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The secret sauce of the Asian manufacturing model is the region’s highly variant labor markets, combined with the American-provided and -subsidized security environment and global trade network.
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supply chain angle: Anything that raises the marginal cost of manufacturing or transport, or increases instability and risk in manufacturing or transport, eliminates just-in-time inventorying from even theoretically working.
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And since the very concept of just-in-time means no one stores much inventory, when it goes down, it’ll all go down, all at once.
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Items most of us just assume the Chinese dominate in—household electronics, office equipment, and computers—actually have more than 90 percent of their value added outside of China. For ships the figure is 87 percent. For telecom gear and the guts of most electronic gadgetry it is 83 percent. Even for exceedingly lowbrow work such as paper, plastics, and rubber, upwards of half of the value-add happens elsewhere.*
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China uses its hyperfinanced model to drive down the costs of the components that it can produce; it imports the parts it cannot produce, plugs them in, and sends the final product off. But this model only works if external suppliers actively participate.
The demographic problem haunts in a second way. Europe has aged to the point that it cannot absorb its own products. Europe must maintain a high level of exports to maintain its system.
When it comes to the fate of the NAFTA system, most indicators look wildly positive.
American manufacturers feel cheated by globalization is because that was the plan. The core precept of the Order is that the United States would sacrifice economic dynamism in order to achieve security control. The American market was supposed to be sacrificed. The American worker was supposed to be sacrificed. American companies were supposed to be sacrificed.
Furthermore, the deliberate sacrifice means that most American manufactured products are not for export, but instead for consumption
the products the Chinese make are ones that, for whatever reason, the Americans have chosen not to make.
and via a branch of the Chinese government, which excels at hacking foreign firms, has pursued a dual strategy for two decades: steal whatever tech is possible, and purchase whatever cannot be replicated. Sanctions enacted by the Trump administration (and doubled down upon by the Biden administration) prevented legal tech transfer to Huawei at the same time American firms wised up to the hacking threat. The result? Huawei’s corporate position imploded in less than two years, taking it from being on the cusp of the world’s largest cell phone manufacturer to not even being on the top-five list
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Then there’s trade access: add all imports and exports together, and still some three-quarters of the U.S. economy is domestically held, limiting its exposure to all things global.
Within North America as a unit, more than 8 in 10 dollars (or pesos) of income is generated within the continent. That’s by far the most insulated system in the world.
As global maritime civilian transport fails, much of the raw production and intermediate processing that is done on the U. S. Gulf Coast will find its potential for global sales limited, either due to collapsing end markets, lack of security, or both. That will trap more of the output within North America. That’s not great if you’re an energy producer or processor, but it’s fantastic news if you are an energy product user. As most manufacturers are.
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Extra-hemispheric sourcing is obviously more problematic, but unlike all other manufacturing regions, the North Americans have the consumption-based market and the capital and the fuel and the military reach to go out and get what they need.
Most studies in the past half decade have indicated that by 2021, most manufacturing processes were already cheaper to operate in North America than in either Asia or Europe. That might shock, but it doesn’t take a deep dive to understand the conclusions.
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But add the United Kingdom and its sophisticated first-world manufacturing capacity to the NAFTA grouping and the math changes significantly.
Two decades of moderate growth in Mexico combined with a gently aging demographic means that Mexico now needs a low-cost manufacturing partner. Put another way, Mexico needs . . . a Mexico.
Most people think of the Bretton Woods system as a sort of Pax Americana. The American Century, if you will. But that’s simply not the case. The entire concept of the Order is that the United States disadvantages itself economically in order to purchase the loyalty of a global alliance.
The real, actual American Century is only now beginning. That hardly means there won’t be manufacturing anywhere else.
The end of China similarly might help out the largely nonmanufacturing economies of sub-Saharan Africa.
India’s problem is that it might be a bit too varied and too heavily populated. India is not an ethnically defined nation-state like China or Vietnam or France or Poland, in which one group dominates the population and the government, but instead boasts more ethnic and linguistic diversity than any continent save Africa.
Many of these ethnicities don’t simply have their own cultures; they have their own governments. These governments often exercise vetoes—sometimes formal, sometimes informal—over national policies.
A common problem for both Southeast Asia and India will be capital supply. Since both players sport relatively young demographics, local capital generation is somewhat thin.
