The Price of 'De-Risking': The Hard Math of Moving Supply Chains Out of China
For three decades, it was the undisputed gospel of global business: build your supply chain in China. The country offered an unparalleled combination of low-cost labor, world-class infrastructure, and incredible manufacturing scale. This model, more than any other factor, powered the era of globalization and delivered a generation of cheap consumer goods to the world.
Today, that gospel is being rewritten. A new term has entered the corporate lexicon: "de-risking." Driven by a combination of geopolitical tensions, the lessons of the pandemic, and rising labor costs, multinational corporations are undertaking the massive, costly, and incredibly complex task of diversifying their supply chains away from their over-reliance on China.
The Geopolitical Catalyst
The primary driver of this shift is the intensifying strategic rivalry between the United States and China. The trade war that began under the Trump administration and has continued under President Biden has introduced a new level of uncertainty and risk into doing business in China. Tariffs, export controls on advanced technology, and the constant threat of further political escalations have forced companies to re-evaluate the wisdom of having their entire manufacturing base inside a geopolitical rival.
The COVID-19 pandemic served as a powerful accelerant. China's "zero-COVID" policies, which led to the sudden and prolonged shutdown of entire cities and factory complexes, brutally exposed the vulnerability of a supply chain that was dependent on a single source. Companies learned the hard way that a model optimized for maximum efficiency was also a model with maximum risk.
The "China Plus One" Strategy
The response from most multinational corporations has not been a complete exodus from China, but a "China Plus One" strategy. This means maintaining a significant manufacturing presence in China to serve its massive domestic market, while building out new capacity in other countries to serve the rest of the world.
Nations like Vietnam, Mexico, and India have emerged as the primary beneficiaries of this shift. Vietnam has become a major hub for electronics manufacturing. Mexico, with its proximity to the US market, has seen a boom in "near-shoring" for the automotive and industrial sectors. India is making a major push to become a new hub for smartphone manufacturing.
The Hard Math of Relocation
While this strategy makes geopolitical sense, its economic and logistical challenges are immense. The reason the world became so reliant on China in the first place is that it is incredibly difficult to replicate its unique ecosystem.
- Cost: While labor costs in China have risen, they are often still competitive when combined with the country's high levels of productivity and automation. Moving to a new country often involves higher initial costs and a less efficient workforce.
- Infrastructure: China has spent decades building world-class ports, high-speed rail, and a reliable power grid. Few other developing nations can match this level of infrastructure.
- Supplier Networks: A single factory, like an Apple iPhone assembly plant, relies on a dense, local network of hundreds of smaller suppliers who provide everything from screws to circuit boards. Recreating this entire ecosystem in a new country can take years, if not decades.
The great "de-risking" is not a simple process of moving a factory from one country to another. It is the largest and most complex reconfiguration of the global industrial landscape in a generation. It will lead to a world with more resilient, but also more expensive and less efficient, supply chains. The era of cheap, frictionless globalization is over, and consumers and corporations alike will have to bear the cost.
