Taiwan, China and the Risk of Global Supply Chain Disruption

Good morning and welcome to Supply Chain Studio for a roundtable on the theme Taiwan, China, and the risk of global disruption. I'm happy to welcome Hervé Gallon. Hervé Gallon, you are Global Lead Material Planning and Logistics of Highway to Dana Incorporated. That's right. Okay, welcome. Welcome to Max Henry. Max, you are Executive Director of Global Supply Chain Council. You are in France today, but ordinarily you are based in China.

Yes, I am.

Welcome to Jean-Luc Labouchec. You are a former group head global supply chain to Apollo Tires. That's right. And welcome to Harb Verbund. You are SVP Global EE Category Global Procurement and global supply chain to Schneider Electric. You hear me?

I hear you loud and clear.

Yeah, okay, okay, okay, okay. And good morning, Hervé. Hervé, you will get questions from the audience.

Yes, so I want to remind the audience that you can ask any question during the roundtable, and I will collect them, and we will— our speakers will answer live during the roundtable.

Max, what about the global context in China?

Yeah, so thanks again for, you know, having us for this very interesting webinar. Again, a very timely, important topic that we've been discussing over the last few months and few years now. So as Jean-Philippe mentioned, I'm based in Shanghai, China, but I'm currently in Europe. I was hoping to be part of that studio today, but as soon as I arrived in Paris, I got hit with COVID and I've been sick for the last 5 days, so unable to join you live, but I'm physically in Paris. So again, you know, this is an important topic. As you know, we've been through in the last 3 years through a very, very extreme measures with zero-COVID in China, which have, you know, had a major impact on how, you know, supply chain executives and more generally foreign companies operating in China. So it's been, it's been very challenging, very difficult for a lot of foreigners and foreign business in the last few years. And the next big worry, as I know we are slowly coming out from that zero-COVID policy, is what might Happen if you know there is a crisis between China and Taiwan. That's you know that's a big concern for a lot of professionals, whether it's a blockade or an attack, an invasion, and and we don't want to be spending too much time today on talking about why that should happen. We want to stay focused again on the impact on supply chain logistics and sourcing manufacturing. of what this crisis might be.

Okay. Okay.

So maybe we'll get started with, you know, as we're trying to get Jean-Luc to come back, hopefully he's going to join us again. I would like to, you know, start with very general questions with maybe all the panelists joining us. You know, on the general situation, we've seen a lot of companies in the last few years Slowly moving out, or trying to move out, or be less dependent from China. And again, you know. So I want to understand from the people here today whether you think this trend of trying to leave China is going to continue, and what are your general thoughts about this? Yeah, maybe we start with anybody. Hervé, Art.

Yeah, well, first of all, good morning, good afternoon, good evening to everybody. My thinking is that that has already started. It started with the— first of all, before the COVID crisis, with the increase of the cost in China that made it a little bit less competitive than it was before, a little bit less competitive than other countries. Then we've seen some relocation after the Trump administration imposed some tariffs on goods produced in China. So it was an opportunity also to relocate to other countries like India, Vietnam, or others. The COVID situation, of course, increased the focus on the dependency that we were having with remote locations, not just China, but remote locations. And yeah, there's a trend for reshoring for sure. And now, can that happen quickly? No. It's a long-term, it's a very long lead time effort. So I think that kind of answers the region for region or the rebalancing of production closer to the market is a long-term trend, fueled also by the increasing cost of transportation and the chaos on sea freight. But it doesn't happen overnight, at least not in the heavy industry that I'm working for.

Okay. Yeah, Jean-Luc, Art.

Yeah, yeah, they all comment on this.

Go ahead.

Yeah, do you hear me, Max?

Yeah, we can hear you.

Yeah.

Oh, I just joined, so what was the question?

Sorry, we, we talk, we talk about, you know, that's slowly moving out from China. The companies have been Adopting in the last few years, and and the question was: Do you think that trend of now leaving China is going to continue in the coming years? Yeah.

