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?
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.”