think the role of firms, governments and trade associations is in investigating multi-tier supply chains? Why?

OM in the News: Geopolitics and Supply Chains

“Supply chain managers today are thinking more about geopolitical risk than they are about any other risk,” writes The Wall Street Journal (May 3, 2024).

The Rubymar, a bulk carrier hit in a Houthi missile attack, sank in the Red Sea in March

Companies’ top supply chain concerns until recently were how to find a reliable source for products at the lowest cost. That led many to China with its cheap labor and unparalleled ecosystem of factories, parts suppliers and raw materials. Now many firms are prioritizing a supply chain that reduces their reliance on a single country or region.

Some of the changes were spurred by the Covid factory shutdowns in China and soaring prices for ocean shipping. The changes are being accelerated by more recent geopolitical shocks as countries such as China, Russia and Iran face off against the West.

The U.S. has also raised national security concerns about its dependence on China for technologies such as semiconductors that are key to computers, electric vehicles, robots and other goods. It has banned the export of some chips to China and is stimulating domestic manufacturing of chips with incentives for new factories that limit the use of raw materials from China. These new rules, regulations and tariffs complicate trade compliance efforts, especially for larger companies that sit atop a supply chain that can include hundreds of thousands of suppliers.

Companies are having to dig deeper into their supplier networks to identify raw materials and components that could be subject to steep tariff hikes or that could violate a growing number of regulations targeting countries such as Russia and China. VW was surprised when thousands of its Audi, Porsche, Bentley and Lamborghinis were recently held up at U.S. seaports. The cars contained a magnetic component sourced from a sub-supplier blacklisted because it is in China’s Xinjiang region, suspected of using Uyghur forced labor. “We really try, but this shows how challenging it is to really know everything that is happening in complex supply chains,” said VW.

Multinational companies cannot easily disentangle themselves from geopolitical risks. Russia is one of the world’s largest suppliers of metals such as aluminum, nickel and copper. China supplies about 75% of the rare-earths minerals that go into U.S. semiconductors.

Classroom discussion questions:

Why is it difficult for manufacturers to know details about their supply chains?
How does Table 11.3 in your Heizer/Render/Munson text relate to VW’s problem?

OM in the News: China’s Four ‘Ds’ and Nearshoring

China’s seemingly unstoppable growth model proved less sustainable than originally thought. The 4D’s—demographics, debt, drought and decoupling—weigh heavily on China’s economy, writes IndustryWeek (April 25, 2024) .

Demographics: China’s population is shrinking. Birthrates are falling and its population is aging. China’s labor shortages and rising wages are driving some U.S. companies to reevaluate manufacturing or sourcing in China, as Chinese exports become less competitive.

Debt: As exports decrease, Beijing bolsters the economy by pumping money into the system with investments from state banks and local governments. . According to the World Bank, “No country in history has amassed so much debt so quickly as China has without succumbing to a financial meltdown.”

Drought: Water scarcity is threatening China’s industrial base. Retreating glaciers, disappearing ice cover, increasing temperatures and China’s unequal water distribution are contributing to its water shortage crisis. Eighty percent of China’s water is concentrated in South China, even though the nucleus of its national development is in the north.

Decoupling: These 3D’s plus geopolitical risk are driving the 4th D. The perception that investing in and sourcing from China was risky business suppressed foreign direct investment (FDI), an important driver of China’s economy. FDI into China plummeted 82% in 2023, to $33 billion, the lowest figure since 1993.

Foreign companies’ worries include a wave of raids, investigations and detentions and an expanded anti-espionage law. By late 2022 countries worldwide had lifted COVID restrictions, but China persisted and the Chinese economy began to lose ground through 2022. To mitigate supply chain risk, multinational companies reconfigured supply chain strategies, choosing localization, China +1 or an “anywhere but China” policy to reduce over-reliance on uncertain Chinese policy. Chief Executive magazine’s 2023 survey confirmed that “geopolitical risk exposure” is the most highly ranked of the “main drivers for reshoring operations.”

Finally, China creates the most emissions—12.7 billion metric tons of emissions annually—due to its reliance on coal. For many products, emissions from production and shipment from China to the U.S. are 25% higher than sourcing domestically.

Classroom discussion questions:

Are the 4D’s enough to make manufacturers nearshore?
What is china’s main strength as an exporter?

OM in the News: The Pig Supply and Demand Problem

“The American pork industry has a problem: It makes more tenderloin, ham, sausage and bacon than anybody wants to eat,” writes The Wall Street Journal (Feb 10-11, 2024).

