Yanwen’s blog

12/22/2024

In my recent posts, I’ve discussed the U.S.’s struggles with China’s rise as a manufacturing powerhouse, particularly its formidable supply chain ecosystem (SCE). Among the most compelling examples of this dynamic is Apple.

Despite mounting pressure to shift its manufacturing out of China, Apple continues to produce the majority of its iPhones there. According to TechNode, over 95% of Apple’s products, including iPhones, are still manufactured and assembled in China. The New York Times also highlighted Zhengzhou, famously dubbed “iPhone City,” as a critical hub in Apple’s operations.

Apple faces several challenges when considering relocation, the foremost being the need to replicate its highly efficient SCE. This ecosystem is a meticulously coordinated network of suppliers, manufacturers, logistics providers, and support systems, all located in close proximity. It enables Apple to source components, assemble products, and manage logistics seamlessly. Relocating production would require not just moving factories but also uprooting the entire network of supporting companies.

Key Challenges to Relocating Apple’s SCE

1. A Comprehensive and Integrated Ecosystem:   Apple’s SCE is a massive, finely tuned system that has been optimized over decades. The dense concentration of suppliers and manufacturers in China allows for unparalleled efficiency. Recreating this level of integration in another country would be a monumental undertaking, both logistically and financially.

2. A Skilled and Mature Workforce:   China offers a vast pool of skilled workers, especially in high-tech manufacturing. Regions like Shenzhen have built decades of expertise in electronics production. Training workers elsewhere to achieve similar levels of productivity and precision would require significant time and investment.

3. Advanced Infrastructure and Economies of Scale:   While labor costs in China are rising, the country’s sophisticated infrastructure—including ports, transportation networks, and power grids—continues to support efficient and cost-effective manufacturing. Moreover, the economies of scale achieved in China cannot easily be matched elsewhere. Apple and its partners have to invest billions in infrastructure before even constructing manufacturing facilities, making relocation prohibitively expensive.

4. Flexibility and Adaptability in Production:   Chinese factories are renowned for their ability to adapt rapidly to changes in production needs. This flexibility is critical for prototyping, scaling production up or down, and responding to market demands. Few other countries possess this level of agility.

5. The Complexity of Rebuilding an SCE:   Apple’s supply chain ecosystem is not just a collection of factories—it’s a highly complex, interconnected network optimized over decades. Rebuilding this system outside of China would require overcoming substantial infrastructure, skill, and logistical gaps in other countries, as well as making enormous investments of time and money.

At this moment, I think of a Chinese saying, “水到渠成” (shuǐ dào qú chéng) literally means, "When the water reaches, a channel is formed." The implied meaning is "when right conditions are in place, success will naturally follow." Or, When enough efforts are made, success will follow. It reflects how China’s decades of hard work -- investment in infrastructure, workforce training, and supply chain building and integration -- has created the perfect conditions for Apple to thrive. Apple's success is inevitable when all necessary elements are in place.

Ultimately, Apple is just one example of China’s extraordinary manufacturing prowess. Countless other tech giants, from electronics manufacturers to consumer device companies, rely on the same intricate supply chain ecosystem that China has perfected over decades. This vast and interconnected network, supported by skilled labor, advanced infrastructure, and unmatched adaptability, is not something that can be easily replicated or dismantled. 

Finally, China’s dominance in high-tech manufacturing is not just a foundation for Apple’s success but has become a critical pillar of the global technology industry, making any attempt to dismantle or relocate this system a monumental challenge.

12/21/2024

Yesterday, I highlighted the U.S. struggle with strategies like de-coupling and de-risking, using onshoring, nearshoring, and friendshoring.

Two days ago I came across Thomas Friedman’s article, "How Elon Musk and Taylor Swift Can Resolve U.S.-China Relations?" It reveals a profound sense of anxiety.

Friedman begins bluntly: "I just spent a week in Beijing and Shanghai… and let me get right to the point: While we were sleeping, China took a great leap forward in high-tech manufacturing of everything."