Yes, I do believe that this will continue. Although in the company I was working for at Apollo Tires, we were not very well exposed to China manufacturing or Taiwan manufacturing. But there was a big risk in shipping, as we have experienced in the pandemic. So any disruption on the Shipping will have an impact on everything. So I think that there is a global trend to move to move away from China and Taiwan. But as I as Hervé say, this will take quite a long time.

Odd, yeah.

Yeah, I think thanks for having me, by the way. So. I'm the, I'm the Senior VP for Schneider Electric running global procurement with, and my scope is primarily electronics, by the way. So I'll answer you from that perspective. By the way, Schneider as a company, we're $30 billion. That's public information. And we are one-third, one-third of our revenue comes from Europe, one-third comes from larger China and EAJ, and one-third comes from North America. So we look at these issues really through a global lens. And let me start with saying the bigger theme is techno-nationalism, and that's not a Chinese topic. The Indians have a Made in India mandate. The Europeans just launched a European Chip Act. The Americans launched their US Chip Act. And by the way, the Inflation Reduction Act was called infrastructure bill before. So globally we see techno-nationalism quite strong as a driver. And so where you could call it reshoring, we really call it regionalizing. So yes, there is a big global trend to regionalize your production, and with that your tier 1, tier 2, and possibly tier 3 vendors. as close to your end markets as possible, because that gives you most resilience against unpredictable changes in any of these techno-nationalist drives, legislations, or whatever you want to call it.

Do you feel that, you know, even with sufficient diversification, and, you know, as companies are slowly, you know, moving to Vietnam, India, Mexico and Eastern Europe. Do you think that is enough to compensate and to deal with some kind of a crisis between China and Taiwan? Is this sufficient?

No, there's not. Not now. So if you— I think the long pole for many companies is electronics. If you realize that putting up a new wafer fab is a 3 to 4 year process, from the moment you make the decision to being actively up and running, right, then, then, you know, there won't be anywhere near enough, say, balance in the supply chains to supply global from global for a long time. And even with, with all the, even with the investments that have been announced to date, and if you add it up, The global semiconductor industry has announced to invest over $500 billion in the next 4 years. Even that will not be enough to make any region self-sufficient, and that has to do with where and the kind of technologies these investments get made in and what people need. What I mean with that is Many companies rely on products that were developed 5 years ago, 10 years ago, in technologies that were, say, invested in 10 to 15 years ago, and that is not where all these new investments are going. So if you look at it at a very— if you look at it at a macro level, you could say, well, the installed capacity in the US is going to go up a lot with investments from big people like TSMC. If you then go in more detail, right, the question is, can you use the capacity in the technologies that they're investing in for the products that you need? And in many cases, people are going to have to redesign to utilize the capacity that, that comes from, say, the regions that they want to sell into. Let me pause here.

Hervé?

I'd like to add to that that, you know, Dana is in the automotive industry serving, you know, $10 billion business, serving all segments. And basically, we use steel as raw material. So, and a lot of steel comes from China, a lot of other rare earths or other base material comes from China. And If you imagine that China's out of the game, there's not enough in the rest of the world. So it just, that would be, I think, first would bring the world to a complete stop, maybe not from tomorrow, but in 1 month, 2 months. And second, I mean, that's not something that I see happening just because of all the intricacies between what we have. Now, if we think of, Yeah, just think of some of the Suez Canal incident two years ago. You can see how one ship in the canal can disturb the whole sea freight and the whole world trade. So, imagining any kind of bigger scale, you can you can just think of the chaos. And I think that that chaos we we cannot we cannot prevent for such a thing. It's just like having a meteorite.

Yeah, Jean-Luc, what do you, what do you take on this?

Well, I will speak from a tire business standpoint. So we don't use— well, we do use steel, but not too much. We are mainly using rubber, and the rubber is mainly produced in Africa, Southeast Asia and India. So I would say that in the tire business, I don't think there will be a big impact. Having said that, and to build on what Hervé just said, the shipping is a problem because if there is any disruption in China or Taiwan when it comes to shipping, there will be a domino effect that will impact the whole supply chain. And this is exactly what we have experienced during the pandemic. Even if in terms of raw material supplies, we were not— Apollo was not deeply impacted, the global disruptions in shipping was quite a nightmare. So in fact, it's not only— even if you are not supplied from China or from Taiwan, And they are order effects. And in the tire business, it's mainly shipping.

