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New Trends of Global Supply Chain Adjustments In Post-Crisis Era and China's Options


Long Guoqiang

How will global supply chains change under the impact of the international financial crisis? What opportunities and challenges will these changes bring to China? What positive measures should China take to seek advantages and avoid disadvantages? These issues deserve high attention. The Development Research Center of the State Council (DRC) set up an ad hoc task force for in-depth investigations and studies on these issues. The task force held discussions with senior managers of nearly 60 multinational companies, made case studies on the China-based enterprises of Philips and Boeing, issued questionnaires to over 1,500 foreign-invested enterprises, and analyzed 472 valid returned questionnaires. In addition, the task force also solicited opinions from experts in the relevant fields through discussions and forums. On the basis of these wide-range investigations and studies, the task force came up with a series of research reports. The following are the main judgments and policy options from these reports.

I. New Trends of Global Supply Chain Adjustments in Post-Crisis Era

Over the past three decades, the formation and expansion of global supply chains has been the most striking phenomenon in the course of economic globalization. It has also represented a profound change in the mode of global production, industrial organization and international division of labor. This has been driven by three basic forces. One, the increasingly fierce market competition has forced multinational companies to fully tap the comparative advantages of various countries and re-arrange their production, marketing, and R&D activities around the world. Two, the vigorous advance in trade and investment liberalization has greatly lowered system barriers to transnational production and operation. Three, the revolutionary advance in technology and management has drastically cut the cost of global production and operation. The sharp fall in the cost of information flow and management and the cost of logistics has greatly reduced the cost of transnational operations and given a strong push to the modularization of production and the internationalization of supply chains.

In the post-crisis era, global supply chains will be influenced by many new factors. They include the adjustment of the savings and consumption behaviors of American families, the "re-manufacturing" pursued by developed countries, the new development trends of low-carbon economy and green economy arising from climate issues, the new-round technological revolution arising from the financial crisis, the resurge of trade protectionism and the new technological trade barriers such as "carbon tariff", the adjustment of the global pattern of economic development arising from the rapid development of emerging economies, the global overcapacity and fiercer competition, the adjustment of the rules on global finance, trade and investment, and the corporate acquisitions and restructuring driven by the financial crisis.

The interaction between these new factors and the past basic driving forces for global supply chains will have far-reaching impacts on global supply chains in the post-crisis era. On the whole, the basic trend of global trade and investment liberation is unlikely to change and some of the original trends of global supply chains may be further reinforced. For example, multinational companies will internationalize their R&D activities and service outsourcing and will make cross-border transfer of their high-end manufacturing activities. But the new factors may bring about some new trends to global supply chains and bring these chains into a new period of accelerated adjustment and integration.

Global supply chains may demonstrate the following new trends in the post-crisis era:

First, global cross-border industrial transfer will gain new momentum. In the post-crisis era, the consumer demand growth in developed countries will slow down, the demand in emerging economies will grow, the partial overcapacity will become more prominent, and the market structure of supply chains will change. All these will further expedite cross-border industrial transfer. According to an UNCTAD forecast, the post-crisis acquisitions between developed economies are likely to be seriously affected and the investment in emerging economies will remain strong. This trend is also proved by a survey on foreign-invested enterprises in China. About 57.5% of the surveyed enterprises say their investment in China will not be affected and they will continue to implement their investment projects. Another 10.9% enterprises say they will marginally increase investments and 1.4% enterprises say they will sharply increase investments in China. Besides, the enterprises in emerging economies will tap their ample funding strength and can integrate global supply chains faster after they acquire enterprises in developed economies at low costs.

Second, the status of regional supply chains will rise. The climate issue has become an important factor to influence the strategic decisions of multinational companies. On the one hand, 70% of the surveyed enterprises believe new energies and low-carbon economy will bring new development opportunities to international trade and investment. On the other, over half of the surveyed enterprises hold that carbon tariff and other measures will drive up shipping cost and the cost of cross-border management. Driven by this factor, global supply chains may become more spatially concentrated so as to form some regional supply chains with global influence. Over half of the surveyed enterprises believe that in the future, "global supply chains will continue to develop and the status of regional supply chains will rise".

Third, the status of market-oriented supply chains will rise. The survey findings indicate that of all the factors influencing the global supply chains of multinational companies, the cost of production remains the most important one. While the market factor is becoming more important and the influence of other cost factors such as procurement, logistics and management is rising, risk controllability is becoming a clearly more important consideration. For this reason, market-oriented supply chains will become more important while low cost will continue to be the primary consideration when multinational companies arrange their global supply chains in the course of regionalizing global supply chains. As emerging economies enjoy advantages in both low cost and rapid market expansion, global supply chains are most likely to move toward emerging economies at a fast pace.

II. Global Supply Chain Adjustments Mean Greater Opportunities than Challenges to China

Thanks to the effective and proper measures taken by the Chinese government after the outburst of the global financial crisis, the Chinese economy has demonstrated a tangible upturn momentum. Although foreign-invested enterprises in China have been affected by external markets, most of their operations in China have been the best among their global operations. Therefore, China's status in the global operations of multinational companies has risen rapidly. More and more multinational companies have responded to this change. For example, General Motors has relocated its global operations headquarters to Shanghai, to take care of all its operations outside the United States.

China enjoys dual advantages in low cost and large market. It is not only the world's most important manufacturing base, but also the world's largest exporter of finished goods. And very soon, it will become the world's second largest economy and the world's fastest-expanding market. Compared with the past, China's appeal to multinational companies is no longer limited to its low-cost factors of production. Of the 17 factors that influence decision making on investment in China, the top five rated by the surveyed enterprises are respectively "domestic market potential", "sound infrastructure", "labor cost", "the level of admission for foreign investments", and "industrial concentration and support capacity". Market appeal has surpassed low-cost labor to become China's No. 1 appeal to multinational companies.

Therefore, the integration and adjustment of global supply chains will bring major opportunities to China: