And, in the end, China wins out…
This column was previously published in L’Express on 16th June 2022
Up against logistical hindrances and the need to take a new look at supply circuits, Beijing finds itself in a strong position.
“We’ve gone from a demand crisis to a supply crisis,” said Olivier Andriès, the managing director of Safran, recently. We are gradually discovering that the problem over masks during the first phase of the Covid crisis is now spreading to other sectors. It’s the end of an era — that of the all-conquering American fabless model which involved Western companies disposing of their manufacturing units in order to focus on product design. Over the last ten years, the market capitalisation of Hon Hai, the mother company of the Chinese electronics manufacturer Foxconn, has remained stable, whilst that of Apple — strengthened by subcontracting out its manufacturing side so as to give more focus to software — has increased by 1,500%.
Beijing will soon have access to heavily discounted Russian hydrocarbons
Have we truly realized to what degree things have changed? In 2021, while LVMH was making profits of €12 billion, the shipping company CMA-CGM, largely unknown to the general public, was, with its 17 billion profits, on an equal par with the leading French oil company TotalEnergies. Production bottlenecks are not simply related to Covid. They are also due to the explosion of logistics costs, natural disasters linked to climate change, government restrictions on world trade, and to past just-in-time stock management that became ineffective with increasingly volatile demand.
China seems to be fully aware of all the advantages it could gain from this new weapon — capable of massively tipping the balance of power — if it manages to bring its manufacturing output more upmarket. Apple unwittingly reminded us of this when it announced it was doubling its supplies from India from 3.5% to 7%, whereas China still accounts for 90%. The new “friend-shoring” promised by the Biden administration — relocating production to friendly territories — will take even more time since its high cost will turn out to be difficult to accept for non-strategic operations, above all at a time of high inflation.
China is banking on most of its value chains returning to production, a choice which seems justified by the unfortunate opportunity offered by the war in Ukraine to build up a decisive advantage because of energy costs. Whilst Beijing will soon have access to heavily discounted Russian hydrocarbons, and will have control over the main metals involved in energy transition, the explosion of energy and environmental costs may well be even worse for European industry.
The contrast will be particularly noticeable with German industry, the main target of China’s move upmarket. In this respect, the recent decision taken by the Chinese state oil company Cnooc to put its assets in the West up for sale, in order to avoid potential future American sanctions, is an auspicious one. It is a forewarning of a possible global decoupling which is also being favored by means of a recent Chinese Data Security law restricting the transfer of so-called sensitive data abroad. This is enough to hasten the world towards a “war economy”.
We have to work towards re-globalizing the world, not de-globalizing it.
Rather than sink into pessimism, European industries should pay attention to the German Minister of Finance, Christian Lindner, when he recently announced the end of bilateralism. Let us not forget that world trade in 2021 was up in value by 13% over 2019. We therefore have to work towards re-globalizing the world and not de-globalizing it. A re-globalized world would be one in which China, currently present in the value chains of a third of all exporters worldwide, cannot of course be disregarded. But it must no longer be treated in a purely bilateral way. The fact that the whole of the container logistics industry expects to make profits of 220 billion (!) in 2022 tells us that, once again, this year “stewardship will not keep up”, because it will still take twice as long to get a product from a Chinese factory to its Western destination than it did in 2019. But this global upheaval will at least make a few company people happy — the purchasing departments, who will finally be invited to attend executive board meetings!