Max, we have a first question from the audience.

Yeah.

Yes.

So the first question, is the European Union able to produce microprocessors, and is there any will to cooperate to create factories?

So who wants to answer?

I can take that one.

Well, go ahead.

Yeah, listen, so the European Union is producing microprocessors, correct? STMicroelectronics and Infineon are traditionally French and German companies, and they have a very relevant market share. So the first answer is yes. The second answer on Fabs, yeah, especially around Dresden, right? There is a lot of investment happening in Europe in wafer factories. I think the mistake though, and I know the European Union is actively interviewing companies, I think the mistake that we're making is focusing too much on the front-end foundries. In the end, you need the whole ecosystem. You need companies that design, companies that make the chips, those are the front end, but then you need the back end and the test. So I think there's too much focus on the heavy CapEx front end. It's the stuff that reaches the CNN and the BBC headlines, but not enough on the rest of the total ecosystem. So yes, there is investment in fabs. No, not as aggressive as in the US. And I see Europe missing the boat in the total picture. Jean-Luc?

Thanks.

Yes, just to complete about this, my colleague was speaking about investment of $500 billion in the semiconductor industry. And if you look at where will go this $500 billion, it's mainly in the US, probably 50% will be in the US. 20% will be in Asia, and this includes China and Taiwan, and only 20% in Europe. So despite there will be— there are some investments, okay, in Europe, it's not enough to compete with all the geographies. So this is point number one. And point number 2, we are— Europe is behind the United States in terms of timing. So not only the majority of investment as known today will be in the US, but the US started quite a long time before Europe. So Europe will be behind in terms of capacity, but as well in terms of timing.

Okay, so before we move on to the next question, I wanted to again raise the issue around trade sanctions. We've We've seen that happening, you know, with Ukraine and Russia and how trade sanctions could actually have an impact also on the, you know, on Russia. Do you think that we, you know, if there is a crisis between China and Taiwan, do you think there would be trade sanctions as well imposed on China? And what would be the impact of those trade sanctions on, on supply chain professionals here?

I think that in any situation, there is the rising sanctions, and we've seen it in the Ukraine-Russia situation. It started with some smaller sanctions and then rising up to first sanctions against individuals and then against some commodities and then rising to gas and oil and things like that. So it should be gradual, if any, that to be gradual. Secondly, I think it's like a very interesting experience that everybody, the whole world is watching what is happening. But as I said before, I mean, what in our homes, what do we have which is made in Russia? Not much. What do we have which is made at least partially in China? Everywhere, in every home. So the sanctions, I think, would be probably gradual, probably more on individuals, Maybe financial, but I think that there will be a lot of discussion. I mean, the world can survive and we're going to survive a cold winter without, you know, in the frame of the Russia-Ukraine conflict. I don't think we could survive anything that big. So would it happen or not? It's not the question, but I think sanctions have to be, would be of course progressive. And and then at some point we say okay this is not bearable anymore for both sides. That's my feeling. Another feeling, Jean-Luc?

Well, if we compare, obviously there would be sanctions against China. We are not at all in the same ball game as what we're experiencing today with Russia and. If you look at the GDP of Russia and Ukraine combined, we are below $3 trillion, which is roughly the same GDP as France. If there are sanctions towards China, we're speaking about a much more bigger business. So it means that today we're already experiencing supply chain problems because of Ukraine and because of Russia. If tomorrow the same sanctions, the same level of sanctions are applied to China, the disruption on the global supply chain and global economy will be much, much higher. So I don't think there will be a big train of sanctions against China because the costs of these sanctions on the global economy will be far much higher. So on my view, the cost of a potential conflict and the cost of potential sanctions will be raised very, I would say, step by step and cautiously because the risk of the global economy is by far too high. The cost, not only for the world's economies, But I would say globally, even for China. China depends a lot on the European market as well.

This is what I think.

Thank you.

Well, whether or not there'll be sanctions, I have no opinion about that, but I think you have to realize what the consequence of sanctions are, right? And the consequence of sanctions are that you'll see a massive shift and rebalance to the capacity that is available for you. So this is again why you look at this from a region-by-region perspective. Which products do I need to make which regions in which end markets? And then in scenario A or B or C, right, which sources can I still have access to? And, and this is where it becomes a muscle and power game. Right? Because all the big guys in the industry that get caught in the wrong positions are going to shift their weight to those vendor relationships where they hadn't secured capacity, right? And that creates, that typically creates the disruption. So we tend to think about this in terms of scenarios. If that happens, how can I be in a situation that I cannot get squeezed out of my vendor base. What kind of actions should I take so that I protect my supply to a certain market?

Okay, we have many questions from from the chat, Hervé.

Yes, what are the other Asian countries who will benefit from the China-Taiwan conflict?

Who wants to answer?

I don't know enough that region.

You've already seen massive investments in Vietnam, and by the way, that started 7, 8 years ago, right? So that didn't start yesterday. The Koreans first, Samsung has made massive investments in Vietnam. Secondly, the The Taiwanese themselves, Foxconn has made massive investments in Taiwan, and with that they've brought over a lot of first and second-tier vendors. So that's clearly a company that's— country that's benefited to the point that right now you should wonder whether you want to go there because it's a very crowded place already. Then where else can you go, right? And typically the countries I see people consider is Thailand, if you have a lot of electronics content, because it's, it's a pretty established place. Indonesia and Philippines for everything that requires quite a fair bit of labor. Those are the countries that everybody looks at. Malaysia is, is kind of in between. It has a very big electronics present also. So typically I would say it's, it's most of the ASEAN countries. And then the ones that are politically more stable.

Another question.

Is there any significant impact on Britain and European Union supply chain due to Brexit?

It depends how you define significant. There are delays. There are more complex procedures. I think it, I mean, big companies have organized for it because it was well known what would happen. I think it's more the smaller players which are impacted. But that's a drop in the ocean of complexity.

There's many, many countries that connect today.

Yeah, the audience is from everywhere, Asia, Europe. So we have different, we are worldwide.

I think the back to that question. I think the main impact right now is a shortage of labor in Britain, with all which impacts both all sectors. Okay, another question.

Many shipping liners had invested in ships and containers during the last two years, while currently the freight is keep declining. Do you think that manufacturers shall start to increase their production?

Ship manufacturers?

Just the manufacturers.

Well, I think the— if I may answer to this one, if I correctly understand the question. Yeah, this is correct. The ocean freight rates are decreasing, which is good news because before it was just impossible to follow. But I think that they are decreasing not because the manufacturing is up, But because there are less and less disruptions in the, in the supply chain because of, thanks to less and less COVID restrictions. So as soon as the supply chain is normalizing in terms of shipping, then you can see that rates are decreasing. And this is what is happening.

Add that it's not decreasing at the same rates all over the world. It's decreasing more on the freight to the US, both from Pacific and Atlantic, and from China, not so much from Europe. So it depends on the lanes that you're looking at. And I think the— yes, it's a— I mean, one of the characteristics of sea freight is that it takes a long time to normalize. Once it's disrupted, you've got ships in the wrong place. We don't have the cruise in the wrong place. We've got ports that have been skipped. So the time to realign this, it's months. And this is what we have seen. The original trigger being the increased e-commerce from the US to China during the COVID the initial COVID lockdown. And that created massive imbalance. And the vessels have been repositioned. And that created the increase in the rates. And all this is taking time. And, you know, something like the Black Friday creates hiccups, the Chinese New Year creates hiccups, and every time we have these kind of hiccups in the global trade, it takes a few months to realign in normal times. More complex. We've seen this in the— go back to the Suez Canal incident. The alternative was to sail around Africa. That adds 4 weeks of transit time. So those who took that decision going around Africa, instead of waiting 10 days, they just created a 20-day lag in all their freight. So that's just an example of one disruption. Think of bigger disruptions and just the chaos will continue in sea freight.

