Diversify, diversify, and then diversify some more. This is the cardinal principle top-rated investors and manufacturers swear by. So why have so many Western economies, industrial manufacturers, and the high-tech sector repeatedly violated this tenet by moving en masse to China starting in the 1980s and accelerating through the 1990s to now?
It's a question many in the industry are beginning to ask now, as awareness spreads that, collectively, poor and rich nations alike are paying, and will in the future pay, a hefty price for the lack of foresight and the corrupting passion for lower-cost production that drove the mad rush to move a hefty chunk of the global supply chain to China.
The recent rare earth controversy, the deepening crisis currency/debt crisis in Europe, high unemployment rates in the US, and the hollowing out of global manufacturing have brought home starkly the danger to high-tech companies. (See: The Truth About Rare Earths, Part 1.) Still, many have yet to truly realize the extent of the imminent danger to global commerce from our three-decades-long outsourcing of production and procurement to Southeast Asia.
It's time to cut back on outsourcing to China and even roll back some of the production that has shifted to the country. The withdrawal will be painful, disruptive in the first years, last perhaps a decade, and many opponents will say it either cannot be done or should not be done because China has been, or is being, integrated into the global economy. That's balderdash. In my opinion, the high-tech sector needs to wake up from its continuous search for cheaper production and implement a much more rational approach to manufacturing.
The result would be a new policy that recognizes China's role in the supply chain but that takes the utmost care to ensure balance, proper distribution of resources, and continuous assessment of the impact of foreign investment strategies on local economies. That review must start now at corporate and governmental levels globally. In the meantime, high-tech companies must begin now to sharply scale back manufacturing and component sourcing in China.
Globally, national governments and companies must cut back on investments in China, explore alternate sourcing locations, and serve a belated but still tough warning to China that its monetary policies are choking off growth in other economic regions and sowing the seeds of social upheavals we may all rue one day.
This is not a call for protective, nationalistic economic policies. Neither does it represent a violation of the principles of the capitalist system. In fact, it is a requirement in capitalism that investors and manufacturers regularly review holdings and systems, excising what's not good and taking steps to optimize and protect manufacturing, social, and economic operations.
Why is the need for change so urgent now? It has become evident that the “just-move-manufacturing-to-China” strategy was destined to hit hard against other needs of the wider society. Unemployment has moved up in Western countries, triggering protests. Although many see the recent riots in parts of Europe (Greece, Ireland, and Portugal, for instance) as national problems arising from mismanagement of the local economies, the root goes much deeper.
Similar problems exist in other parts of the world, not only in huge, developed economies like the United States, but also in smaller and developing nations.
China has become the de facto manufacturing center for most consumer products worldwide, and the social effects have not all been positive. Sure, we can now buy cheaper products, but manufacturing jobs are also vanishing. New business services have not produced enough jobs to replace the ones lost to China. There is also the lurking danger a political (or any other unanticipated) hiccup in China could freeze the global supply chain.
China, evidently, has also learned its newly toned economic muscles can be used as a diplomatic weapon to guarantee its interests at the expense of business partners. China showed this recently when it allegedly threatened to stop the supply of rare earth metals to Japan. Shipment has since resumed, but the controversy points to how economic power can be used in a military context.
It's time to purge ourselves of some of what we've been swallowing about China and realize the over-dependence on the country is having a negative effect on other economies and could potentially destroy the social fabrics of many nations.