Asia’s Sick Man and the Domino Effect on the Global Supply Chain

Asia’s Sick Man and the Domino Effect on the Global Supply Chain

FRIDAY FEBRUARY 21 2020

Photo: Courtesy (Nation Media Group)

BY GEORGAS JANATA

For a whole generation, perhaps due to the loss of face suffered under the Century of Humiliation, postcolonial China sought to avoid that which it needed most – free and open trade.

During this generation, the predominant global trade paradigm was anchored on classical theories of international trade. Theories that stood foursquare on the orthodoxy of perfect markets, constant returns to scale, trade in final products, and product homogeneity.

Borrowing cue from the Ottoman Empire, the pejorative tag of Asia’s sick man stuck on it like a bad habit. But Chbosky observed that things change, friends leave, and life doesn’t stop for anybody.

Because things change and life doesn’t stop, the assumptions of the classical trade theories became their original sin and eternal damnation their inevitable end. Evidence of product heterogeneity, unbundling/fragmentation of production activities and tasks, and the presence of intermediate goods triggered a paradigm shift away from the classical to the new trade theory whose most visible face was Krugman.

Hand in hand with this, and thanks to the dissolution of trade barriers and the emergence of information, transport, and communication technologies, the process of globalisation spread like a circus parade, giving birth to the global value chains (GVCs).

In the GVC, the primary and support supply-chain activities are unbundled and pharmed out, based on location-specific advantages (LSAs), to multiple workers from multiple firms across multiple countries. Consider the iPhone, whose accelerometers are outsourced to a German firm, audio chips, glass screens, networking chips, and cameras to US firms, batteries to South Korean and Chinese firms, compass, flash memory and LCD screens to Japanese firms, processors to Taiwanese and South Korean firms, and the assembly carried out in Taiwan. Consider these firms have global networks of production facilities to which they may further unbundle this production…

The benefits of exploiting dispersed location-specific advantages aside, a distinct advantage of GVCs is that they open up the prospects for countries to integrate into the global economy in a cost-effective way. Because things change, Rumi might have remarked that yesterday China was clever and so it wanted to change the world, but today it is wise and so it changed itself. In 1979, following the Open Door policy, China embraced that which it needed most – open and free trade. This was followed, in rapid succession by WTO membership, effectively integrating into the GVC.

So complete has this integration, and so comprehensive has its dominance over the global supply chain been that one a half generation later, China manufactures 70% of all the world’s mobile phones, 80% of its conditioners, 60% of its shoes, 30% of its cars, and almost half of the world’s goods.  Cheap labour, extensive clusters of supplier networks and manufacturing ecosystems, and a large pool of sophisticated skills and competencies aside, the other LSA that has made China the world’s factory is its network of port infrastructure (seven of the world’s ten busiest ports are in China).

But one and a half a generations later, the country sits smack at the epicentre of the COVID-19 outbreak, and the tag that it had sought to avoid – the sick man of Asia – once again sticks to it like a bad habit. They say that when China sneezes, the world catches a cough.

Supply chains are subject to uncertainties and managers have to prepare for them. But the nature of the uncertainty posed by the COVID-19 is a structural rather than operational disruption that presents a new challenge to managers, and subjects firms to ripple/domino effects.

Rather than being localised, it is likely to propagate as it cascades downstream, and thus affect performance metrics such as sales. Since its occurrence is at the structural level, firms are likely to take severe hits on their performance (revenues and profits), and recovery may only occur in the mid-long term. For example, forecasts indicate that smartphone shipments in the first quarter of 2020 are likely to drop by 50% compared with 2019, with Foxconn (the world’s largest electronics contract manufacturer) and Apple (whose production is outsourced to Foxconn) forecasting revenue and profit shortfalls.

But with the focus riveted on the human cost of the COVID-19, those paid to ponder and wonder over its disruptive effect on the global supply chain have – so far – limited their focus within the supply chains of specific industries (e.g. the auto and electronic supply chains). With more than 50m people under lockdown, factories shuttered, and Chinese supply chains seizing up; will the virus break free from its host cell, reproduce, and multiply in the bloodstream? How hard is this domino effect likely to hit the global supply chain?

2 comments on “Asia’s Sick Man and the Domino Effect on the Global Supply Chain

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