China and the Supply Chain Puzzle

If I were the Chinese president today, how shall I master today's complexity of the fast shifting global context and keep advancing the agenda of sustainability, not just limited to China itself, but a global movement? Confucius' legendary advice of "power of silence" tells me that "a seed grows with no sound" , "creation is quiet", and "grow silently." But on the other, in a highly digitally-connected and market-interdependent world, silence won't be adequate anymore. China has to communicate and put words and deeds together. Any misstep, or perceived misstep, would trigger global media and social media tsunami that could set China in a very difficult and disadvantaged situation. Things are already very complicated, as we all know it. What shall I do?

No matter how challenging the current situation is and has already been, I am delighted to see Chinese government and Chinese people' empathy and action by offering a helping hand. After its current temporary success in containing the coronavirus pandemic, China is reaching out to help other nations with urgently needed medical devices and products, as well as sharing data (could be more), experience and expertise. But, I also feel saddened and worried to see resentment, jealousy, and even hatred from US and many other countries towards China and Chinese people. At the core of it is a sensitive issue - China's role in global supply chain.

PPE's

What's at stake today are five categories of products to fight coronavirus. According to the latest available data, China provided 43 percent of world imports of face shields, protective garments, mouth-nose-protection equipment, gloves, and goggles in 2018. China was the source of 50 percent of EU imports of these products from outside the bloc in 2018, including as high as 71 percent of EU imports of mouth-nose-protective equipment. Similarly for the United States, China was the source of 48 percent of imports of PPE in 2018, providing 45 percent of US imports of protective garments.

From China's production side, at a State Council press briefing on March 6 this year, the government indicated it had managed to scale up production of some key hospital supplies. Its daily output of protective clothing had increased from “less than 20,000 pieces in the early stage of the epidemic to the current 500,000 pieces. N95 masks production reached 1.6 million from 200,000, and ordinary masks reached 100 million. The production capacity of other materials and medical treatment equipment is also greatly improved.” A New York Times coverage recently also reported that "China is now producing 116 million masks a day, 12 times its supply prior to the outbreak. "

According to different information sources, China, through "wartime-like industrial mobilization", has boosted production of masks more than tenfold. China produces roughly half of the N95 respirators critical for protecting health workers. Meanwhile, antibiotics are critical for addressing emerging secondary infections from COVID-19, and China produces the vast majority of active pharmaceutical ingredients necessary to make them.

The United States, by contrast, lacked the supply and capacity to meet many of its own demands, let alone to provide aid in crisis zones elsewhere. The picture was grim. The U.S. Strategic National Stockpile, the nation’s reserve of critical medical supplies, was believed to have only one percent of the masks and respirators and perhaps 10 percent of the ventilators needed to deal with the pandemic. The rest had to be made up with imports from China or rapidly increased domestic manufacturing. At least this was the case when the pandemic first hit the US.

For the EU, the United States, and many other countries, a major concern in the first quarter of 2020 was that if China shut down its exports, imports of these critical supplies and pharmaceutical ingredients could have been disrupted. And US and EU seem also concerned that world depends on China to fight the coronavirus.

Drugs

Since the 1990s, U.S. companies increasingly depend on China and India for their pharmaceutical products. Why? They produce the required ingredients cheaper and subject to fewer regulations. China is the second largest exporter of drugs and biologics, or drugs from natural sources, to the US, according to US FDA.

It is believed that China and India contribute about 80% of basic components used in US drugs, known as active pharmaceutical ingredients (APIs). The US also relies on the two countries for its supply of generic drugs, accounting for 90% of the medicines that Americans take. India supplied 40% of over-the-counter and generic prescription drugs used in the US, according a report from the Council of Foreign Affairs.