Both will pick up many pieces of many manufacturing networks as China breaks down and up, but the industrial plant will still need to be built—and that is not free.
foreign direct investment (FDI). The concept behind FDI is simple: money to purchase or build specific facilities—typically industrial plant—in order to produce a specific product. The solution to Southeast Asian and Indian capital problems is likely the same: Japan. The Japanese workforce is rapidly aging into obsolescence and Japanese consumption peaked three decades ago. But the Japanese are still loaded.
Combine Japanese tech and military strength and wealth with India and Southeast Asia’s manufacturing potential and demographic and industrial inputs and you have one of the great alliances of the twenty-first century.
The longer and more complex the supply chain, the more likely it is to face catastrophic, irrecoverable breakdown.
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Total manufacturing value-add in China in 2021 was right around $4 trillion, some three-quarters of which were for export. The raw value of the underlying industrial plant is easily ten times that, not counting supporting transport and power infrastructure, nor the thousands of long-range ships that shuttle inputs into and end products out of the country, nor the value of supporting codependent supply systems that involve other countries
Mass-production assembly lines are largely out. Mass production of any type requires massive economies of scale.
Reducing economies of scale reduces the opportunities for automation. Applying new technology to any manufacturing system adds cost, and automation is no exception. It will still happen, but only in targeted applications such as textiles and advanced semiconductors.
The pace of technological improvement in manufacturing will slow.
Supply chains will be much shorter. In a disconnected world, any point of exposure is a failure point and any manufacturing system that cannot snuff out its own complexity is one that will not survive.
Instead, successful manufacturing will twist into two new, mutually supportive shapes. The first will carry out more steps within individual locations in order to eliminate as much supply chain risk as possible. This suggests that such core facilities will become far larger. The second sort of manufacturing will be tiny facilities that supply customized parts. Machine shops in particular should thrive.
Production will become colocated with consumption.
The new systems will put premiums on simplicity and security just as the old system put premiums on cost and efficiency.
The death of just-in-time will force manufacturers to do one of two things. Option A is to warehouse masses of product—including finished product—as far forward in the manufacturing process as possible, preferably at the very edge of major population centers. Option B is to abandon as much of the traditional manufacturing process as possible and do all-in manufacturing as physically close to the end consumer as possible.
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The workforce will be very different. Between an alternating emphasis on customization and carrying out multiple manufacturing steps in one location, there isn’t much room for people who don’t know what they are doing.
Not everyone can play. Each fractured piece of the world will need to look to its own internal manufacturing system, and many will lack the capacity. The capital requirements for building out industrial plant are steep.
The only region likely to be able to fully self-fund its own buildout is NAFTA.
Just as with energy, countries that lose access to the building blocks of modern industrial society do not just enter recession, they lose the capacity to play the game at all.
The single biggest piece of international manufactures trade is automotive. All those 30,000 parts per vehicle have their own supply chains.
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Heavy vehicle manufacturing—primarily farm, mining, and construction equipment—in many ways follows the same pattern as automotive.
The lumber industry* straddles the world of agriculture and manufacturing in complex and shifting ways. The value-add process from tree to lumber to pulp—or boards or aromatics or planks—adds up to a cool quarter of a trillion dollars of goods, and even that is before the real work begins that transforms the wood into furniture or veneer or cologne or house guts or charcoal.
First, the United States is the source for the more important of globally traded manufactured wood products, like agglomerates such as pellets, sawdust, and particleboard; panels like plywood; and pulp for paper.
Next up: with the fall of Asia Inc., expect the world of semiconductors to look very different. The fabrication of semiconductors is an exceedingly difficult, expensive, exacting, and—above all—concentrated process.
Taiwan, Japan, and Korea do the really good semiconductors. Malaysia and Thailand handle the midmarket. China has the bargain basement. These facilities just don’t move. Or, at least, they haven’t.
much so that even at the height of hollowed-out globalization, the United States remains responsible for roughly half of all chips by value despite producing only about one-ninth of chips by number.
Computer assembly is surprisingly straightforward (most of the important components are, in fact, semiconductors) and it really just comes down to a question of price point. If it is a lower-quality product and can be done by hand, like, say, assembling motherboards, Mexico will be where it’s at. If more precision is required—say, the installation of displays—and so automation is required, look to America.
The first post-globalization decade is going to be rough for smartphone users. Right now nearly the entire supply chain system is either in Europe or Asia. The European system is probably fine. Most European cell manufactures are in Scandinavia and their regional supply systems are unlikely to face too many challenges. But the Asian system? Phbbbt. Korea is the biggest player, and Korea’s ongoing existence not only as a manufacturing or tech power but as a functional country is dependent upon the Koreans making their peace with the Japanese. A significant wrong step and the entire Android
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