Let’s take a look at how China became the single point of failure for trillions of dollars in economic impact.
In 2016, China now accounts for the largest share of manufacturing output.
The trend began in 1980 and accelerated beginning in the early 1990s. This was a synergistic process with several benefits to Western companies that offshored to China.
UPDATE: Per on-ground estimates from logistic service providers, about 80% of Chinese factories and production facilities have resumed operations. Trucking and warehouse labor remains limited, but almost all port terminals are operating fully.
During the period of turmoil following the death of Mao in 1976, political titan Deng Xiaoping survived a series of palace schemes by Mao loyalists and other powerful interests.
The concern was that Deng would undermine the Cultural Revolution and press for reform.
After consolidating power at the Third Plenary Session of the CCP in 1978, Deng did exactly that.
He instituted a series of initiatives designed to gradually elevate China to a position of power in the world, centered on four domains:
The reforms began a period of phenomenal growth and stands as one of the more remarkable economic revolutions in human history.
Not to valorize Deng, as he was behind a great many terrible human rights abuses and violations.
In 1980, Deng began to rapidly force modernization of the manufacturing and economic base of China, with the key goals of: moving from light to heavy industrial manufacturing, controlling many key raw materials, and creating a consumeristic society with larger spending power.
The People’s Liberation Army (PLA) is the primary military body of China, and going back as far as the 1970s, it has been known to “secretly” control and benefits from civilian company ownership.
The combination of an aggressive subsidy model, cheap labor, export-focused manufacturing base, and expanding containerized shipping industry was too much for Western companies to resist.
Offshoring exploded in the 1990s as the preferred business model of MBA’s everywhere.
Fueled by China’s importance as the ascendant manufacturing hub of the world – from steel to electronics to consumer goods – the ocean shipping industry began realigning global routes.
Further, China established its own shipping companies and shipbuilding capacity.
Containerized ocean freight follows a hub-and-spoke model.
Busy deepwater ocean ports see the largest vessels and throughput of containers, with cargo going to smaller-volume ports on smaller ships via the mega-ports.
This process is called “transshipment”.
Larger containerships are more efficient per TEU (twenty-foot container-equivalent, the standard unit of measure for the industry), but are limited by how deep they travel in the water (“draft”).
Transshipping means efficiency.
As of 2016, 7 of the 10 busiest ports in the world by throughput of containers were Chinese thanks to its massive exports and transshipment activity.
South Korea, once the heavy shipbuilding leader, was overtaken by China in 2012, with the gap widening again in 2017.
Part of Deng’s plan, set down all the way back in 1978-1980, was to establish control of both manufacturing and transport.
With the world’s economy incrementally more and more reliant on Chinese labor, Chinese subsidies, and Chinese ports, the plan was solidly in motion.
By 2013, China was ready to enact the next phase of this program and announced the Belt and Road Initiative.
Thanks to the consolidation of the ocean shipping industry since the 1990s, fewer and fewer carriers are operating ships, crews, and infrastructure such as port terminals.
Most of these carriers are state-owned, or at least heavily subsidized by govt’s and banks.
With China dominating such a large percentage of global port capacity via its domestic capacity, BRI, or carriers relying on Chinese ports to streamline operations, any economic contagion that affects China will have myriad knock-on effects for the global economy.
Companies worldwide rely on Chinese manufacturing – 94% of F1000 corps have significant exposure to disruptions there.
All ocean carriers depend on higher-margin freight from China to help offset losses in every other country and build huge alliances around Chinese demand.
Further, with the COVID-19 outbreak coming during Lunar New Year when Chinese ex-pats return home, a number of workers may or may not be returning to their foreign jobs or schooling.
Freight forwarders are feeling it, as most of these middlemen rely on China freight.
Cargo airlines, also dependent on the transshipment model via major air routes and hubs, are also being squeezed.
Draymen (container trucking), customs brokers, warehousemen, and delivery companies are struggling with less freight in circulation.
Logistics and transportation – globally a $4 trillion industry – has been completely upended by the sudden and dramatic slowdown of China.
The companies who rely on their Chinese factories, labor, and shipping services – from Amazon to tiny mom and pop firms – are crippled.
While the trade war has had a significant impact on manufacturing, retail sales, and logistics between China and the West, COVID-19’s impact seems to be likely to have a more sustained and durable effect.
Uncertainty is the enemy of capital, and no one really knows for sure what will happen next.
Sourcing and manufacturing that relocated from China during the trade war can’t hide from a bioweapon.
Port and logistics providers can only reorient so fast.
The coronavirus is affecting global supply chains, which brings up the point that the centralization of the global supply chain of medicines in a single country makes it vulnerable to interruption, “whether by mistake or design.”
The US is dependent on China for thousands of ingredients and raw materials to make our medicine. While we only purchase a small number of finished pharmaceuticals from China, about 80 percent of the active pharmaceutical ingredients (APIs) used to make drugs in the United States come from China and other countries like India.