China's rise reshapes global supply chains, boosting serviceization in manufacturing

The Trump-induced tariff bomb, affecting both countries and items indiscriminately, is accelerating the reorganization of global supply chains. In particular, as the tariff battle between the United States and China intensifies, the U.S.-led unipolar system is transitioning to an economically multipolar system, rapidly changing the global value chain. Richard Baldwin, a professor of international economics at the International Institute for Management Development (IMD), noted in a recent interview that "the importance of intermediate service in future supply chains will increase," forecasting that "the serviceization of manufacturing may accelerate." He is an international economics expert who served as the chief staff economist of the President's Council of Economic Advisers during the administration of George W. Bush. In September 2024, he is scheduled to deliver a keynote address on global supply chain reorganization at a joint seminar hosted by the Bank of Korea and the Korea Chamber of Commerce and Industry.

Global supply chain and geopolitical changes are active.

"There are two significant changes. The first is the rise of China. In the past, China was a developing country focused on domestic consumption. However, now China aims to become a global economic power beyond a regional power. The U.S.-China conflict is an inevitable phenomenon that occurred when the U.S. economy stagnated while the Chinese economy thrived. The second change is the rebellion of the American middle class severely impacted by technological innovation and globalization (especially the changes in the global value chain of manufacturing). The United States lacks social safety nets and re-training systems compared to other developed countries. As it becomes difficult for the American middle class to make a living, the Trump administration is implementing tariff policies for them." Baldwin pointed to "securing jobs for the American middle class" as the reason why President Donald Trump is fixated on tariffs. Through high tariffs, manufacturing corporations are expected to build factories in the United States and secure "middle-class jobs" in the country to revive the economy.

Developed countries are focusing on manufacturing.

"Major countries around the world prefer manufacturing. They believe that manufacturing is important for political, economic, and philosophical reasons. It is not an exaggeration to say that the core of the U.S.-China conflict is a struggle for manufacturing hegemony. Global manufacturing corporations seek to localize their supply chains. They are producing in ways that serve China, the U.S., and Europe, respectively. However, I believe the expectation that this manufacturing-centric supply chain recovery will revive the economy is exaggerated. The future of the global supply chain lies not in manufacturing but in services."

There is also a prospect that the serviceization of manufacturing will accelerate.

"The importance of intermediate service will grow in future supply chains. It is expected that the serviceization of manufacturing will accelerate. The global value chain is transitioning from a U.S.-led unipolar system to an economically multipolar system, with the emergence of G-zero (international order chaos due to the absence of global leadership)1) expected."

There are many movements of China+1 or nearshoring (relocating production bases to adjacent countries).

"The China+1 strategy aims to diversify industrial dependence on China. For example, in the 2010s, Apple's iPhone was produced solely in China. However, now it is produced in both China and India. Given that the U.S.-China conflict has become fundamentally a struggle for manufacturing hegemony, there is a heightened urgency not to become excessively reliant on a specific country. Although nearshoring has issues with trade fragmentation, it offers advantages in reducing production delays caused by long supply chains and geopolitical risks. This is why corporations pursue such strategies."

Will nearshoring help corporate activities?

"In terms of efficiency, it does not help. However, I believe it does help in terms of resilience. The COVID-19 pandemic, along with the U.S.-China trade conflict, has led to higher manufacturing costs for corporations when producing the same products. In that sense, nearshoring is accompanied by trade fragmentation, but it becomes a strategy to adapt to the new trade order."

How do developed countries view manufacturing reshoring?

"Along with nearshoring, reshoring2) is a good idea for diversifying production facilities. However, it can be risky to return all production facilities to the home country. This is because it can become vulnerable to geopolitical risks."

What strategy should Korea adopt in a rapidly changing trade environment?

"Korea has well-educated personnel and relatively inexpensive labor. If utilized well, exporting office services could be competitive. Although there are language barriers, in the near future, simultaneous translation technology will solve these issues."

+Plus point

"Service in manufacturing refers to adding service elements to manufacturing processes."

The Korean economy has grown primarily based on manufacturing sectors like automobiles, semiconductors, and home appliances. However, recently, the manufacturing competitiveness of China and emerging countries has rapidly risen, causing difficulties for Korean manufacturing, including reduced price competitiveness and shrinking technological gaps. The emerging alternative to overcome these challenges is the serviceization of manufacturing. The serviceization of manufacturing means creating new value by combining products and services and incorporating intermediate services into production processes. Manufacturing production can be classified into 'pre-production,' 'production process,' and 'post-production' stages depending on the processes. Different services are injected as intermediates according to the characteristics of each stage. The pre-production stage corresponds to the planning and market research performed before actual production. Market research and management support services are representative.

Nike, a sports brand, is incorporating artificial intelligence (AI) technology to analyze customer usage patterns and develop new products based on this analysis. This represents the servitization occurring at the front end of production. The production process stage refers to the phase where products are actually manufactured. In this stage, information technology (IT) that integrates and manages the production environment to enhance productivity can be considered a service—for example, smart factories. In the back end of production, services include retail, product brokerage, and transportation. Apple enhances customer loyalty by offering product experiences and consultations through its offline stores, Apple Stores, which is an example of servitization in the back end of production. The Bank of Korea has evaluated that the production inducement coefficient and value-added inducement coefficient for services such as planning, market research, and IT services are higher than those of other service industries.

Terminology explanation

1) G-zero:

Countries that commonly lead the world order are grouped as G7 (Group of Seven) or G2 (Group of Two). G-zero refers to an international order chaos where, without global leaders, all nations focus solely on their national interests.

2) Reshoring:

This term refers to the phenomenon where corporations that relocated their production facilities abroad due to reasons such as reduced production and labor costs return to their home countries.

※ This article was published in the March issue of the monthly magazine "Trade." Please search for "Monthly Trade" on Naver.