The strategic competition between the United States and China is a broader story that is impacting all countries and cross-border businesses.
Due to China’s rapid economic rise and geopolitical tensions, a new globalization story begins in China. Most companies’ manufacturing and supply chains are overly concentrated in China. But excessive concentration is not limited to China.
As we outlined in May, we do not believe in deglobalization or decoupling in our research or work with multinational corporations (MNCs), nor do we believe the status quo will persist. The factors fueling discussions of decoupling—such as geopolitical pressures, national security concerns, strategic competitive considerations, data privacy, vague state secrets laws, widespread distrust, and the demise of international organizations that enforce the rules—are real.
However, manufacturing has not largely returned to Western countries or focused on emerging consumer countries, which is the basic proposition of anti-globalization theory. It’s going elsewhere (countries like Vietnam and Mexico). Rather than decoupling or disengaging. Multinational corporations are doing what they have been good at for more than a century: finding ways to adapt and thrive. We call this shift “reglobalization.”
Ideally, the end result will be a multipolar world with more countries participating in global commerce and prosperity.
We conclude that reglobalization will ultimately have a positive impact on emerging workforces and consumers (especially women) in the West and China, as well as around the world.
end of an era
The transfer of supply chain capabilities and control by Chinese, US and European multinationals to third countries is a neglected dimension of competition in the emerging order. Over the past 30 years, multinational companies have sought to achieve cost efficiencies by relocating manufacturing and related supply chains to lower-cost countries. Export data reveal little about the business entities that control and benefit from cross-border flows of goods and services, and these are certainly the entities that make strategic choices.
To achieve maximum scale efficiencies in the 1990s and early 2000s, multinational companies tended to concentrate their growth and sourcing efforts in a single facility or region. In many if not most cases, that means China. As reforms unfold and China becomes increasingly welcoming of foreign investment, it ticks all the boxes. That’s not to say there haven’t been any problems. In 2003, the SARS threat sparked widespread discussion about the risks of overconcentration, the importance of contingency planning, and the value of supply chain diversification. But like the SARS threat itself, the discussion was short-lived.
Over the past decade, and especially since the start of the COVID-19 pandemic, the folly of prioritizing efficiency over resiliency has become apparent. The global landscape is changing due to an increase in many complex factors, including geopolitics, a shift toward nativism in consumer sentiment and politics, climate change, demographic changes and natural resource distribution.
At the same time as supply chains are migrating, multinational companies are beginning to seek to enter new consumer markets in emerging economies outside of China. Given the slowdown in consumer growth in China, the drive to expand operations to achieve growth has heightened the drive to expand more supply centers to increase resiliency.
The current phase of reglobalization begins with the natural migration of light industrial manufacturing from China to lower-cost countries. China is methodically climbing up the value chain to avoid hampering its manufacturing and export success. Despite modest gains in productivity, China still has one of the lowest manufacturing costs in the world due to systematic (but often inefficient) allocation of central resources, overcapacity, and rapid advancement in the export value chain.
Demographic and other social changes will reduce China’s labor force, which will create pressure to continue upgrading production activities and incentivizing companies to internationalize. China’s economic system is likely to maintain its superior export competitiveness in areas identified by national planners.
While these factors have artificially accelerated diversification, the fact is that more than 2 billion people have yet to become globalization’s new consumers and workforce.
Operational model
Most multinationals readily admit that their China experience has changed their entire global activities. In the decades since they entered China, multinationals in industries such as IT, biotechnology, and semiconductors have learned important lessons about speed to market, product localization, and radically different legal and regulatory approaches that they now face Market challenges that require improvements will prove valuable in their own operations.
Many multinationals began their relocation journey in response to Trump-era tariff tactics, not to be confused with the resiliency strategies now taking center stage. For multinational companies, the initial manufacturing relocation is costly and not without new risks, including some start-up and backtracking. Many U.S. CEOs say boardrooms are divided between China hawks and doves: those who believe there is an urgent need to reduce exposure to China and those who do not. Even before any new capital spending requirements, companies often report initial cost increases of more than 20%, before falling back to 1% to 3% within five years as supply chain efficiencies and labor productivity recover. However, once relocated, multiple flexible sourcing locations and rapid information and response systems will provide flexibility and choice. They also have the potential to open up new growth markets.