If we could stay on the shipping line topic, I think it's interesting because there was recently a number saying that more than 80% of the largest vessels have been basically crossing the Taiwan Strait in the first part of this year. And again, going back to the potential conflict between China and Taiwan, what will happen to all the shipping lines which are so dependent on going to China and passing through that strait between Taiwan and China? And also, you know, not mentioning the proximity of all those ports on the, you know, eastern side, you know, Of China, what do you think you know will happen? And do you also another interesting topic we could discuss is do you think the free PLs or the logistics service providers or shipping lines in general are actually ready for such disruption if there is a conflict between China and Taiwan?

Well, go ahead, Erwin.

Okay, on my side. Okay, I start, sorry. Go ahead. Thank you. What I think on my side, I think that the, well, the shipping companies will succeed to avoid the Taiwan Strait. Okay, it will take an additional maybe 2 weeks of transiting time. So the shipping line capacity to adapt, I would say, is not A real concern for me. The real concern is really what will, what could happen in the Chinese ports. Because if there is a shutdown of some Chinese ports, that means that the loading capacity, the movement of the goods will be routed to other ports, then creating new bottlenecks. Then creating a waiting list of vessels waiting to be loaded. And this is how you create the big problem in the supply chain, just the beginning. So even if the vessels will be, to my view, will be ready and will be prepared to change the routings, even as say by RV, it will take a long time to adapt. But the main concern for me could be the bottlenecks on the Chinese ports because the capacity will not be increased in the other ports, in the alternative ports. So this will be a problem of how fast you can load containers on vessels. And if the vessels are waiting to be loaded, then this is a capacity that is disappearing. And this is why we have experienced what we have experienced in the pandemic. The global capacity of vessels was not decreased, it was immobilized, which is completely different.

I would just add one thing to what Jean-Luc said, which I fully agree with, is the insecurity in the sea. I mean, if there was a blocus, an embargo, a conflict, there would be many warships around, and that might create more issues with insurance companies, and maybe the carriers would be a little bit more, you know, avoid even more that area. So that would be another side effect.

Art, what's your take on this?

I wouldn't. I'm not the 3PL expert, but if you remember what happened earlier in the year, right, it was really, it was really like Jean-Luc said, the congestion of the ports, a bigger issue than shipping capacity, right? And so you, you can expect that to happen again. So the moment you have disruptions, In my mind, the port capacity is a bigger bottleneck than anything else. You saw that happening in Shanghai. If you looked at the charts back then, the number of vessels waiting outside Shanghai for unloading was massive. The same thing happened, by the way, on the LA side. And only this weekend I read a report that many people— so today, actually, the East Coast ports in the US are handling more traffic than the West Coast. So you, you see that people have taken actions and, and rebalanced their, their freight line, their shipping lines for, for certain products. So I honestly, I'm looking more at port capacity than I'm looking at the number of ships. The one of the reasons also why right now, right, freight is down is because many, many companies over-ordered. in COVID. So there is a big inventory rebalancing going on right now with people trying to flush out and trying to shore up their balance sheets more than keeping the reordering flows going. So candidly, most of the outlooks that I see and that I look at consider H1 2023 more of a temporary lull than a real market decline. I have no evidence to back that up, but it is the scenario I think is that is most credible.

Okay.

What's your point of view from the trend of leaving China between Vietnam and India? Which country has more of the best potential to be the next, the new destination for manufacturing?

It probably depends on which kind of industry you're talking about. It depends on the skills available, on the material available, on or many things, just looking at size, India seems an easier option because there is more growth potential. I mean, it's not as saturated. I mean, I think Arndt said that Vietnam is already saturated in many areas. So India has more potential and also is closer. If you think Europe and Western world, it's a bit closer, which is also an additional benefit.

But Maghreb?

No, it's already started. It really depends on industry, the car industry, the fashion industry went to Turkey also. We have resourced from China to Turkey for steel and things like that. But once again, it's a question of capacity. If you want a massive transfer, it takes years. If you want to move one supplier from one place to another, that's quicker. But then there's a mass effect.

Yeah, let's not forget why Vietnam grew so fast, right? Vietnam is a neighboring country of China. So for many products, China still supplies the Tier 2 and Tier 3 components. So there's a huge railroad that it's very— it's culturally, geographically, ethnically very similar, right? So Vietnam was a very logical offload for Tier 1 assembly manufacturing activities while not having to change all the Tier 2s and Tier 3s. You go to India. So India, it's an apple and pears comparison, right? India is one of the most populous countries. So from an end market perspective, the potential is awesome. But if you look at the state of the industry, right, yeah, they have a lot of hands, but do they have the tier 2, the tier 3 installed capacity to go with that? In many cases not. So you need to look at this from an total ecosystem perspective, not from a who can just do the last finished goods assembly perspective.

Yes, well, I used to work for an Indian company, so I know a little bit about India. So let me tell you my thought on this perspective, and I agree with what Hervé and Art just said. On my side, yes, India is a good bet. And when we speak about the semiconductor industry, the roundabout $500 billion investment in the next decade, well, a good portion will go into India as well, at around 10%. Now, the concern I have with India as a supply chain manager is more about the infrastructure of shipping. China was— is extremely well advanced in terms of waterways, logistics, port capacity, where India is lagging much behind. And today, even with the current situation, there are bottlenecks in Indian ports, not because of the pandemic, but it was because of the pandemic in the past. But today the investment in the logistics infrastructure in India is not enough. So what will, to my view, constrain India for exports is the logistics industry.

Okay, Max?

We have more questions, I think, so let's move on to the next question.

What's your opinion on the carbon-linked tariff proposed by Europe and the US?

Hervé, maybe? That's a very tough question. I heard some pros and cons depending what you're looking for. Or looking at, it probably internalizes costs that are outside lost in the in the world. And like all tax, it will be a it will be slowing down trade or limiting some you know changing the balance of of existing trade. It's probably good for the planet overall. How is it good for our own industries? I'm not sure because I heard on the on the radio this morning that. For example, steel would be taxed coming from the other side of the world. But if that steel is used to make a car, say, in that country, that car is not going to be taxed. So that could have another opposing effect of driving final assembly out of Europe, which is not what the overall scheme seems to be. So I have mixed feelings about it, although it's probably in the air to get a little bit more Well, to price the real cost of carbon.

Okay, let's move on to the next question. Or maybe, Anne?

Do you have any information whether China is preparing a plan to reboost its economy, which might again create further supply chain disruption in the midterm?

Max or knows China more?

You're fleeing?

I don't think so. I mean, you know, the problem what we are going to be facing in the next few months is that huge wave of pandemic. I mean, we're still in the middle of it. We have to we have to remember that the the world has moved on, but China has not. And you know, due to the current vaccination level and And all the issues that we had in the last few months, China is going to go through some major, you know, problems. You know, I think that's going to last at least until Q2 2023. So I hope that there will be a slight recovery starting March or maybe April or May. But nobody really understands, you know, how fast and good it will be. So that's my, that's my take here. So things are still looking very complicated in China for now.

Jean-Luc, what do you think? I, well, I don't have any thoughts about this one. This one's for me. Well, no, I don't have much idea about this one. I agree with what you said, Max.

Well, I think it really depends on what you're looking at. I mean, you know, Dana, we serve the mining business. The construction business, the material handling business, the construction business. We see no slowing down on those segments. I still think that China has huge opportunities in the energy sector. There's a global wake-up call for decarbonizing energy. China is a major coal producer. There's an obvious opportunity to switch away from coal to other sources of energy, whether it's the big dams or nuclear. But it will take time. This is long-term investments. So I think there is no reason why those investments would not continue and increase.

I'm going to say that one thing that I would urge everyone to keep in mind is try to understand that China is a centrally led, long-term concept of— I don't know what the right English word is, but listen, they're playing a very long game. And they can because the governance is so stable. So try to understand the strategic objectives that the country is pursuing. They will not slow down on their strategic directions.

Arda, I had a question for you related to the ecosystem of Taiwanese companies in China. That was a topic that came to us. I think there are, you know, Quite a number of obviously big factories, you know, tier one, tier two suppliers, which are run by Taiwanese in you know in China. What will happen, do you think, if there is a crisis? You know, to you know to those factories and and more generally to Taiwanese, to those millions of Taiwanese living in China. Yeah.

