Are U.S. Companies Permanently Restructuring Their Supply Chains?

A container ship sails towards the dock of Shanghai’s Yangshan port. Shanghai has pledged to ease restrictions by mid-May and there is evidence from Yantian port that recovery can come quickly © Chen Jianli/Xinhua/AP

On April 1, Chinese authorities imposed a near-total lockdown in Shanghai, forcing factories and businesses to close. Meanwhile, Beijing officials launched mass testing programs, shut down schools, and imposed targeted lockdowns on some residential buildings. The lockdown of the two mega-cities is only the latest impact of the stringent zero-COVID policy that has resulted in the repeated imposition of strict quarantine measures during the pandemic. These closures and associated effects on the global supply chain have come when the United States and other countries are reversing course on pandemic control measures. If consumer demand continues to rise in countries with relaxing restrictions, a new set of supply-side bottlenecks are expected should China continue its strict COVID measures. 

The lockdowns have forced many factories to halt production temporarily; this has massive effects as China is responsible for about 30% of world production. In addition, many Chinese cities are requiring truck drivers to take daily COVID PCR tests before allowing them to cross municipal borders or are quarantining drivers deemed to be at risk of infection. These measures have limited how quickly drivers can move components among factories and goods from plants to port, increasing transit time and cost. Furthermore, the lockdown of Shanghai and other major cities has resulted in port congestion. COVID restrictions have paralyzed over 90% of the trucks providing drayage and other container logistics services, creating container pileups. These disruptions on the economy’s supply side, have caused massive delays in the delivery of intermediary and finished goods and contributed to price hikes in the U.S. market. 

Will these supply chain challenges have long-term implications for how U.S. companies operate?

Global trade management expert Karen Kenney and former head of U.S. Customs and Border Protection (CBP) Office of Field Operations Bill Ferrara weigh in.
To date, only a minority of U.S. Companies have made an active effort to change their supply chain infrastructure to improve resiliency, explains Karen Kenney. Firms in this category have implemented efforts to diversify their supply chain, some by bringing supply chain components closer to the United States. The success of this effort is mixed. For example, as companies have tried to shift production from China to countries in Southeast Asia, the differing quality of infrastructure has made the move challenging. Other firms are also exploring possible onshoring strategies to move supply chain elements closer to the United States. Mexico has particularly been under consideration by many firms. However, this strategy is expensive and requires a shift from shipping goods from China to delivering goods by truck or rail, which come with its challenges.

 

Efforts to move away from China stem from the recent supply chain disruptions due to COVID-19. Cost is the primary driver for firms as they weigh options to divert elements of their supply chain to other destinations, says Kenney. The tariffs on Chinese imports imposed under the Trump administration have particularly been a pain point for many companies. 

The ongoing trend of rising wages in China over the past two decades vis-à-vis other developing countries is also something firms are considering in their supply chain strategy, explains Bill Ferrara. Political sentiments towards China could drive firms’ long-term decisions to diversify their supply chain. This driver pertains to industries that are sensitive to global politics. The semiconductor manufacturing industry is a prime example. Chips are an essential component in a broad swathe of critical sectors of the U.S. economy including the automotive, aerospace, and electronics industries. With political tension rising between the U.S. and China on the international stage, the U.S. government and companies are taking the strategic step to lessen dependency on microchips manufactured in China and its asserted sphere of influence. 

Karen Kenney concludes that most U.S. companies continue to see COVID as a temporary shock that will eventually resolve itself. Absent additional factors that increase the overall costs of existing arrangements, most companies are hoping to ride out the storm and are unlikely to make structural changes in their supply chain.

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