Of course, in a global business, moving one’s own manufacturing or assembly is not an isolated decision. There is a complete supply chain behind any company’s operations. For decades, China has been committed to building an unparalleled comprehensive supply base for commercialized electronic components. Many parts can be sourced in the destination country without much difficulty, but some special projects require knowledge, scarce resources and large capital investments (e.g. semiconductors) and require continued reliance on mainland suppliers.
The devastation caused by re-globalization will be as painful for those affected by, for example, the loss of factory workers as it was when globalization first took off. It will also force multinational companies to shift low-end production to those who have already achieved low-end products. Producing countries to enhance resilience. For example, Pakistan, Tanzania, Kenya, much of Central Europe and the Middle East have huge, untapped potential as manufacturing hubs and future fast-growing consumer markets.
As manufacturing jobs are created—typically in clothing, running shoes, and other light industries as well as semi-automated manufacturing—we expect to see widespread employment of women, who dominate these jobs. As light manufacturing multinationals establish operations in other emerging economies, this population will become consumers with new stable incomes and start investing in their homes. When women receive regular paychecks, we typically see significant social change in a relatively short period of time. These, in turn, have a positive impact on the next generation (through higher living standards and education). When emerging economies open up, there are a number of procyclical dynamics at play.
We are also on the cusp of other transformations that are poorly understood, such as artificial intelligence, networked manufacturing, Manufacturing 2.0 and additive manufacturing, and other just-in-time manufacturing and logistics control technologies, to name a few, each with the potential to change the world. huge potential.
Re-globalization
The decentralization of manufacturing and related supply chains is a key process in reglobalizing the world. Despite interest from Brazil, India, Eastern Europe and Southeast Asian countries, we do not expect any emerging market or supply hub to dominate investor attention the way China has. MNC executives have little interest in new over-concentration scenarios.
A clear trend among many multinational companies in recent years has been to restructure the ownership and control of entities in their business activities to improve tax efficiency, sanctions compliance, tariff management and resilience. National borders have little impediment to the steady flow of mergers and acquisitions, and coupled with active capital markets, the asset value of some multinational companies has exceeded US$1 trillion. That’s why deconcentrating doesn’t mean descaling or breaking. The re-globalization landscape will see an unprecedented scale of strategically coordinated business activities. This landscape also includes large-scale, complex transnational organizations whose geographical origins and legal domiciles are increasingly blurred, and whose economies exceed the scale of many countries in the world. The extent to which their business decisions are consistent with and impact government policies will be an important driver of re-globalization.
To achieve this, we expect to see enterprise structures move from a hub-and-spoke model to a networked model driven by a focus on local knowledge, relationships, data privacy rules, local content and compliance requirements, and ever-shrinking time-to-action determined by the needs. Alliance solutions will be found for more closely aligned groups (such as North America and the EU), while competing groups (such as North America and China) will struggle to find stable solutions to an inevitable or unavoidable set of interactions. .
Potential high-growth emerging economies will pursue their national interests by maintaining a non-aligned stance in the strategic competition between China and the United States.
This will result in clusters of expertise and supporting supply chain infrastructure emerging in multiple countries, with virtual teams replacing physically co-located teams.
Clustering increases robustness and redundancy, but also makes it more difficult to exclude competitors from the global system. It is unclear whether existing international organizations that support rules-based behavior and effective dispute resolution will regain their importance and effectiveness.
Some of the recognized ills of rapid globalization are reflected in changing climates, with ESG concerns increasingly being reinforced through local regulation at all levels of developing economies. Measures are being taken to control tax inequality and systemic tax avoidance, as well as exploitative relationships between investors and investees.
Unrecognized ills are also certain to emerge in a reglobalized landscape, including innovations in cybercrime and terrorism, biological and chemical health threats, disruptive military events, and political disasters in major economies. The relevance of once effective global regulatory and dispute resolution institutions has declined dramatically. Major economies with a stake in stability and a level playing field in markets will either need to revive them or replace them. Fintech and cryptocurrencies offer many efficiencies to global financial operations, as well as a range of opportunities for regulatory circumvention and tax evasion.
However, we are optimistic. As multinationals expand their factories, they will gain greater resilience – which will help regulate inflation in the long run, even as disruptions become more frequent. Emerging markets will benefit from this, increasing population levels and empowering women. But in this new world order, it will take different types of managers, different types of companies and different processes to achieve business success.
Looking ahead to a reglobalized world is only the starting point for successful decision-making. In the final article in this series, we will analyze ways to adapt to reglobalization and examine the responses of companies we observe in the market to these changes and opportunities.
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