If younger Americans don’t start buying more pork, annual consumption will drop by 2.2 pounds per capita over the next 10 years.

From giant processors to the farmers who supply them, they are in a predicament largely of their own making. They made production so efficient that demand can’t keep up with supply. U.S. demand for pork is 9% less than what it was 20 years ago, but farmers produce 25% more.

The rise of industrial-scale hog farms, steadily increasing crop yields and growing overseas demand helped supercharge the U.S. pork industry in the late 20th century, and since the 1980s, pork production in the U.S. has doubled. The industry will produce nearly 28 billion pounds of pork this year, cleaved from roughly 125 million hogs.

Pork contributes $57 billion to the U.S. economy and employs 610,000 people. In Iowa, the top pork-producing state, hogs outnumber people nearly 8 to 1. That zeal for efficiency and expansion are a factor in the current troubles. Practically everything that goes into raising hogs is now significantly more expensive: machinery, services, equipment, repairs, building materials, livestock-feed supplements and labor.

In the 1960s and early ’70s, beef was king among American consumers and pork held second place, but chicken overtook pork in 1986 as poultry production skyrocketed, making it the cheapest of the big three meats. By 1993, chicken became the most-eaten meat in America. Religious prohibitions in Judaism and Islam limit pork’s popularity, along with a sense among some that pigs are too smart to slaughter. On the other hand, some consumers are more passionate about their love for bacon than any other meat.

So American pork producers increasingly bank on consumers in other countries. The industry exports 25% to 30% of product. Sales to China, the world’s top pork-eating nation, surged following a hog-disease outbreak in the country in 2018. Producers in the U.S. responded by expanding capacity even further, with new processing plants in Iowa and Michigan. Chinese pork producers rebuilt their herds, however, and exports to the country have plummeted over the past two years, contributing to U.S. oversupply and pressuring meatpackers’ profits.

Classroom discussion questions:

What options do pork producers have? (Hint: see Supp. 7 in your Heizer/Render/Munson text on page 308)
How has technology played a role in the imbalance?

OM in the News: The U.S. Enters the Lithium Supply Chain

These days, companies in the south aren’t looking to find more oil—they are instead prospecting for lithium, a metal that is increasingly prized around the world as an essential ingredient in electric-vehicle batteries. “If the U.S. is to ease its dependence for lithium on other countries such as China, it may need Arkansas to lead the way,” writes The Wall Street Journal (July 21, 2023).

The lithium geologic band running through the South

Exxon Mobil, a new player in the hunt for U.S. lithium, is planning to build one of the world’s largest lithium processing facilities in southern Arkansas, with a capacity to produce 75,000 to 100,000 metric tons of lithium a year. At that scale, it would equate to about 15% of all finished lithium produced globally. The prospect could have the equivalent of 4 million tons of lithium carbonate equivalent, enough to power 50 million EVs.

To push the project forward, Exxon and two of its announced competitors will have to profitably scale up the technology used to siphon lithium from brine, which has been an elusive goal across the industry. This particular geologic region, called the Smackover Formation, runs from Texas to Florida. It is rich with saltwater brine, which once bedeviled companies drilling for oil. That brine also contains small amounts of lithium, and the companies are now optimistic they can scale up technologies to extract it. Drilling for lithium with this extraction method is cleaner than traditional mining, and faces fewer regulatory risks.

The mining is expensive, though, costing about $1.5 billion to build 25,000 metric tons of capacity. The three proposed projects would create 6,000 jobs– and require 1,600 trucks by 2028.

Exxon believes it can leverage its engineering prowess to become a low-cost domestic supplier of lithium, and has had discussions with battery and EV manufacturers. The company would also benefit from U.S. green-energy subsidies, which allows for tax credits of 10% of the cost of producing lithium. The firm, generally bullish about the future of oil and natural gas, is also preparing for a future less dependent on gasoline. Last year, Exxon projected demand for auto internal combustion engine fuels could peak by 2025, while EVs, hybrids and vehicles powered by fuel cells could grow to more than 50% of new car sales by 2050.

Classroom discussion questions:

Why is lithium an important EV supply chain component?
What is Exxon’s strategy?

