Tokyo Flex 2.0
Often, regionalization in supply chain comes up in the context of disruptions like geopolitical instability and sustainability directives. But spontaneous stock market events, like Monday’s 12-point dive in Tokyo, can turn supply network risks upside down, too – even more so than direct supply network disruptions. In the face of polycrisis, supply chain strategy must become exponentially more dynamic and risk-aware.
A stack of wars, trade wars, and now-imminent EU social and environmental directives are intensifying pressure on supply chain leaders to accelerate regionalization. But a near-term stock market swoon, like we’re seeing right now in Japan, could just as easily drive trade arch-adversaries right back together. The key in the midst of such extreme uncertainty is dynamic and actionable supply chain network strategy discussions, part of which involves making network scenario analysis a core part of planning and execution routines.
China Isn’t Going Anywhere
When I started writing this article, the Tokyo stock market hadn’t yet plunged 12%. I was preparing to argue that China decoupling is a slow but inexorable juggernaut. Indeed, regionalization is fast proving to be a linchpin of supply chain resilience strategies.
Recent Zero100 analysis of 3,210 corporate earnings calls across 213 global consumer and industrial brands found that the use of regionalization-related terms increased by +45% in the 18 months ending in July 2024. Moreover:
- In the last 24 months, Apple has shifted over 10% of its iPhone production out of China and into India. Apple produces Macbooks (10% of volume), Apple Watches (15%), and AirPods (25%) in India and Vietnam.
- Samsung, Dell, HP, and other electronics behemoths are following suit, substantially shifting assembly operations to Vietnam, Thailand, Malaysia, and Mexico.
- In its most recent earnings release, pharma giant AstraZeneca doubled down on its “China+1” strategy, building one supply chain for the Chinese market and another (largely redundant) supply chain for all other markets.
But even the most aggressive regionalizers generally remain highly dependent on China for intermediate goods supply. The graph below shows that China’s role as a production superpower is tied in large part to its control of anywhere from 30% (automotive) to 45% (metals and metal products) of intermediate product manufacturing capacity.
It’s pictures like these that illustrate why companies like Tesla are so eager to build battery factories in China. China owns approximately 65% of the world’s lithium refining capability and over 80% of other essential rare earth metals like manganese.
Moving final assembly from China to India thus carries its own hidden tradeoffs, often in the form of more transport, longer total supply chain distance, higher logistics costs, more inventory, and more points of cross-border complexity. Those factors sit on top of vital qualitative considerations, such as production engineering skills and their impact on product quality, in-country logistics infrastructure, cultural differences, and so on.
To Regionalize or Not to Regionalize
Some decisions to regionalize are, of course, reversible. Others less so. Amazon itself coined the terms “one-way” and “two-way door” to distinguish between the two types of decisions. But in the game of strategic sourcing, many decisions take years to reverse. In an optimistic scenario, a new electronics assembly operation takes over two years to build.
The notion of regionalization, therefore, requires a careful look at the full menu of decision variables and risk profiles before making a board-level decision on the optimal supply chain footprint.
To that end, network design leaders like Apple, Dell, Siemens, and Schneider Electric:
- use fit-for-purpose, balanced network design decision scorecards that look across at least 8-20 unique dimensions,
- conduct detailed analysis of scenario financial implications, geopolitical scenarios, and market forecasts, and
- run rigorous multi-month stakeholder consultations (including interviews with major suppliers, government officials, etc).
Of course, the scorecard doesn’t drive decisions on its own. But it serves as an essential simplifier in the midst of an otherwise overwhelming complexity of choice.
Risk Has a Seat at the Table – So Dynamism Must, Too
This week’s news and instant global domino effect remind us that whatever network strategy methods we use, tradeoff discussions must be far more continuous than they were in our simpler pre-pandemic era just four years ago.
A recent McKinsey study estimates that major supply chain shocks occur every 3.7 years. But that definition only includes events like earthquakes and pandemics that interact directly with supply chains. An economic recession that starts tomorrow may not qualify as such, but a Tokyo economic meltdown could upend supply network risk and economics far more consequentially and persistently than any direct supply network hit.
It is quite possible, for example, that in the upcoming US presidential election, tariffs will fall quite precipitously to political footnote status, and we’ll be debating options for economic stimulus instead. If so, the supply chain network scorecard weightings could just as easily swing us back towards China reliance as Western and Chinese governments both scramble to regain stable economic footing. Perhaps.
What’s clear is that risk has a seat at the table, and we, as supply chain leaders, must embed network scenarios and options in every core planning and sourcing review we attend. Dynamic, holistic, risk-adjusted options exercises must be routine.
Let’s flex.