Globalization might seem to be crumbling due to the COVID-19 pandemic as borders close and travel is restricted, but it would be premature to declare the “death of globalization” in light of temporary seal-offs while ignoring the unprecedented growth and benefits it has brought over the past three decades.
The scaling-down of globalization is clear. One example is the manufacturing sector, a key pillar of many economies, which has been hit hard by the effects of COVID-19. Manufacturers are rethinking how to cope with the pandemic and potential future outbreaks as they face acute challenges to restore production amid supply chain disruptions. They are adjusting operating models and re-evaluating the feasibility of building production sites in new areas.
At a minimum, the long-standing model of “taking orders in Taiwan and manufacturing elsewhere” is no longer applicable.
Reducing reliance on China is the first step, which would prevent businesses from halting entirely due to disease-induced lockdowns, as happened in Wuhan, China, where COVID-19 emerged. Over the past 30 years, Taiwanese manufacturers have been moving factories out of Taiwan, mostly to China, and using cheap labor and land to slash manufacturing costs and support affordable electronics. The strategy proved successful, but corporate executives are at a crossroads — keep operations going, or increase costs by moving production out of the comfort zone.
With constrained component supplies, a labor shortage and logistics problems due to lockdowns in China, Taiwanese manufacturers redirected production back home. They reduced overseas production last month by 8 percentage points from a year earlier to 40.7 percent of orders received, the lowest in 15 years, Ministry of Economic Affairs data showed.
Flat-panel maker AU Optronics Corp (AUO), which has LCD module assembly lines in China, said that it is pondering a fundamental shift in its supply chain by diversifying production sites, given that the impact of the pandemic is expected to be broader and longer-lasting than the SARS outbreak in 2003.
Such changes would reverse the long-term slide in consumer electronics prices, as production efficiency would no longer be as good, AUO said, adding that it would cooperate with customers to decide on manufacturing locations.
Before the COVID-19 outbreak, manufacturers benefited from globalization and passed on the savings to vendors, which led to lower shelf prices. They leveraged large-scale production and industrial clustering. This production mode might be broken, as the clustering effect is fading along with a rising diversity in production locations to smaller developing countries, rather than concentrating on China.
Building or raising inventory should be the second step to minimize operating risks as supply chains become relatively vulnerable and not completely reliable amid the pandemic.
Some manufacturers, automakers especially, have been keeping optimal fund allocations and their operations as agile as possible since the 1980s. With many countries shutting their borders to contain the spread of COVID-19, firms are facing acute challenges to manage the supply of components. Inventory building is the simplest solution.
No matter how the pandemic upends the world, it looks like the globalization trend is here to stay. It is impossible for any country or company to shut the world out.
Agility is becoming the norm for companies to get along in a changing world.
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