I don't know. The honest answer is I don't know. But I do know that most Taiwanese companies have a scenario in the safe of how to deal with it. Some of them have structured the company already legally and/or organizationally so that they can carve out certain assets. There's 3 logical categories there, right? Taiwanese assets, mainland Chinese assets, and other global assets. So I know they all have their plans and their scenarios. Other than that, I don't know more than that.

Hervé, is this also a threat for you as you deal with your suppliers in China? Do you look at whether they are Taiwanese or not?

Well, you know, we're more in the mechanical industry, so I don't believe we have not a big exposure to Taiwan, maybe on some electronic parts because there starts to be electronics in automotive components, but with electrification of vehicles, but I don't have a clear answer on that, sorry.

Okay. All right. Let's go back to the questions then. Yeah.

Yeah.

So if you think about it, if you reason it through, right, all these companies are mainland Chinese entities rolling up into a Taiwanese mother company.

Right?

But ultimately, the employees, they're all mainland Chinese. Most of their factory management is mainland Chinese. Only part of the leadership is typically Taiwanese or non-mainland Chinese. So from a stability perspective, right? And again, if you— so my experience with China over the years is that harmony Right? And avoiding unrest is a big driver in understanding why the Chinese government acts the way it acts, that they have every interest in keeping people at work. Right? So if there's— I think so, honestly, it's not a question that's ever crossed my mind because I candidly think if I regionalize my production, Right, and I work with factories that have good local management. There, it's not at the forefront of my area of concerns.

Okay. One thing also we did not mention is that a lot of Taiwanese companies have also in the process of moving out from China. So many of them are started to delocalize in places like Vietnam, for example. You know, so they've been taking steps already to kind of move out.

Yeah, in the big electronic space, right? You talk about Foxconn or Hon Hai, you talk about Quanta, you talk about Wistron, you talk about Pegatron, right? So yeah, all these guys have massive factories in China, but also in India, also in Vietnam, also in the US, in Mexico. So they have big factories already in Europe. So yeah, they have all that. I wouldn't say diversified for the sake of diversifying, but they all have global customers that are again trying to serve their customers regionally. So from a capacity perspective, I'm not concerned. There is enough capacity to go around. So—

Okay.

The problem, but this is where the opening question becomes relevant, right? Are you manufacturing in China for global, or are you manufacturing in China for local? So if you manufacture local for local, I think you are much more resilient against prices.

Yeah, okay, let's go back to the questions.

Yeah, talking from semiconductor and electronic standpoint, and due to the current tension between China and Taiwan, And coming from an electronic distribution business, there is a trend that price increasing typically from 5% to 10%. So, some customers are coming and asking, what risk mitigation strategies best suit to wave off this price increase, both from short-term and long-term perspective?

Question for Hervé.

There's no fighting that. This is supply and demand.

5% increase is nothing these days, no? So we're dealing with increases 10 times that.

I was going to say this.

This is—

yeah, listen, there's no fighting that one. This is supply and demand, and there is more demand than supply. So if you're not willing to pay the price, then don't pay the price and don't get the part. This is a seller's— so we've moved from a buyer's market into a seller's market in semi. And that is not going to change anytime soon.

Another question?

Yes. What could be the role of Africa?

Good question.

Apart from—

Well, first of all, it's a huge and developing end market. And there are massive Chinese investments in Africa. I think the big question in case of conflict or tensions is what will be the positions of African countries versus that? And we've seen that they are, with the Russia-Ukraine, they don't want to make any— I mean, they're very careful.

Right.

I think they would be even more careful. I mean, that's I think Africa could be the next India in terms of manufacturing origin and end markets, making region-to-region manufacturing, but this is a long-term thing.

I mean—

Jean-Luc?

Yeah, I think that to build on what Hervé just said, I think we have to look at Africa country by country. It's, as you know, it's a huge continent with a huge diversity. And not all the countries are politically stable. So there are countries, to my view, which are stable. I'm thinking about Morocco, very stable. I'm speaking about Nigeria, which has become, as Hervé said, thanks to Chinese investment, a big exporting country. So, but the main problem would be, well, when it comes to Africa, will be the political stability. And I'm not sure that many Western companies would agree to invest everywhere in Africa just because of the political stability. So you have to look at Africa country by country.

