Tue, Nov 17, 2015 page8

• ‘Red supply chain’ to be recognized, not feared

  • By Mark Lin 林士清
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  There have been numerous reports in the media about the so-called “red supply chain,” saying that China’s electronics industry is gradually displacing Taiwan’s.

  Reports have said that, for China, the stage of providing cheap labor for assembling high-tech equipment has passed and that it has succeeded in joining the supply chain for precision parts for Apple Inc.

  China is an important manufacturing center in East Asia and Beijing is implementing various policy incentives to bolster the nation’s electronics industry in an effort to place it at the heart of the Asia-Pacific supply chain. Following these developments, Taiwan has become sensitive to the term “red supply chain.”

  In September 2013, the Financial Times published a report on the “red supply chain,” saying that the number of Chinese companies involved in manufacturing parts for Apple had doubled from eight in 2011 to 16 in 2013. The report said that the upgrading of China’s tech companies was a direct threat to Taiwanese, Japanese and South Korean firms, which are the main forces in the global electronics supply chain.

  Delayed orders by information technology firms, especially Apple, have caused original equipment manufacturing exports to shrink, adding to Taiwan’s already slack export figures. This has caused concern that the “red supply chain” is gradually taking Taiwan’s place.

  Can the “red supply chain” prevail? There are doubts about this even within China, because its manufacturing sector finds itself in a predicament. The road to high-end, high-added-value manufacturing remains fraught with difficulties, because China continues to cling to low-end manufacturing.

  Although China boasts large macroeconomic statistics, it still cannot be called an economic power. The biggest 500 Chinese companies cannot compete with corporations such as General Electric, Siemens or Toyota. With regard to general indices, such as branding, technology, management and profits, it still has a long way to go.

  Following China’s entry into the WTO, Europe and the US stopped competing with emerging economies in terms of productive power. Instead, they have turned to cutting-edge technology and brand management, cementing their control over the upstream of the supply chain to consolidate their own competitive advantages.

  For example, quality makes up a greater part of US economic growth, with technological progress contributing as much as 80 percent to economic growth, whereas in China, the contribution of technological progress is less than 50 percent. If China fails to upgrade its core technological abilities, it would remain a long way from becoming an economic power.

  From the perspective of global value chains, the “red supply chain” is nothing to fear. The concept of global value chains is similar to sharing a cake, whereby some nations eat the rich fillings of the cake, some settle for the crumbs, while others do not even get to see the cake. China’s share in the international trade division of labor is the equivalent of the crumbs; it is not advanced enough to enjoy the rich fillings of the cake.

  Nonetheless, the “red supply chain” offers some revelations.

  If Taiwanese companies that are chasing after the crumbs do not promote innovative and fresh manufacturing technologies to strengthen their business structure, they are to have a hard time avoiding being hunted down by the “red supply chain.”

  Mark Lin is an assistant research fellow at the Taiwan Institute of Economic Research.

  Translated by Julian Clegg
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