Chinese pharmaceutical firms have captured 97% of US market for antibiotics and more than 90% of the market for vitamin C. The 2018 data shows, China export accounts for 95% of ibuprofen, 91% of hydrocortisone, 70% of acetaminophen, and 40-45% of heparin in the US market. China also contributes to US over-the-counter and generic drugs, including antidepressants, HIV/AIDS medications, birth control pills, chemotherapy treatments, and medicines for Alzheimer’s disease, diabetes, epilepsy, and Parkinson’s disease.

The sudden lockdown early this year in China threatens drug supply in the US and triggered waves of debates on the US security in medical and pharmaceutical supply chain. But the story line is more complicated than what most media platforms have been reporting. The fact is Chinese factory closures have also slowed production in India, which gets three-quarters of APIs in its generic drug formulations from China. Now the Indian government has also ordered nationwide lockdown and also ordered its pharmaceutical industry to stop exporting 26 pharmaceutical products, most of which are antibiotics. That decision could also make shortage of certain drugs, especially antibiotics, in the US.

This reminds me of a 2018 book - China Rx: Exposing the Risks of American Dependence on China for Medicine, by Rosemary Gibson. She argues that American dependence on China "is a disturbing, well-researched wake-up call for improving the current system of drug supply and manufacturing." In her view, the rise of globalization is the main culprit. And she emphasizes the inherent riskiness for the US to depend on any one country as a source for vital medicines, given the uncertainties of geopolitics. Another risk is the lax in safety standards and quality control in Chinese manufacturing.

I don't know how far the US legislators have grappled with the challenge yet. But I definitely hear its echos in today's reality.

The Perplex Supply Chain

Across the Pacific, in the last two weeks or so, a couple social media postings have gone viral. First is about US federal government committing to fund the relocation of American firms in China back to the US - whole cost! Then came a similar decision by Japanese government to fund all Japanese companies in China to move back to Japan. Proved or not, they definitely triggered anger, resentment and worries in China, followed by discussion and debate among policy advisory community, who usually would come up with responses and tactics to react.

I try my best not to be distracted by social media these days because of fake information and misinformation, but from scattered readings, I have seen some interesting comments and reactions. For instance, there are conversations between Chinese colleagues with their friends in China's MNCs (multinational corporations) around feasibility and possibility of the relocation scenario. The answer unanimously is not Possible. Companies follow market rules - cost-effective and close to markets.

There are more "calm and cool" analyses of the awakening of industrialized countries on their national security risk and the next moves to strategically reshape global supply chain - to shift away from the current situation that relies heavily on one or two countries, but rather, to redesign a global supply chain that is more secure and resilient. Very importantly, job creation, fast and in large quantity, in the post-pandemic era, is a top priority in economic recovery and stimulus plan in home state. China has to rethink about its role in a fast shifting global industrial and re-industrialization landscape.

Decades of globalization have created a rather interconnected industrial structure around the world. Take a look at smart phone manufacturing. There is a saying that not a single smart phone can be manufactured by a single country. Last year, Huawei released its 30Pro smart phone. A Japanese research company - Fomalhaut Techno Solutions, through dissembling the phone, discovered that out of the 1,631 parts, 80 are provided by mainland Chinese companies, 869 by Japanese companies, 15 by American companies, 83 by Chinese Taiwanese companies, and 562 by Korean companies.

Another example is Apple's XS smart phone series. Measured by value, Korean companies provide 32.9% of its parts, and 13.5% by Japanese companies, but its processing and assembling is completed in mainland China. Therefore, "interdependence" is a more appropriate word to describe the relationship between Chinese and American companies and the supply chains.

Trade

China opened up its door to global market four decades ago when the paramount leader Deng Xiaoping decided to integrate China into global market and link the 5,000-year Chinese civilization with world progress. China's economic magic and success was achieved thanks to the FDI's, the technological expertise that came with the capital, and more importantly its joining WTO when its domestic market is wholly connected to global market.