He sounds alarmed, noting, "You have to go to China to see it… a lot of people in Washington have missed the country’s staggering manufacturing growth."

This is something new when he mentioned "dark factories." These are factories so highly automated and fully roboticized that they operate day and night without lights, as there’s no need for human presence—aside from engineers occasionally adjusting the machines. As China Daily explains, “Dark factories, also called smart factories, are entirely run by programmed robots.”

China’s independent manufacturing ecosystem is unparalleled, capable of producing and sourcing virtually any component or material domestically. Friedman acknowledges this, stating, "No other country in the world has such a complete homegrown ecosystem."

A Chinese saying captures the rapid development of China, “日新月异” (rì xīn yuè yì), means "transformative changes with each passing day," symbolizing rapid progress and continuous innovation. It reflects China's transformative growth in high-tech manufacturing and infrastructure.

Toward the end, Friedman credits China’s achievements, saying, "We fool ourselves if we believe China’s growing strength in advanced manufacturing is only from unfair trade practices. It’s also because it has people driven to work ‘9-9-6’—9 a.m. to 9 p.m., six days a week—and because Beijing has invested in world-class infrastructure and education, producing countless engineering graduates."

Make no mistake, Friedman’s intent isn’t to praise China but to urge the U.S. to respond urgently to China's technological and manufacturing rise. He proposes an “Elon Musk-Taylor Swift paradigm”—suggesting that the U.S. should focus on Elon Musk-type innovation and domestic manufacturing ability, while China should open its door to Taylor Swift-type American culture, products, food and drink. In other word, Americans should produce and export more while China should import and consume more American goods.

Finally, Friedman warns, without strong industrial efforts, the U.S. risks losing its competitive edge to China’s technological and manufacturing dominance.

12/20/2024

Yesterday, I discussed China's rise alongside the growing tide of globalization. Today, I will continue with my narrative on when relations between the U.S. and China began to sour.

The turning point that I remember can be traced back to the "Pivot to Asia" policy, a hallmark of Barack Obama’s foreign policy. This strategic shift redirected the U.S.’s diplomatic, economic, and military focus from the Middle East to the Asia-Pacific region. As part of this pivot, Obama committed to stationing 60% of the U.S. naval force right at China’s doorstep in the South China Sea.

Amid rising geopolitical tensions, supply chains—a once purely economic matter—emerged as a critical national security concern. The U.S. began prioritizing securing its supply chains over cost-efficiency, marking a significant shift in policy.

By 2018, under the Trump administration, trade wars erupted. The U.S. imposed tariffs on Chinese goods five times in succession, escalating tensions between the two nations.

In 2019, following the detention of Meng Wanzhou in December 2018, the Trump administration targeted Huawei, banning its 5G technologies and cellphones from the U.S. market, accusing Huawei of carrying out espionage and surveillance, though without any evidence.

Concurrently, export controls on high-tech products to China tightened, and these measures evolved into a systematic effort to dismantle China’s supply chain system. If anything, the Huawei event and Trump might be the pivot moment, a wake-up call for China to build independence in every aspect imaginable.

Fast forward to today, U.S. policies revolve around “decoupling,” “de-risking,” and “choking” China’s high-tech development, pushing out these major strategies:

1. Onshoring Manufacturing   Opposite to offshoring, this strategy aims to relocate manufacturing operations back to the U.S. However, its impact has been limited due to high wages, insufficient supporting industries, and incomplete supply chains. As a result, much of the manufacturing that was offshored decades ago remains unviable to bring back.

2. Nearshoring Manufacturing   This approach relocates manufacturing operations to nearby countries, such as Mexico and Canada. In 2020, the U.S. signed the USMCA (United States-Mexico-Canada Agreement) to stimulate regional manufacturing. Yet, progress has been slow, hindered by limited industrial capacity, skilled labor shortages, and production constraints in North America.  

