In the past eight years, a lot has changed in the world. Many of these changes have been quite startling. To begin with the slightly humorous, unlike now, eight years ago Manchester United was still a good team, virus-like films were still films, and our greatest fears about the world ending in 2012 turned out to be the joke of the year. When compared to 2012, today everything has partially fallen to bits proving the great and ancient observation that “stuff happens”.
This observation as much as it’s true for our comparison above, it’s also true for Joe Biden’s and Xi Jinping’s relationship. Unlike today’s tense relationship, in 2012 Joe Biden considered Xi Jinping as a charming to-be Chinese leader “prepared to show another side of the Chinese leadership”. Now Biden calls him a “thug” thereby proving that the next American President (whether Trump or Biden) will continue to view China as an adversary.
Considering this reality of US changed relationship with China and already rising Chinese labour costs which have risen by 30% since 2016, it is no surprise that many multinational companies have begun to fragment their supply chain into one for China and several others for the rest of the world. As an example, Foxconn, the world’s largest electronic contract manufacturer, has already begun to relocate some of its supply chains out of China after publicly claiming that China’s days as the world’s factory is over.
But there are many difficulties with these fragmentation goals. For one, to efficiently operate a complicated manufacturing unit, you need not just your unit but also the technology and supply chains to handle complicated production. In China, you had all of this in one place. But outside of China, such clusters are hard to find and will take time and investment for host countries to replicate. In light of this, it’s no surprise that even Foxconn (despite its ambitious exodus goals) still expects to maintain 70% of its supply chains in China for the near future.
Even if you find the right, there are still very high relocation costs associated with moving supply chains and setting up new units out of China. At the moment, BofA estimates these costs at $1trillion. For companies with muted cashflows, these high costs will probably mean you will have to resort to external debt or raise capital from equity markets to absorb migration costs.
Of course, these high costs and problems will mean that the expected fragmentation of supply chains will occur over very slowly. It unlikely to be as quick as the mass exodus that Biden and Trump are promising, and many are forecasting and expecting.
For fictional UK-based Global law firm, Tom, Dick and Harry Solicitors and their American counterparts, Margaret, Abigail and Aimee LLP, their role as lawyers will depend on the current strategy of their clients. At the moment, some companies are holding back from making big decisions as they wait for the more certainty and predictability a likely Biden government may bring. Where clients have already made their big decisions to move, lawyers will help provide supply chain support services. These services will help clients effectively structure and document new third party relationships, comply with regulatory laws while setting up new supply chains and undertake appropriate risk assessment of suppliers.