While many in the U.S. and the West shelter in place hoping that warmer spring weather will slow the spread of the Wuhan coronavirus, China is planning its own Spring Offensive.
China sees an opportunity to exploit the fear and carnage of the outbreak to strengthen its hold over global supply chains — and the medical-equipment and pharmaceuticals sector is the next industry in China’s sights.
It’s a bold move, but a deeper look reveals the fundamental weakness in China’s dominant position in global logistics and points to two strategic opportunities for the U.S. The first is to bring supply chains for vital medical, pharmaceutical, and technology products and rare-earth minerals back home to the United States. The second is to cripple the Chinese commercial maritime network that has allowed the Chinese Communist Party to sit atop a global supply system like a puppet master pulling the strings of commerce from Wuhan to Westchester.
China’s game plan is to pit large companies and financial investors against Western populations. Leading Chinese business schools and the creator of China’s top state-owned cement company believe that large U.S. companies and investors can be persuaded to increase foreign investment for the production of pharmaceutical and medical supplies in China. The calculus is that China will be more successful at keeping companies in China by appealing to the financial motives of those that are already invested there than it would be by opposing anti-globalization political constituencies that want companies to move manufacturing out of China.
It’s the latest application of the predatory economic and financial strategy that China has long used to gain dominance over almost every industry it has targeted, to coerce developing nations into accepting Chinese loans in exchange for giving mineral rights to China, and to pressure developed countries such as Italy and Greece to turn their historic harbors into ports for China’s global maritime empire. But China’s pharma gambit may be too little, too late. The political tide China is hoping to sidestep by appealing to the financial motives of U.S.-based multinationals is turning against the country now that American consumers, their homes brimming with Chinese-produced electronics, realize the full cost of moving so many critical domestic manufacturing jobs to Communist territory. Americans now understand the urgency of moving production of vital goods back to the United States.
Some Chinese business schools believe that large international companies might delay such supply-chain adjustments. In a recent paper, the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University argued that the driving force of globalization is the profitability of capital, and risk-averse large companies could decide to leave substantial portions of their production capacity in China. The paper recognizes that calls to bring manufacturing back to the U.S. reflect a wider anti-globalization political movement in the West, and asserts that it’s easier, in the face of the pandemic, to promote the potential profitability of capital investments in China to large companies than it is to promote the benefits of globalization to populations suffering under lockdown orders.
One of China’s leading architects of state-owned companies recently said that epidemic-control products can become a major Chinese export. Song Zhiping, who previously led the consolidation of the Chinese cement industry into the state-owned colossus China National Building Material Co., Ltd., said that demand for technologies such as surveillance drones, disinfection robots, AI-powered epidemic-forecasting systems, no-contact technology for online education, and fabric for protective masks is a boon for Chinese business. In the People’s Daily on March 12, Song wrote that “these areas are bound to become the focus of attention of the entire society and have great potential for development.”
An early-March paper from Nanjing University Business School describes how the virus outbreak is an opportunity for Jiangsu Province to stabilize the global supply chain and increase foreign investment in the province, where biomedical companies from many countries have operations. The author even provides a target list: “Multinational pharmaceutical companies such as Pfizer, Merck, Johnson & Johnson, GlaxoSmithKline, Siemens, and Roche have already settled in Jiangsu,” he writes. After the pandemic, opportunities will arise to “vigorously develop Jiangsu’s biomedical R&D outsourcing service industry, innovate the use of foreign investment models, and improve the quality of foreign investment.”
China’s confidence is striking but understandable. To cut costs over the past two or three decades, manufacturers around the world adopted techniques such as lean manufacturing, offshoring, and outsourcing. These methods allow companies to reduce the number of parts held in inventory to the minimum needed to keep “just in time” assembly lines running, often at factories in China employing low-cost workers. By not paying for parts until the last minute, companies freed up cash for other purposes. But companies also gave up control of supply lines. A recent Harvard Business Review analysis of how the coronavirus might affect supply chains noted that the “vast majority of global companies have no idea of what their risk exposure to what is going on in Asia actually is; that’s because few, if any, have complete knowledge of the locations of all the companies that provide parts to their direct suppliers.”
Supply chains consist of two parts: the supplies that go into finished goods; and the chain, the physical network of trucks, ships, and cargo-handling gear that moves manufactured goods, food, and autos from the point of production to the point of consumption. Over the past ten to 15 years, China weaponized the supply chain itself. Its state-owned port and shipping companies bought up contracts to operate ports and container terminals in developed and emerging markets, and these companies now control a base network that previous global hegemons obtained only through military victory.
The sun never set on the British Empire because the British had a port under their control in every time zone that mattered. With its state-owned enterprises now in control of a global commercial maritime network penetrating deep into Western territory, Beijing is in a position to issue threats, such as the warning that it might cut off life-saving pharmaceuticals to the United States in the middle of a pandemic. And if countries depend on Chinese companies to run their import and export infrastructure, China could also coerce them to adopt its policy positions or to endorse its handling of the pandemic. With medicine and medical equipment on the line, what country is going to risk running afoul of China by siding with the U.S.?
