The Chinese Supply Chain: How Country Plans to Fortify Place in Manufacturing

by: Loraine Lawson

The news from China’s manufacturing world is grim: Falling export orders and rising inventories led to Chinese factories contracting in August more than in the past nine months, according to the Chicago Tribune.

It’s no surprise to manufacturers or the Chinese that the country is losing it’s edge as the world’s destination for production and supply chains. Product costs have been rising in the country and are more on par with other parts of the world.

Meanwhile, logistics cost 18 within China are 18 percent of product costs, compared to just 10 percent in the US, according to Andrew Sheng, President of the Fung Global Institute and a former chairman of the Hong Kong Securities and Futures Commission.

Sheng, writing for MorningWhistle.com, recently looked at how four Chinese supply chain pillars helped drive foreign investment in the country:

1. The “world factory” supply chain, which was largely crated by foreign multinationals, their suppliers and subcontractors;
2. The Chinese infrastructure network, operated and built by “vertically integrated state-owned enterprises in logistics, energy, roads, telecoms, shipping and ports,” writes Sheng.
3. The Chinese financial supply chain, which was dominated by state-owned banks, high domestic savings, a closed capital account and “relatively under-developed financial markets,” he adds.
4. Government services supply chains, in which central and local officials affected every aspect of the supply chain and logistics through regulations, taxes or permits.

But these  pillars have started to give way to market stresses, including labor shortages, wage increases and competition from other countries.

“Investors are concerned about Chinese equities’ erratic performance, regulatory risks, and policy surprises, as well as the uncertainties stemming from greater volatility in asset prices, including property prices, interest rates, and the exchange rate,” he writes.

To change course, Sheng contends China should “re-engineer to become a more balanced, socially equitable and sustainable country.”

For companies already invested in China, GreenBiz recently offered a list of “Seven Steps to a Greener Chinese Supply Chain.” Among the suggestions: Encourage the training of more Chinese environmental professionals and tailor programs to local realities.

Sheng isn’t the only one with ideas about how China can reinvent itself.

Last month, China’s State Council announced it would focus on the development of domestic supply chains and improve the domestic circulation of consumer goods.

The Chinese government is also considering offering interest-free loans to encourage the stockpiling of heavy rare earth oxides. The most recent news is that China plans to start building 18,000-tonne strategic stockpile of the elements in September.

China has just 23 percent of global reserves, but accounts for more than 90 percent of the world’s supplies of rare earths, according to the Star Online Business.  It has also started to trim its export quotas in recent years, which has left trade partners upset.

The U.S. Magnetic Materials Association contends the rare earth components supply chain in the U.S. is vulnerable and is pushing the U.S. Government to support its efforts to build a “stable and secure supply chain for rare earth components.”

“These oxides include four of the five rare earth elements classified as critical by renowned industry consultant Jack Lifton of Technology Metals Research: terbium, dysprosium, europium, and yttrium,” the USMMA press release states. “USMMA and its member companies have long expressed their concerns to the U.S. Government about the availability of and dependency on Chinese rare earth elements for national security and energy requirements.”

China isn’t the only country re-assessing its manufacturing and supply chain infrastructure. Some leaders in the UK are also pushing for a refocus on this sector.