3. Friendshoring Manufacturing   This strategy focuses on moving manufacturing to allied nations, ensuring political alignment and economic stability. For instance, the U.S. has partnered with Japan and South Korea to establish semiconductor factories and increased investments in countries like Vietnam and India. Intel invested $1.5 billion in Vietnam to build Asia’s largest chip testing and assembly plant. Similarly, Apple has set up 14 production bases in India, aiming to produce over a quarter of its global iPhone output there. These efforts are designed to reduce reliance on China’s supply chain. But friend countries have not reduced their reliance on China.

There's a Chinese saying, “置之死地而后生” (Zhì zhī sǐ dì ér hòu shēng), means: "Driven to a dead end, one is forced to find a way to survive and ultimately thrives," similar to the English saying, "What doesn't kill you makes you stronger." This saying captures the spirit that external pressures or crises can drive innovation and resilience, as shown how U.S. sanctions on Huawei have spurred China to redouble their efforts to be independent.

Ultimately, China moves head regardless. And the U.S. government's strategies have thus far failed to achieve their intended goals. China continues to advance in technology and maintain its formidable, seemingly unbreakable supply chain.

Continue tomorrow...

12/19/2024

With the incoming Trump administration and the promise of tough tariffs, I started researching how we got to where we are today.

I came across an article from the Council on Foreign Relations, titled, "What Happened When China Joined the WTO?" and the United States thought it was directing the show when China acceded to the World Trade Organization. Instead, China wrote its own script (June 17, 2021).

The article highlights, “American consumers broadly benefited from China’s WTO entry because they could buy goods at lower prices. Corporations profited from increased access to China’s massive market. In 2017, for example, Chinese consumers accounted for about 15 percent of Apple’s sales, and since 2001, U.S. exports to China have skyrocketed by 450 percent.”

Indeed, China’s accession to the WTO marked a significant milestone. According to a Cambridge University study, "China and the WTO: A 20 Years Assessment", China—now the world’s second-largest economy—saw its GDP surge from $1.339 trillion in 2001 to $14.723 trillion in 2020. Meanwhile, China became the leading trading nation, with exports increasing nearly 8.74 times, from $266.1 billion in 2001 to $2.59 trillion in 2020. Imports also climbed nearly 7.44 times, from $243.55 billion to $2.05 trillion over the same period.

However, China’s economic transformation cannot be viewed as an isolated event. It must be understood within the broader context of globalization and its underlying logic.

At its core, globalization is driven by multinational corporations seeking to maximize profits through efficiency, cost reduction, and the free flow of goods. This pursuit of greater profit margins led companies to voluntarily relocate manufacturing processes to regions with lower labor costs. The United States, as the country with the world’s most powerful corporations, played a central role in shaping this global economic landscape.

Globalization had already shown its power in the economic rise of the Four Asian Tigers—South Korea, Taiwan, Hong Kong, and Singapore. Before the 1970s, these economies were primarily dependent on agriculture and light industries. By adopting export-oriented strategies and strong development policies, they first absorbed labor-intensive industries like textiles, clothing, and toys brought about by global trade. Gradually, they advanced into technology-intensive industries, such as electronics, semiconductors, household appliances, and automobiles. By the 1990s, the Four Asian Tigers had entered the ranks of developed economies. Their success was fueled by the openness of the U.S. market, capital inflows, and technology transfers.

A Chinese saying goes, “水涨船高” (shuǐ zhǎng chuán gāo) means: When the water rises, the boat floats higher. This reflects the interconnected nature of globalization, it can lift every boat (country) in its process.

When China joined the WTO in 2001, it already had a clear roadmap: replicate the success of the Four Asian Tigers but on a far larger scale. With its vast reservoir of low-cost labor and continuous inflow of Western capital and technology, China rose with the tide and achieved an unprecedented economic miracle.  

Of course, in this round of globalization, the United States has been a significant beneficiary as well. 

When my children were little, I took them to Beijing, where McDonald’s was the most popular choice for kid's birthday parties, and Coca-Cola was their favorite drink. These symbols of American prosperity became deeply integrated into China’s consumer culture, demonstrating how U.S. companies profited from China’s emergence. Now Chinese parents save money to send their children to America for higher education.

