Supply chains: when the chips are down

In the latest in a series of business school-style teaching case studies, Professor Usha Haley considers the supply problems faced by technology and electronics companies because of growing restrictions on US-China trade. Readers are invited to read the article and linked stories and consider the questions raised at the end.

China and the US are intense rivals in national security and economic output. Yet the world’s two largest economies — which represent 40 per cent of GDP — remain integral partners in many ways.

So, in these circumstances, what should companies do to manage global supply chains and geopolitical risks, and how does uncertainty affect the green economy and economic stability?

CIA Director William Burns has argued that, for the US, the answer is “not to decouple from an economy like China’s, which would be foolish, but to sensibly de-risk and diversify by securing resilient supply chains, protecting our technological edge and investing in industrial capacity”. The August 2022 US Creating Helpful Incentives to Produce Semiconductors (Chips) and Science Act reflected that view, with implications for supply chains, nanotechnology, clean energy, quantum computing and artificial intelligence.

In December 2022, China announced a $143bn retaliatory package and, in May 2023, banned Chinese companies from buying from US chipmaker Micron Technology, reducing its sales by $3bn. Then, in July, it restricted exports of two key metals essential to the semiconductor, telecommunications and electric vehicle industries.

In October, an updated Chips act limited US sales of high-performance semiconductors and access to technology that “could fuel breakthroughs in artificial intelligence and sophisticated computers”. That affected Nvidia (which receives a quarter of its chip revenues from China), Intel and AMD.

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China has been a major player in global supply chains, dominating the technology and electronics industries. In 2020, its chip sales totalled nearly $40bn, or 9 per cent of the world market, and they are projected to reach $116bn this year. But that is changing. Kearney’s 2023 Reshoring Index indicated that 96 per cent of US chief executives may reshore or already have, including Dell, Google, Microsoft, Intel, Apple, Amazon and Walmart. In 2023, China accounted for the smallest share of US imports in 20 years. And, as global supply chains restructured, US foreign direct investment in China fell to an 18-year low of $8.2bn in 2022.

For US and European companies, strategies for resilient supply chains now include the following:

Friendshoring & reshoring

Foxconn and the other leading Taiwanese manufacturers of electronics responded to customers’ demands by moving production from China to elsewhere in Asia, Mexico and beyond. Companies have hedged bets using a “China plus one” strategy to maintain existing domestic operations while directing new investments elsewhere.

Many businesses “friendshored” or moved supply chains to political or economic allies such as India, Thailand and Vietnam. In 2022, Dell said it would move one-fifth of its laptop production to Vietnam. Apple also said it was shifting 18 per cent of global iPhone production to India. US companies “near-shored” to Mexico and Canada to benefit from the United States-Mexico-Canada Agreement on free trade, and reshored production to the US.

‘In China, for China’

Chips subsidy recipients are not allowed to make semiconductors in “countries of concern” (including China) for 10 years. So some companies are now producing goods made in China for domestic Chinese consumption only, although government-affiliated organisations must buy Chinese brands. Investing in China has exposed foreign manufacturers to IP theft and skewed competition from Chinese subsidised industries that obtain cheap or free land, capital, electricity, raw materials and access to technology. Companies have also faced politically motivated harassment. In October 2023, Foxconn underwent tax probes in four provinces.

Chinese investment in the US

Chinese investments face a high risk of coming under regulatory scrutiny, over national security and competition concerns. For example, a China-linked company’s Wyoming facility came under investigation by the Committee on Foreign Investment in the United States, after a report suggested its proximity to a Microsoft data centre and a US airbase might enable intelligence gathering. Some 33 US states have now prohibited the Chinese government, citizens or businesses from buying agricultural land or property near military bases, and the trend will probably continue. Meanwhile, Chinese investments in US shale gas have been found to skew energy technology development, reduce US patents, increase Chinese patents but offer few benefits to local communities, in research funded by the National Science Foundation.

Replacing China in supply chains will take time. It is the largest producer of key components in electric vehicle battery production. Over the next two years, manufacturing incentives in the $430bn US Inflation Reduction Act (IRA) offset one-tenth of an EV’s cost while shutting out battery-content and critical materials from “foreign entities of concern”, including China. But China has begun circumventing the restrictions through joint ventures with US free-trade partners South Korea and Morocco. The US and China remain mutually dependent, even as they balance economic interests with geopolitics.

Usha Haley is W Frank Barton Distinguished Chair in International Business & Kansas Faculty of Distinction, Barton School of Business, Wichita State University