Wherever one looks nowadays - there are supply chain disruptions and shortcomings everywhere. Container vessels anchor off ports, waiting for being admitted to berth. Cargo planes are
loaded to the ceiling with China produced goods, but capacity supply doesn’t meet market demand. Complicating matters further is Beijing’s nationalistic policy. It aims to siphon off technical
know-how from Western companies that run production plants in China to give local firms a competitive edge.
Facts that are fueling the debate in Europe and the U.S. about relocating production to reduce the industrial dependence on China.
The latest data, published by research provider S&P Global, are revealing information about the long-term effects of industrial dependency from China, U.S. or European enterprises are
increasingly facing. From mid-2020 through July of this year, about 40 percent of all goods imported into the U.S. by sea freight came from East Asia, primarily China, says S&P Global in a
study. Due to bottlenecks in electronic components and scarce ocean and air transport capacity, the value creation of industrial goods is slowing down considerably. No key components, no finished
product can be built. It’s as simple as that.
Volkswagen Chief Herbert Diess spoke of some 600,000 cars that could not be completed because of the lack of semiconductors. Missing chips have also slowed down Audi’s production rate, and the
chip shortage sent Daimler sales south as Mercedes delivered 428,361 vehicles from June to the end of September - 30.2% fewer than in the same period last year.
Silicon misery
Prices for silicon, the indispensable base material of most processors, have exploded in recent months, quadrupling since August. More than 60 percent of the silicon mined worldwide currently
comes from China. With a global share of 20 percent, the province of Yunnan is one of the main producers. In mid-September, provincial government published a decree according to which local
companies are only allowed to produce ten percent of the usual amount of silicon - in order to achieve the energy goals of the province since producing silicon is extremely energy consumptive.
The world market is thus expected to be short 200,000 tons of silicon by the end of the year.

“Made in China 2025”
Simultaneously, local Chinese authorities are actively subsidizing their own manufacturers of aircraft, high-tech products or electric cars, as well as their local suppliers. This is part of
Beijing’s campaign "Made in China 2025" aimed at replacing most Western imports with domestic products. The EU Chamber of Commerce in Shanghai said in a September report that there is clear
evidence China is increasingly turning inward. "This trend raises serious doubts about WTO member’s future economic course," the report concludes.
Homecoming trend
Meanwhile, an increasing number of U.S. and European companies running production facilities in China are considering relocating them to other Far Eastern countries, such as Vietnam, Thailand,
Indonesia, or the Philippines, or bringing them back home altogether.
Particularly in the case of reshoring, i.e. the relocation of production back to the home country, there is a clear correlation between the intensity of digitization and companies' propensity to
relocate back: "Companies that are advanced in digitization and IT technology are more likely to relocate parts of their production back to their European home market,” predicted analyst of the
University of Karlsruhe in a study published already pre covid.
The situation is similar in the U.S. where the exodus of companies from China, politically motivated by the Trump administration, has not halted since Mr. Biden took office.
Now it is China that is tightening the thumbscrews
Meanwhile, the era of offshoring is fading out and reshoring or nearshoring are the new trends. An important reason for this is Beijing's increasing pressure on Western companies to share their
sensitive production data with domestic suppliers, which translates into a state-sponsored technology theft. A game that many companies are not willing to play any longer. Take U.S. manufacturer
All Things Equal, which produces high-end board parts and is now considering moving them from China to Mexico. Similarly, shoe manufacturer Steve Madden who decided to exit China and produce his
goods in Brazil and Mexico instead.

Impaired supply chains
Another reason for companies turning their back on China is the hike in transportation costs and, even more crucially, the loss of time caused by overloaded intercontinental traffic routes
leading to disrupted value creation chains.
Impairments that prompted the Mursix Corporation of Yorktown, Indiana to quit China and look out for new suppliers in neighboring Mexico. The company manufactures components for the automotive
and healthcare industries, among others. Management reports that components coming by sea freight from China need 9 to 11 weeks until arrival in the USA, compared to 5-7 weeks before the
pandemic.
In contrast, trucking the goods from Mexico to Indiana takes only 3 or 4 days – at the most. Surely a time-saving and cheaper alternative.
Heiner Siegmund
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