OM in the News: Taiwan, Chips, and Global Supply Lines

“If anyone hits Taiwan, or there is a serious disruption . . . the tech and electronics industry worldwide is basically screwed,” says the founder of chip provider MA-tek in Financial Times (June 1, 2023). Taiwan is best known for making cutting-edge semiconductors. But its companies also turn out other crucial components from printed circuit boards to advanced camera lenses and they run huge device assembly operations in China. This has created a triangle of critical interdependence between Taiwan, China and the US that has deepened even as tensions have risen.

To understand, let’s look at the iPhone. It is one of the most successful consumer devices of all time: 2.4 billion sold since its launch in 2007, racking up over $1 trillion in revenue for Apple. Its success rests on a sprawling Asian supply chain producing chips, displays, speakers and more on an almost unimaginable scale. At its heart lie both mainland China and Taiwan. Each iPhone needs some 1,500 different components. Nearly 70 per cent of Apple’s top suppliers, making everything from processors to casings, are based in either China (26%), Taiwan (23%) or the US (18%).

The most valuable components — including core processors, 5G modems, Wi-Fi chips, and premium camera lenses — are made inTaiwan. All told, the island’s suppliers account for nearly $200 of the total materials bill for each iPhone. These chips, however, are designed by Apple, or otherU.S., Japanese or European chip developers, such as Qualcomm, Sony, and Bosch.

Chinese suppliers are concentrated in less technologically demanding areas, like product assembly and mechanical parts. The number of China-based suppliers has overtaken all other countries to become the largest source over the past few years. They have also started to move up the supply chain, and now make some of the advanced OLED screens for iPhones. China is also where 95% of all iPhones are assembled, a figure that has changed little since its launch. The country is a major market for Apple, too, providing 1/5 of its total annual revenue. Complicating the picture is the fact that many Taiwanese and U.S. suppliers serve Apple from hundreds of facilities in mainland China.

Without any of these components, an iPhone would not be an iPhone. But a formula that has worked for 15 years is being put to the test as geopolitical tensions rewrite the rules of tech manufacturing.

Classroom discussion questions:

Western nations this month vowed to “reduce excessive dependencies in our critical supply chains.” How can they do this?
What has brought this supply chain issue to a head?

OM in the News: China’s Lithium Supply Chain Strategy

Lithium, a soft, silvery metal, is a component in the lithium-ion batteries that power electric vehicles and smartphones. By the end of the decade, demand could outstrip supply by some 300,000 tons, reports The Wall Street Journal (May 25, 2023).

Many Western companies have unwound their assets in Zimbabwe, which has been under U.S. and EU sanctions, but Chinese companies aren’t hindered by such concerns.

Chinese companies have long dominated lithium refining, but their hunt to secure a greater share of the world’s supplies of the metal is leading them to buy up stakes in mines throughout the developing world as they face increasing resistance in Western countries. It is a risky strategy. China is spending billions on stakes in nations that have histories of political instability, local resistance and resource nationalism. Projects often face protests, regulatory delays and even cancellations.

If China succeeds, however, it could secure access to 1/3 of the world’s lithium-mine production capacity needed by 2025. (It currently holds only 8% of the world’s reserves). China’s drive to secure a greater hold on the world’s lithium is fueled by concerns that its booming electric-vehicle industry could struggle to get access to supplies as tensions with the U.S. and its allies rise. Canada and Australia, with some of the world’s largest lithium reserves, have recently blocked new Chinese investments over national-security concerns.

In the past two years, Chinese companies have spent $4.5 billion acquiring stakes in nearly 20 lithium mines, most of them in Latin America and Africa. Those include investments in countries such as Mali and Nigeria, where they face security threats from terrorism, and places such as Zimbabwe, Mexico and Chile, which have tried to gain greater control over their mineral resources. Zimbabwe recently imposed an export ban on unprocessed lithium, effectively forcing foreign companies to process it there. Mexico just signed a decree to fast-track nationalization of its lithium reserves.

Chile, along with Bolivia and Argentina, is also discussing the creation of a lithium cartel, similar to that of OPEC. Despite the challenges they face, Chinese companies have advantages over their Western counterparts. CATL, for example, is a battery giant, with the political backing of Beijing and a strong network of companies along the supply chain.

Classroom discussion questions:

1. What other rare earths and minerals are needed in the EV and electronics global supply chain?

2. What is the U.S. strategy for dealing with these minerals?

OM in the News: China Finally Has a Rival as the World’s Factory Floor

Western companies are desperately looking for a backup to China as the world’s factory floor, a strategy widely termed “China plus one.” India is making a concerted push to be the plus one, writes The Wall Street Journal (May 10, 2023).