Consider Apple: it is the world’s most valuable company, yet 90% of its phones are manufactured in China. Walmart, the world’s largest retailer, procures 70% of its global inventory from China. Tesla, another success story, derived 40% of its global sales in 2022 from the Chinese market, with its Shanghai factory producing over half of its vehicles.

America’s prosperity today has been built, in no small part, on the foundation of China’s manufacturing power—mature supply chain. China today not only provides an immense consumer market but also possesses unmatched manufacturing capabilities. Over the past two decades, the globalized division of labor—where American design and innovation meet Chinese manufacturing strength—has created a win-win scenario. However, as geopolitical tensions rise and economic priorities shift, the sustainability of this symbiotic relationship faces increasing uncertainty. All remains to be seen with the entrance of Trump into the White House next year.

Continue tomorrow…

12/18/2024

Last Thursday, December 12, I came across a CNN report about President-elect Donald Trump extending an invitation to Chinese President Xi Jinping to attend his inauguration ceremony. My initial reaction mirrored the disbelief I felt upon hearing about South Korea’s martial law: This can’t be true. It must be fake news.

To verify, I checked other reputable outlets—AP, The Guardian, CBS—and found the same story. The report caused quite a stir globally.

After the initial shock wore off, I started to make sense of it. Once it sank in, it became clear that this bold and unconventional act was quintessential Trump. His style has always been defined by unpredictability, norm-breaking diplomacy, theatrical gestures, and headline-seeking moves. This invitation aligns with his penchant for personal diplomacy and his desire to redefine U.S.-China relations on his own terms.

The invitation itself has sparked a range of interpretations. I believe there could be some positive implications:

1. A Signal of Engagement Over Confrontation  The invitation suggests Trump’s willingness to prioritize engagement with China rather than confrontation. It hints at his desire to reset, from day one, the often-contentious U.S.-China relationship and pursue closer ties.

2. A Pragmatic Shift in Tone   The gesture stands in stark contrast to Trump’s earlier campaign rhetoric, which emphasized being tough on China through tariffs and addressing trade imbalances. This pragmatic move may signal a more flexible approach to future dealings.

3. Symbolism Over Seriousness   Given the unconventional nature of the gesture, the invitation seems more symbolic than a real expectation for Xi’s attendance. This flexibility allows Xi to decline without risking offense or diplomatic fallout.

4. A Glimpse of Trump’s Personal Diplomacy  Trump values direct engagement with world leaders, often bypassing traditional institutional channels to create high-profile, personal relationships. This invitation sets the tone for what the world might expect from his approach to foreign leaders.

A Chinese saying goes, "礼尚往来" (Lǐ shàng wǎng lái), meaning, "Courtesy demands reciprocity." This saying emphasizes the cultural and diplomatic principle of making gestures of goodwill in the hopes of fostering mutual respect and exchange. It aligns with the spirit of Trump’s invitation as an overture to reset the frosty relations, even if it means breaking traditional norms.

However, while the invitation is bold and unconventional, it’s unlikely to gain traction with a leader like Xi Jinping. Here’s why:

First, Chinese diplomacy prioritizes convention, discipline, and respect for established norms. A domestic event like a U.S. presidential inauguration falls outside the traditional parameters of international diplomacy.

Second, Trump’s unpredictability can be a liability. World leaders, including Xi, often avoid high-stakes, unpredictable situations. Trump’s penchant for sudden shifts and headline-making gestures may be viewed as a risk rather than an opportunity.

Third, the two leaders have vastly different leadership styles. Trump’s bold, short-term, and attention-driven diplomacy contrasts sharply with Xi’s disciplined, long-term, and risk-averse approach. The lack of alignment in styles further diminishes the likelihood of Xi entertaining the invitation.

Ultimately, while Trump’s invitation may be more symbolic than practical, it speaks volumes about his intentions and his willingness to break with tradition. Even if Xi declines, the gesture signals that Trump’s presidency will likely feature dramatic, unconventional diplomacy aimed at shaking up the established order. Whether such moves prove effective remains to be seen, but globally, all eyes and ears are on it.