In this episode…
We discuss how wars like the one waged on Ukraine by Russia right now could affect global supply chains. In particular, could China be affected, and if so, how? Is the West likely to decouple from China in the future in a similar way as they have done with Russia?
Finally, Renaud leaves you with some guidance on ways to diversify your suppliers and therefore reduce the chances of supply chain disruptions and risks.
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🎧 Could War In Ukraine Affect Chinese Supply Chains? 🎧
00:00 – Greetings & introduction.
01:15 – Some thoughts about the war in Ukraine.
04:26 – The speed of Western sanctions against Russia and their effects.
Russia went from an uneasy trading partner to a country with the same level of international standing as Iran or North Korea in just days. The fall of the rouble is leading to huge inflation, Russian banks have been excluded from SWIFT, and there has been a Western backlash against buying Russian oil and gas. This trade blockade will no doubt affect the global economy as well as Russia’s, as energy costs could be negatively impacted and Russia’s importation of a lot of goods will stop. Inflation globally could increase due to this.
07:57 – Will sanctions on Russia affect China?
China purchases a lot of raw materials for energy production from Russia, so could sanctions cause another energy crunch n China? Sanctions haven’t covered energy yet and so China’s economy looks unlikely to be too affected by energy issues unless sanctions on Russia increase further, but they may be somewhat affected by lower consumption and foreign investment from the West.
10:34 – Logistics costs.
Logistics costs have been high due to the pandemic, but some estimates suggest that the war in Ukraine will send them higher still (possibly triple!) and this affects Chinese exporters because their customers will probably purchase less. Add this to ship route changes, trans-shipments to finish legs, and refusal to accept ships from Russia, and the already creaking shipping industry has extra pressure.
12:28 – Could the decoupling happening to Russia happen to China, too?
A lot of Americans would like a serious decoupling with China in the same way as the West has decoupled with/ostracized Russia. It would probably take a war or invasion of Taiwan for this to happen and it seems unlikely that China would do this soon having seen the situation in Ukraine.
The West has mobilized to move against Russia diplomatically and economically a lot faster than Russia may have expected (and indeed China), so this demonstrates a certain appetite for a fight in the right circumstances. Is this a deterrent for other countries that might consider similar military invasions? Maybe more than expected.
It would be good for China to act as a mediator here given their relationship with the West and Russia. They have already made some statements to urge restraint and reduce hostilities.
17:24 – Is the risk of a sudden decoupling from China higher or lower now?
Probably much higher. The West knows it can be done, as it has been with Russia. Also, belief in economic blocs like the EU is renewed and this could make it harder for China to have influence over European countries and will likely reduce resistance against punishing China if they do something wrong (there are already a lot of reasons currently in the media that could be seen as such). If that happens China likes to have the last word, so it could lead to a real rift.
20:29 – What can be done to reduce supply chain risks in this time of instability?
- Look at alternative countries for sourcing products rather than relying solely on China alone.
- Pinpoint where the supply chain needs to be optimized for efficiency (low cost possible, long lead times, inability to fly there and some quality issues are OK) and focus on China here while focusing on finding suppliers in other (probably closer) countries when responsiveness is key.
- Start researching new sources, maybe closer to home. This could take time, but it’s a good move to reduce supply chain risks by diversifying sources. This may cost in flights, hiring people etc, but compare it to the cost of poor quality goods shipped from China (with shipping costs as high as they are) and sourcing more local suppliers may not be as financially unrealistic as it once was.
Or perhaps you:
- Make no change. Focus on efficiency first, getting good costs and keep going with China as long as you don’t need to do a lot of extra work and build up a new supply chain because you have a good thing going there, but be conscious of the risk of having only one source. It is worth noting that China is still a relatively safe option. They have been stable for 40 years and provide almost unparalleled manufacturing capabilities and infrastructure.
25:06 – Wrapping up.
Here are some related posts:
- Ukrainian invasions adds to chaos for global supply chains
- A Guide to Fast-Moving Russian Sanctions and Export Controls
- You may check up-to-date information on the war in Ukraine on Reuters
- Supply Chain Risk Reduction Strategies [Presentation]
- Supply Chain Risk Management, Part 1: What are VUCA and Black Swans?
- Supply Chain Risk Management, Part 2: The Business Continuity Plan
- Supply Chain Risk Management, Part 3: A Purchaser Supply Chain KPI Scorecard’s Benefits
- Supply Chain Risk Management, Part 4: How Much Inventory Do You Need?
- Supply Chain Risk Management, Part 5: Moving Manufacturing to Vietnam, Thailand, Malaysia, or India (Pros & Cons)
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