Employees test mobile phones at a Foxconn plant in Sriperumbudur, India

Only India has a labor force and an internal market (population) comparable in size to China’s. Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past.

It scored a coup with the decision by Apple to significantly expand iPhone production in India. Now it will boost iPhone production to around 20 million units annually in India and triple the number of workers to 100,000. Apple had previously built up a state-of-the-art supply chain almost entirely in China to make its laptops, iPhones and accessories. Its presence helped the entire manufacturing sector in China.

China still towers over every other country in global manufacturing, a position it cemented when multinationals flooded in after it joined the World Trade Organization in 2001. But a growing list of factors has prompted companies to search for a backup. First, there were rising labor costs in China and pressure from the Chinese government to transfer technology to Chinese competitors. Then there were President Trump’s tariffs on Chinese imports in 2018, Covid lockdowns from 2020 through last year, and now a push by Western governments to decouple their economies from China.

Many countries are competing to be the “plus one,” with Vietnam, Mexico, Thailand and Malaysia in particular contention.

India must still overcome entrenched problems that have kept it a bit player in global supply chains. Its labor force remains mostly poor and unskilled, infrastructure is underdeveloped and the business climate, including regulations, can be burdensome. Manufacturing remains small relative to the size of India’s economy. It can take longer to get land and approvals to set up a factory in India and getting visas for expatriate technicians, managers and engineers is time consuming.

Nonetheless, it is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s. The biggest gains have been in electronics, where exports have tripled since 2018.

Classroom discussion questions:

Why are companies now looking to India and away from China?
Compare India to Mexico as an alternative location for a U.S. manufacturer.

OM in the News: China or Mexico?

“We needed to have a near-source option to complement our supply chains out of Asia,” said one U.S. manufacturer. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”

More and more companies seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S., reports The Wall Street Journal (April 25, 2023). It has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances to U.S. consumers that reduce the need to carry so much inventory. This also offsets the risk of production disruptions and lost sales because of freight delays.

But Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers. Building up similar ecosystems in Mexico will take years. And physical security is a concern in a country notorious for drug cartels and violent crime.

Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ said an industry expert.

China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.

Classroom discussion questions:

Summarize the Mexico vs. China tradeoffs facing American manufacturers.
Figure 8.1 (page 357) lists six KSFs for country location decisions. Compare Mexico and China on each.

OM in the News: Is “Friend-Shoring” a Solution to Global Supply Chain Challenges?

The onset of the COVID-19 pandemic and Russia’s invasion of Ukraine had profound consequences for the global economy, not least by exposing the fragility of global supply chains, which had to contend with restrictions that prevented goods and raw materials from reaching their end destinations. And while a host of stop-gap solutions have been proposed to counter these issues, the flare-up of geopolitical tensions over the last year has prompted key trading players to look to “friend-shoring”—the manufacturing and sourcing of components from countries with shared political values—to resolve this persistent supply-chain turbulence. This also means countries perceived as economically safe or low-risk, to avoid disruption to the flow of business.

But this potential solution is not without drawbacks, writes International Banker (March 30, 2023). The practice has stoked concern within the international community about the possibility of further geo-political fragmentation and deglobalization of the world’s economy – the decline of interdependence between nations, global institutions and enterprises.

The US government, as an example, has stressed its intention to obtain components and raw materials from ‘friendly’ countries with shared values to increase security of domestic production. US Treasury Secretary Yellen set out the new approach to trade last year, saying: “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers. And we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.”

Yellen added that the US is providing $500 million in debt financing to its biggest solar-manufacturing company to build a plant in India to help diversify supply chains away from China. Other American multinationals are also opting for greater exposure to India—an ostensibly friendlier option than China. Tech giant Apple recently made friend-shoring moves, relocating some of its iPhone production to India from China. Currently, only 5% of Apple products are made outside of China, but this could rise to 24% by 2025.

The United Kingdom, meanwhile, proposed the creation of a network of liberty. “The more freedom-loving countries trade with each other, build security links, invest in our partners and pull more countries into the orbit of freedom, the safer and freer we all are,” said the Foreign Secretary.

Classroom discussion questions:

1. Explain the difference between friend-shoring, nearshoring, and reshoring? Where does Mexico fall?

2. What are the advantages and disadvantages of friend-shoring?

OM in the News: Countries Compete to Lure Manufacturers From China

China may be losing its place as the center of the world’s supply chains

Countries are jostling to grab a piece of China’s manufacturing action as tariff battles and worsening U.S.-China ties jolt companies into reordering global supply chains. Executives are circling the globe looking for factory space or local tie-ups to reduce their dependence on China—and governments are pulling out the stops to welcome them.