But when it comes to logistics, China has been fighting the last war. As China tries to accelerate its efforts to strengthen its hold on medical and pharmaceutical supply chains, the coronavirus crisis will also accelerate changes in logistics. Supply-chain innovations include “logistics control towers” that consolidate supply shipments into integrated dashboards; AI software that for the purpose of quality control creates avatars of every step in a production process; and 3D printing that eliminates the need for long supply lines for some parts, thereby cutting inventory costs by moving production close to consumers.
The pandemic has already sparked 3D printing of masks and ventilator parts. Such new techniques and tools can digitally disrupt the source of China’s manufacturing dominance: centralized control of complex supply chains. Emerging supply-chain technologies result from innovation, and while China has built manufacturing platforms for autos, pharmaceuticals, electronics, and other goods, it lacks indigenous innovation capacity. China prefers instead to force foreign companies to divulge their proprietary technology developed at great cost, or to simply steal the technology through cyber espionage and human spies. In its Made in China 2025 plan, the CCP sets forth its goal of upgrading China’s manufacturing base by rapidly achieving dominance in ten industrial sectors, but the ambitious program also reveals China’s Achilles’ heel: The creativity and experimentation that drive such innovation are kryptonite to the CCP system of control.
The American response to COVID-19 suggests that this country can reboot domestic production of pharmaceutical ingredients while also creating numerous vaccine candidates and innovating and producing virus tests that did not exist even weeks ago. Institutional investors have financed a boom in construction of life-science research labs across the country in the past few years, and those capabilities are now coming into play. Meanwhile, China has proven — with its propaganda to evade culpability for the pandemic, and with the failure of Chinese masks sent to the Netherlands and of Chinese tests rushed to Spain — that it cannot deliver innovation, the one ingredient it needs for its Spring Offensive to succeed. It’s time for American industry to stop subjecting consumers in the U.S. to China’s predatory authoritarianism and to start building new supply chains at home.
Pending legislation that requires American companies to move production of certain goods back home is a good start. But in recent research for my book Ships of State, sources with deep experience and current operating responsibility in ports, shipping, and military sealift support have made it clear that America needs a comprehensive two-track strategy to rebalance manufacturing supply chains in a way that ends China’s weaponization of global logistics while ensuring that the U.S. Navy can sustain high-tempo operations in multiple theaters if Chinese aggression escalates.
First, the U.S. should initiate a dialogue about strategic supply chains with South Korea and Japan in the Pacific, and with the U.K. and Ireland and perhaps certain Nordic countries in the Atlantic, with the aim of ensuring that all member nations have fully secure access to critical medical and technological goods and to the means to transport those goods by air, sea, or land. This framework could be expanded to encompass Latin America, Africa, and Southeast Asia as well.
The goal would be to form a new type of commercial alliance that encompasses not only trade rules, as in post–World War II trade agreements, but also the trade tools that make modern supply chains work.
Second, we need a strategy to expand the size of the U.S. merchant fleet and the number of operational vessels in the U.S. sealift fleet, including the Military Sealift Command and the Maritime Administration’s Ready Reserve Force. This process has bogged down while China has been adding as many ships to its commercial fleet annually as exist in the entire American inventory. It’s also important to build or buy the right mix of vessels to sustain naval operations for long periods. We can do this by developing U.S. and allied shipbuilding industries, shipping finance, and mariner training. A mobilization exercise last year found that only about 40 percent of the U.S. military support fleet would be ready to surge in a crisis, and naval sources warn that the U.S. lacks secure capacity in fuel tankers. Also last year, Chinese commercial vessels began conducting exercises to replenish Chinese combatants and supply ships while underway. That technology is not new, but the exercises suggest that China’s commercial ports around the world must be treated as potential logistics bases that can extend the range and scope of Chinese naval activity without requiring those ships to dock at commercial ports.
My recent helicopter reconnaissance of the Port of Long Beach found mostly empty berths. With demand from the West at a standstill, the power of China’s maritime network is temporarily depressed. This presents an opening for the U.S. The administration, wisely, is providing financial aid to Italy; the U.S. could also work with Italy and other countries hosting Chinese ports to cancel or renegotiate their port contracts. The concept is simple: Retake the ports, and the rest of the Belt and Road will follow.
Despite the enormous stress America is under from the pandemic, we now have an opening to mitigate or remove the economic leverage of China’s commercial maritime network and start to correct America’s dangerous neglect of the commercial maritime capabilities that underpin naval power. To fail to take advantage of these opportunities would be to accept a risk of historical magnitude: that a country can maintain global supremacy without having command of the commercial maritime domain under its own commercial fleet.
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