One of the most dramatic stories of the last 30 years has been the rise of China as a global manufacturing hub. By 2018, China accounted for 28.4 percent of global manufacturing output. The United States was in second place with a 16.6 percent share (as recently as 2009, the United States led China in manufacturing output). The United States was followed by Japan (7.2 percent share) and Germany (5.8 percent share). China’s growth was powered by surging international trade. In 1995, the value of China’s imports and exports of goods totaled $280.9 billion, or 3 percent of global trade. By 2018, China’s total trade in goods had jumped to $4.6 trillion, or 12.4 percent of global trade.
The U.S. was the world’s second-largest trader at 11.5 percent of total trade, followed by Germany at 7.7 percent. By 2019, China accounted for 13.5 percent of global exports, way ahead of the United States and Germany, which had a little over 8 percent each.
China’s export-led manufacturing growth has made the Chinese economy the second largest in the world behind the United States. China’s growth has been based upon a number of factors. Initially, low labor costs and a large and relatively educated population were important. More recently, China’s world-class logistics network, decades of manufacturing experience, and tight clusters of primary producers and networks of suppliers have made China an attractive location in which to manufacture products for export to the rest of the world. China has become a global center for making everything from Apple smartphones and Lenovo computers to Nike shoes, as well as toys for Hasbro and Mattel.
Since 2017, however, China has been hit by two events that have led many companies to question their dependence on the country as a manufacturing hub. The first was the trade war between the United States and China initiated by President Donald Trump. Trump’s goal was to reduce America’s large trade deficit with China. The Trump administration started placing targeted tariffs on Chinese products such as steel, washing machines, and solar panels in early 2018. Then, in September 2018, the administration slapped a 10 percent tariff on $200 billion of Chinese imports into the United States. This was followed by additional 10 percent tariffs on another $300 billion of imports in August of 2019, along with threats to increase those tariffs to 25 percent if China did not accede to U.S. demands.
Faced with a growing trade war between the two countries, many American importers who had long relied upon China to source products started looking around for other opportunities. The idea was to diversify their supply sources, thereby reducing their dependence upon China. However, that strategy was not always easy to execute.
A case in point is MGA Entertainment, an American toy company whose brands include “LOL Surprise,” “Little Tikes,” and “Bratz.” MGA’s CEO, Isaac Larian, notes that his company “is dependent upon China in a major way. There is no way you can pick that up and go to another country.”* Larian notes that MGA cannot find affordable labor for a factory in the state of Ohio, while other locations, such as India or Vietnam, lack the workforce and infrastructure of China. In his view, “no other country can do what China does.”*
Other companies have made more determined attempts to diversify their supply chain as a hedge against trade wars. For example, the Hong Kong–based, high-end apparel company, Lever Style, has quickly been moving production from China to Vietnam and other Southeast Asian countries. In 2016, China accounted for the lion’s share of Lever’s production, but by 2020, Vietnam accounted for more than half, with China second.
The risks associated with sourcing most production from China were further highlighted in early 2020 when the SARS-CoV-2 virus responsible for the COVID-19 disease swept through China’s Hubei Province; much of the country was put on lockdown to try and contain the spread of the deadly virus. With factories closing for a month or more, many firms that depended heavily upon China found themselves facing a massive problem.
MGA’s Larian notes that “In four decades doing business in China, the coronavirus is the worst thing to happen.”
Typically, toy companies start ramping up production for their Christmas season in the spring, but with many Chinese factories closed, MGA faces major disruptions to its supply chain. Just how serious this might be can be gleaned from the dramatic drop in shipping from China during February 2020. Container traffic arriving daily at U.S. ports from China fell from 32,550 on February 4, 2020, to just 2,784 on February 26, suggesting a cataclysmic collapse in trade. As the director of one company that had already moved significant production out of China noted, “The coronavirus confirmed that we were too reliant on one country and that moving was the right thing to do.”
Despite the sharp drop in Chinese production during the first half of 2020 due to the COVID-19 pandemic, economic output rebounded strongly in China in the second half of 2020, and the country ended up recording a 2.3 percent growth rate for all of 2020—making China the only major economy to register positive growth. One of the main drivers of this rebound was China’s ability to contain the spread of COVID-19 within its own borders. In addition, Chinese exports rebounded sharply in the second half of 2020. For the year as a whole, China registered record exports of $2.9 trillion. Its politically sensitive trade surplus with the United States hit a record $535 billion, despite the fact that American tariffs remained in place. Although Trump lost the U.S. presidential election held in November 2020, the Biden administration seems to be in no hurry to remove the tariffs the Trump administration placed on Chinese imports.
Case Discussion Questions 1. What factors explain the rise of China as the world’s manufacturing hub?
2. What other countries do you think could substitute for China as a center for global manufacturing?
3. What are the risks associated with being overly dependent upon one nation, such as China, as a source for manufactured goods?
4. How easy is it to shift supply chain sourcing from one country to another? What characteristic of a product or production system might make it easier or harder to shift?
5. What are the possible solutions to supply chain disruption caused by unanticipated events, such as the shift in trade policy under the Trump administration, or the COVID-19 pandemic?
6. Given how quickly China rebounded from the COVID-19 pandemic, and its ability to continually grow exports despite tariffs, do you think companies should push ahead with plans to diversify their supply chains away from China?