Disruption has taken on new meaning, particularly as applied to global supply chains during the pandemic. That “disruption” is to human activity, but the existing ecosystem of supply chains—the plants, factories, and logistics infrastructure—remains intact if temporarily human-less.
That might be an obvious observation, yet you wouldn’t know it by the chorus of calls for overhauling supply chains because the pandemic has somehow revealed structural weaknesses. It has also become a central political argument in justifying economic “decoupling”—in large part because China happens to be where many industries’ suppliers are located.
But was the supply chain system in place pre-Covid particularly fragile? It would appear that the concentration of supply chains in East Asia—from high tech products to commodity goods—has turned out to be a major silver lining. That’s because Taiwan, South Korea, China, and Japan dealt successfully with the pandemic and are now the first batch of major economies to resume production. As of April, the majority of Chinese firms’ production capacity had returned to above 80%, according to official figures. This is corroborated by Trivium China’s “return to work” tracker, which currently stands at 87%.
A leading indicator of how well the East Asian supply chain has absorbed the pandemic shock is Apple. It is only one company, but its performance in the middle of a pandemic, combined with the concentration of its suppliers in East Asia, makes Apple a useful bellwether for the resilience of supply chains (see Figures 1a and 1b).
Figure 1a. Apple Suppliers Breakdown by Region, 2017
Figure 1b. Apple Suppliers Breakdown by Region, 2019Notes: 1) The data show where suppliers are physically located, not the headquarters of the actual firms. 2) For 2017, there are a total of 759 supplier entities in the sample; for 2019, there are a total of 799 supplier entities. 3) The “Other” category includes Brazil, Mexico, Israel, India, Costa Rica, Morocco (2017), and Australia (2019).
Source: Apple; author calculations.
Not only did Apple concentrate more suppliers in China from 2017-2019, it also increased its overall supplier presence in East Asia, from 83.6% to 86.5%. Taiwan and South Korea also gained slightly, possibly at the expense of Japan because they manufacture substitutable products, though that’s difficult to determine precisely from the data. To the extent there is some diversification from China, the shifts have been largely intra-Asia among Asian suppliers. Some Japanese, and even Chinese, firms have relocated to Southeast Asia.
Among the “Others” category, Apple seemed to have shifted away from Mexico (from 7 to 4 entities), while India gained more supplier entities in those two years. Perhaps it is no coincidence that Indian newspapers have been rife with speculation that Apple may shift one-fifth of its manufacturing from China to India, though it would appear that is far more aspirational than anything approaching reality.
But what is the reality is that none of the new products that Apple has quietly released over the last few months has experienced significant hiccups, despite reports raising concerns. If East Asian supply chains were in shambles, then consumers would feel it quickly. So far, consumers haven’t (including myself who ordered a laptop for work that arrived days ahead of schedule). And the company’s upcoming iphone 12 release is still scheduled for the usual fall season, with few signs of delay.
Doubling down on the East Asian supply chain ecosystem isn’t exclusive to Apple either. After its splashy investment in Shanghai in 2019, Tesla has since redoubled its efforts to build out what amounts to a “parallel” supply chain in China as it aims to ramp up capacity out of its Shanghai Gigafactory. That makes sense as a matter of corporate strategy, since one of the key inputs that Tesla needs, the lithium-ion battery, is increasingly being dominated by Chinese giant CATL.
For multinational companies, supply chains by definition come with ever-present risks, with or without a pandemic. It is sensible and necessary for companies to constantly improve the integrity and security of their supply chain networks that took years, if not decades, to build. But it is precisely the fact that these ecosystems are painstakingly built and generally well managed that they have largely passed the Covid shock test.
That doesn’t mean the next crisis will be the same. For some companies, it may make strategic sense to enhance their supply chain integrity by diversifying from China and East Asia. For others, the lesson from the pandemic may be to hasten the adoption of robots to hedge against interruptions to human activity rather than to diversify production location.
Industries differ in their experiences of the pandemic’s impact, but any industry that has complex and entrenched supply chains would agree that the switching costs are likely exorbitant in terms of both corporate revenue and lost productivity. And the cost of unwinding that complexity by political fiat, such as forcing China out of the East Asian ecosystem by mandate, will ultimately be borne by consumers.
Factors could change more drastically post-Covid, but the resilience of the East Asian supply chain has been a bright spot amid abysmal economic news. To borrow Robert Solow’s famous quip: you can see supply chain decoupling “everywhere except in the numbers.” At least not yet.
Get Our Stuff
Get on our mailing list to keep up with our analysis and new products.Subscribe