Since US and China established diplomatic relationship in 1979, their bilateral trade has risen 207 times, reaching a total of USD 600 billion of traded goods and products and another USD 100 billion in trade services every year. When China gained more access to global market through trade, the country has also become the fastest growing market for US overseas development. Let's take a look at some numbers. US today sells to Chinese consumers 26% of its Boeing airplanes, 56% of its soy beans, 16% of its automobiles, 23% of its agricultural products and 23% of its circuits panels.

In the service sectors, the US harvests the benefits from Chinese tourists and students pursuing their education in the US. In 2016. Today there are still 400,000 Chinese students studying in the US. Chinese non-financial investment in the US reached USD 50 billion, which is spread in 44 states and creates more than 100,000 jobs for the Americans.

The US-China phase I trade deal has China committed to buying additional American energy for at least USD 18.5 billion in 2019 and USD 33.9 billion in 2020. The baseline is USD 9.1 billion in 2017. With the world oil market collapsing and price of oil so cheap, I wonder how much oil China will get at the current oil price! With more than 1,000 US shale gas companies at risk of falling out the market, what does it mean for the agreed phase I trade deal?

Petroleum, dollar and dollar-based debt formed the foundation of global oil trading system 50 years ago. The current COVID-19 pandemic crisis and the corresponding relief and stimulus has released astronomical quantity of liquidity into the market. China is the largest US Treasury Bond holder. To add to the complexity, some observers are saying that China could reduce up to USD 700 billion of its holding of US Treasury Bond and use it to purchase oil, natural gas and gold - which have become cheap asset now due to the hit of the pandemic. What will this imply to the US and its dominating role in global finance and economy?

Plus and Minus

China became the world largest trading nation in 2012. China definitely has benefited tremendously from global trade. During the last four decades, half of global population out poverty came from China, according to the World Bank. Infrastructure is developed and defines the country's temporal and social web and governance so that the country would be able to steadily advance its sustainable development agenda. Investment in education and R&D has born the fruits that China today has a large number of engineers and talents who lead technology innovation and support the country's new industrialization. And China has become the world second largest economy.

China has become global leader on many fronts. In 2008, China topped the world in terms of number of internet users; in 2009, the largest energy user; in 2010, fast supercomputer; in 2011, the largest manufacture industry; in 2015, the largest middle-class population and billionaires. China became the world largest crude oil importer in 2017 and natural gas importer in 2018. In the meantime, China became the world largest solar power capacity in 2016. But, China became the world largest carbon emitter in 2006.

You probably would say this represents another side of the story. Indeed. While China has become a world manufacturing center, it mostly relied on cheap labor costs, cheap land and lax environmental regulations. As a consequence, the country's air, water, and soil are heavily polluted. Natural resources are fast depleted. The whole country's economic infrastructure is built around the second industrial revolution - to exploit Nature and cheap labors for surplus while supplying goods and products to rest of the world famously knowns as "Cheap".

Scientific studies show that for residents living in Beijing, their life expectancy is at least 5 years shorter than those in Guangdong, the Pearl River Delta region due to air pollution. Cancers, all kinds, have become the biggest killer of people in the last decade. Local pollution of air, water and soil has created hundreds of "Cancer Villages." Not only people suffer, so do Nature and wildlife. A couple of years ago, China's longest river, the Yangtze River, was declared by Chinese scientists as "ecologically dead" due to the fact that the Yangtze dolphin was extinct.

Who to blame and who shall pay the price? This question has never been properly addressed. Now the law makers in China have been making steadfast efforts to tighten regulations and standards and lift the bar of Investment's market entry. Local governments are held accountable to protect local environment. Rivers and lakes today in China have their "masters" - officials who are responsible for their protection. And very excitingly, digitalization and social media have ushered in a new environmental movement when transparency and information disclosure could be delivered by innovators. Ecological and environmental surveillance is becoming a powerful tool to guard its ecological security.