At stake for low- and middle-income countries eager to help is the chance to turbocharge economic development and create millions of new jobs, writes The Wall Street Journal (March 25, 2023). India, Mexico, Vietnam, Cambodia, the Philippines, and others are competing on subsidies, tax breaks and other perks to convince businesses that their country is the next best thing to the manufacturing machine that China has honed.

China cemented its dominance of global manufacturing over the past 50 years. It has also grown its share of higher-value manufactured goods, such as cars and complex electronics, at the expense of rivals including Germany and Japan. But this dominance risks being whittled away. Companies have been stung in recent years by the supply-chain disruptions caused by Russia’s invasion and the pandemic. Many are seeking to fashion more diverse supply chains in the hope that they will prove more resilient in future crises.

Foreign direct investment into China in 2022 fell 43% on the year to $190 billion. And China’s share of U.S. goods imports fell to 17% in 2022, from a high of 22% in 2017.

Rerouting global supply chains away from China won’t be an easy process. Would-be rivals need to overcome challenges such as higher transport costs, outdated equipment and processes and subpar infrastructure. In the competition for a bigger slice of global manufacturing, countries are competing not just on cost and geography, but on who can offer companies the choicest perks while meeting their own development goals.

Cambodia revamped its laws in 2021 in an effort to attract more foreign investment, pinpointing manufacturing in advanced technology, machinery and spare parts, and electronics. Vietnam offers tax holidays to companies willing to invest in poorer areas of the country. India announced $1 billion in incentives to persuade companies to make more computers and tablets in the country. Mexico’s big advantages are its proximity to American consumers and membership in the USMCA trade agreement, which we discuss in Chapter 2.

Classroom discussion questions:

What does this “reordering” mean for reshoring and nearshoring?
Who benefits most from the move to expand beyond china?

OM in the News: The EV Supply Chain and Canada

International giants are investing billions of dollars in Canada’s EV and mining sectors

Multinational companies are pumping billions of dollars into Canada’s electric-vehicle manufacturing sector, lured by government incentives, access to raw materials and cheap renewable energy. VW just announced that it had chosen a site in Ontario to build its first battery-cell plant outside Europe, citing Canada’s natural resources as one of the reasons. VW’s plan follows recent EV and battery-making project investments by GM, Stellantis, Michelin Tires, Brazilian miner Vale, U.K. mining company Rio Tinto, and German chemicals company BASF, among others.

According to The Wall Street Journal (March 23, 2023), Canada is benefiting from a push by the U.S. and its allies to reduce their dependence on China for the critical minerals used in EV batteries and military equipment. In one example, Stellantis and South Korea’s LG are building a $4.1 billion battery plant in Windsor, Ontario, with 2,400 workers starting next year. As we discuss in Chapter 8 (Location Strategies), incentives are common and Canada has had to pay up to win the investments, scrambling to keep up with the U.S., which has unveiled a raft of subsidies meant to draw investment in its EV industry. Canada gave $732 million to land the Stellantis/LG venture.

Canada is among the most expensive countries in the world to build cars and the highest-cost market for car assembly in the North American free-trade zone. To save money, auto makers in recent decades moved thousands of manufacturing jobs and motor-vehicle assembly capacity to Mexico, dropping auto employment in Canada from 175,000 to 110,000.

The Canadian government is pitching itself as a counterweight to China in the race to develop EV technology. China leads the world in processing metals and minerals like nickel, copper, lithium and cobalt. It also is home to 78% of the world’s cell-manufacturing capacity for EV batteries. Helping Canada’s pitch: It is one of the few places in the Western Hemisphere with the raw materials companies need to make their EVs. Electra Battery Minerals Corp. is the only facility available in North America for processing battery-grade cobalt, a metal used in batteries. Rio Tinto is upgrading an iron-ore and titanium refining facility in Quebec with a $500 million investment.

Access to hydroelectricity was a key reason GM and others chose Quebec. The renewable power helps lower GM’s greenhouse-gas emissions. Quebec also offers the lowest industrial rates for power in North America.

Classroom discussion questions:

Summarize the reasons more companies in this field are looking to Canada.
What is China’s strength in the EV supply chain industry?