Tariffs Versus a Complete Supply Chain: The Difference a Single Screw Makes

Tariffs vs. a Complete Supply Chain Some thoughts from my conversation a few days ago with the head of a listed company: if the tariff gap between China and Southeast Asian countries is 20–30%, manufacturing in China still offers considerable advantages. For example, tariffs for Vietnam, Thailand, Malaysia, and Indonesia might be 19–20%, versus 40–50% for China. There are, of course, many reasons, including skilled, experienced workers. But one key factor is the completeness of the supply chain. Over time, China has continually raised the bar on that front. Suppose a manufacturer heads into Southeast Asia—Vietnam, for example—on its own, and a piece of equipment suddenly breaks down and needs a replacement screw. Where can it find that screw? It might take more than a day for the screw to arrive and be installed before work can resume. In China, a missing equipment part might be delivered in five or ten minutes, allowing production to restart immediately. Think about production efficiency and the cost of waiting. And this is only a tiny screw. Extend the example to all kinds of equipment, maintenance, equipment components and consumables, production materials and auxiliary materials, suppliers’ willingness to respond around the clock, and their eagerness to win a single order… China’s supply chain has accumulated over decades. Although Southeast Asian countries have gradually risen in recent years, they still focus primarily on labor-intensive activities and final assembly, because China’s complete supply chain is already in place. For Vietnam to build an entire chain like China’s—from all kinds of production materials to equipment—might take another decade or more. It can instead build the final production line and rely on China for most raw materials, auxiliary materials, semifinished goods, and automation equipment. It can buy automation equipment from China, where such equipment has also advanced rapidly in recent years, bring in materials, then assemble products for sale overseas. Hence the talk of disguising products’ country of origin. But in truth, building a complete supply chain is not easy. It takes time and resources. ---- Taiwan’s strength, its semiconductor supply chain, has also gradually developed. For this, we really should thank the industry’s “sacred mountain” for cultivating Taiwan’s supply-chain system in recent years, including equipment, consumables, and fab facilities. The most advanced lithography and etching equipment may still be some way off, but the semiconductor supply chain as a whole has gradually become more self-sufficient. A complete supply-chain system provides a relative competitive advantage, which can lessen the effects and impact of tariffs.