Analysis | Supply chains are unbroken, at least not everywhere – The Washington Post | Jewelry Dukan

The world worries about the decline of global supply chains and the threat of deglobalization, with the US trying to lure manufacturing activity home – or at least closer.

Still, supply chains in some places – notably Asia – have actually thrived for the better, despite all the challenges since 2020, when Covid disrupted world trade.

The problem isn’t that the long-globalized operations of big industrial firms have broken up, or that decoupling of trading partners is underway, or that China is just looking out for itself. It is that companies in Asia have been better at weathering geopolitical shifts, focusing instead on building up needed inventories and diversifying their products while maintaining smooth trade relationships. The dismal state of American manufacturing coupled with resilient Asian supply chains has brought into focus the critical global role of industrial giants like South Korea, China and Japan.

The flow of high-tech products, industrial machinery and capital goods between South Korea and China surpassed $300 billion in 2021, the highest since the two countries established an economic relationship in 1992, according to Bank of America Corp.

It wasn’t so easy for US companies. Since late 2020, a number of S&P 500 companies have consistently complained about supply chain pressures in their earnings calls and reports. Later this month, executives at American conglomerate Dover Corp. said they had prepared their customers for delays “on many shipments related to the supply chain.”

Colleagues in Japan and South Korea raised the issue much less frequently during this period. Hitachi Ltd., one of Japan’s largest industrial companies with a huge business in China, noted in its latest conference call in July that there was “no supply chain disruption” in the first quarter. Other large firms have spoken of steps they have taken to reform or restructure trade flows.

As trade in Asia has increased, so has interdependence. Raw materials, components, and processed and consumer goods flow freely and in large quantities between countries. And as Chinese demand for higher value products grows, its trading partners have changed their exports. The Herfindahl-Hirschman Index (1), a measure of market concentration, shows that South Korea is shipping larger volumes of specialty goods to its huge western neighbor. Industrial equipment, precision machinery and semiconductors accounted for almost 40% of South Korea’s exports in the first six months of this year. Japan’s exports of machinery and electrical appliances to China have also increased.

The reality is that supply chains don’t come and go; they expand and deepen. They work best when there are economies of scale, as manufacturers produce more and better goods — as has happened in China, Japan, and South Korea. Industrial companies specialize products over time as the needs of their trading partners evolve, more suppliers and countries are added, and different commodities are traded.

Ultimately, corporations want to do business, not geopolitics. The opportunity cost of acting on erratic political rhetoric by changing production lines and moving factories is far too high. It’s one of the reasons we continue to see short-term supply chain disruptions morph into longer ones – companies aren’t making big long-term changes based on the latest policy announcements.

But companies — particularly in Asia — are choosing to adjust, adding product lines and cutting others, among other things. Few actually make the switch because they “do not address most of the risks,” as the Asian Development Bank’s annual report on global value chains notes. The power of supply chains lies in their ability to adapt to changing macroeconomic realities – as they always have.

For the US, hopes that one day the great American supply chain will emerge are misguided. The Biden administration’s Inflation Reduction Act and Chips and Science Act aim to support efforts to build manufacturing capacity domestically. Still, the US risks isolating itself from large swathes of global suppliers and creating greater dependence on its North and South American trading partners. It would be wise to woo his Asian friends as well: their supply chains can go a little further.

More from the Bloomberg Opinion:

• If factories don’t come back now, they never will: Thomas Black

• Don’t believe the prognosis. China is doing well: Anjani Trivedi

• The West needs friendhoring, not reshoring: Adrian Wooldridge

(1) Footnote: Herfindahl-Hirschman Product Concentration Index, according to Bank of America analysts

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Anjani Trivedi is a columnist for Bloomberg Opinion covering industrial companies in Asia. She was previously a reporter for the Wall Street Journal.

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