A New Capitalism

Are polluting enterprises all shut down in China? No. When the labor costs started to rise and more restrictive environmental regulations and standards were enforced, many companies have transferred to Southeast Asia, Latin America and Africa countries which offer cheap labor and lax environmental regulation. Just like what had happened to East Asia and China included, second industrial revolution industries today continue to transfer geographically, to other poor and least developing countries, in the name of need of growth that can only met by industrialization for jobs. Those companies continue to exploit the surplus of local labor forces and Nature for profits.

Climate change is regarded as the biggest policy failure of market economy. Nearly three decades passed since the 1992 Rio Earth Summit when global political leaders committed to work together to tackle climate change challenges. Today, we know the best ever that climate change has become an existential challenge. And immediate scaling and acceleration of existing technologies is the only option for humanity in order to mitigate the negative impact. This means the decade of 2020-2030 becomes the only time window for global community to pull all the pieces of acts together to achieve halving emissions by 2030 and net zero emissions by 2050. This will dramatically reduce climate risk and enhance climate resilience.

In order to do so, it requires a fundamental shift of how capitalism defines how finance and market works, from squeezing the surplus value from cheap labors and Nature to becoming a steward of Nature. All value created shall be built upon biospheric health and ecological security. And very importantly, we need to reshape our relationship with Nature.

I have seen lots of soul-searching lately in the lockdowns. Many metaphorically describe humans as the coronavirus to Nature. NASA and European Space Agency's satellite data show a clear benefit from lockdowns when air becomes so clear and crisp. Social media shares photos and videos of blooming flora and fauna when people are forced to shelter-in-home. We are forced to give back Nature more space to breath.

I choose to embrace the metaphor given by an American Indian prophet, though. She said the Earth needs people, just like the other way round. Just like a beaver who builds dykes in the middle of a stream or river, which creates a micro-ecosystem that enriches lives and enhances the value of ecosystems, American Indians have pretty much behaved that way. Today, indigenous population accounts for only 5% of global total, but they steward 80% of global biodiversity. This is the New Capitalism - a Nature-based Capitalism I have in mind!

China Can Contribute

In the long history of Chinese civilization, such wisdom and practices have also been deeply rooted in society. In the last four decades, reality tells us that it's lost somehow in China's pursuit of economic growth and joining the 2nd Industrial Revolution. It's time to find it back and recreate an ecological civilization. This shall be the biggest contribution from Chinese leaders and its people to global humanity.

China today is well positioned to lead a global clean revolution. Enabled by a new generation of technologies in digitalization, renewable energy, and clean transportation and logistics, China is reshaping its economy's general-purpose operating infrastructure that would embrace the plug-in of new clean and resource-efficient technologies and increase its economy's integrated efficiency and productivity. All these is guided by a clear vision sustainability and incentivized by policies and regulations, as well as high standards that consider to minimize negative impacts on environmental safety and ecological security.

I call this decade of 2020-2030 as the most critical one that will lay a solid foundation of smart green infrastructure so that the world can achieve net zero carbon emissions by mid century. China's direction of growth is an encouraging one. Very recently, the national government rolled out a stimulus package of RMB 3.4 trillion (about USD 500 billion) designated for New Infrastructure that is centered on digitalization, smart grid, rail system, and energy charging stations. It will be well built into the country's 14th Five-year Plan (2021-2025).

Combining this with the country's built-up expertise, strength and leadership in renewable energy, energy efficiency, circular economy, and environmental pollution control and prevention, watershed protection, biodiversity conversation, China seems on the right track to transition its economy towards sustainability, which is very much aligned with global sustainability agenda.

Making the case is the first thing China shall do to put its words in the deeds. While China cannot possibly succeed in building up its case by itself, Chinese leaders have to figure out how to work constructively with their peers in other countries. The vision of sustainability is a shared one. And yet, antiglobalization and nationalism pose unprecedented geopolitical challenges.

These days, we often say that the old world is gone and we are creating a new world. How to reshape and restructure global supply chain and industrial landscape has become a fiercely debated agenda on the table. What does it take to recreate nature-based global supply chain that is also inclusive and leaves no one behind? A daunting task to accomplish.