And back to the shipping questions that we— that were evoked earlier. I mean, some countries are better positioned in terms of infrastructures, harbors, trains, and things like that. And the big maritime players like CMA CGM and others and Bolloré Logistics, they all know how they position themselves into those strategic countries as well.

Okay, we have more questions, so let's, let's take them. We have 5 more minutes before we wrap up this discussion.

Our next question: The global container shipping costs have been easing for the last for last some months, but it has not reached the pre-COVID levels. Do you think it will go the same level as pre-COVID levels, or it may rise in 2023?

For me, it's a $1 million question because we are running every year a global ocean bid, and I don't think we will ever come back to the pre-COVID levels. But it will certainly continue to go down because, as Arne said, it's also supply and demand, but with a lot of inertia.

I agree with what Hervé just said. We will never, to my view, we will never come back to pre-pandemic level. Even if the supply chain worldwide is normalized, that will drive down the costs. But I think that the shipping companies have learned a lot during the pandemic and they know now how to manage their capacity. So to my view, the cost of sea freight post-pandemic was too low. The shipping companies could not, well, didn't have a high margin at the pre-pandemic level. Now they have huge margins and they have learned how to manage their capacity. That means that they had the possibility today to immobilize part of their vessels, consequently creating a higher demand versus supply. So they have learned how to manage their vessels and consequently they will continue to make big margins, even if the supply chain worldwide is normalized. So to my view, we'll never come back to pre-pandemic level in terms of rates.

Are you saying that they will try to manipulate the market in the coming months?

It's not a question of manipulation, it's a question of managing your capacity.

Okay.

It's not manipulation, it's managing the capacity.

And I think this is not just a freight cost discussion. I think this is a very generic topic. I think for most fabricated parts and/or services, we will never see the cost levels back that we were pre-pandemic, right? And that's how inflation works, right? So certain things you can recover, Part of the supply and demand price inflation, you can press it out again if you get into an oversupply. But wherever you've had structural inflation like labor costs, you're never going to get back to the level where it was. It's never happened in history, and I see no reason why it would happen this time.

There's another factor is that there are new gas emission rules for sea freight. And some vessels are getting so old that they're going— they are being retired because they just make too much pollution. And so that also creates what Jean-Luc was describing. And the transformation of those vessels or the new vessels will come in a few years only. So that's— yeah, there's a very, very smart management of fleets. And it makes me think of the yield management in the air industry.

Okay, do we have time for one more question?

The last, the last question maybe.

Yeah, US customers are looking at alternate sourcing destinations for industrial spare parts supplies other than China. Can we consider Mexico, Poland as low-cost country sourcing destinations for industrial spare parts? And are there suggested countries for this scenario by taking into consideration shipping cost, price and better lead time?

This is not new. I mean, for decades, Mexico has been the low cost of North America and Eastern Europe has been the low cost of Europe. So this is not new. I mean, and of course, the higher the shipping cost, the more interesting it makes those destinations or those sourcing areas. Don't know if my colleagues—

There's one new thing on the horizon here, and that's the American trend to move from, say, what I call TAA, which is Trade Act compliance, to BAA, which is Build in America. So there is legislation in preparation and/or being heavily, what do you call that, lobbied for to really increase Build in America content, definitely linked to US government spending, and actually many private companies follow US spending rules. So that is getting stronger and stronger. Other than that, I'll second the comments that were just made. It's not new, and I think Mexico and Europe and Eastern Europe will remain having those places for North America and Europe respectively.

I just agree with what has just been said. Yes, manufacturing will expand in Eastern Europe, speaking about Europe, and Mexico will continue to have the role that it has today. So this will develop as well. So nothing to add on top of what has just been said.

Okay, well, with that, I think it's— yeah, yeah, Jean-Philippe.

Yes, what recommendation to the company to be ready to the risk, adjust risk?

Well, I think all companies have DRPs, disaster recovery plans, and things like this. It's a must. I mean, how deep, how detailed, not to be discussed here. I still think, you know, if we speak Latin, civis pacem para bellum. So be ready. If you want peace, prepare for war. Or if you want, you need to be prepared for something. But I think the key thing is agility, resilience, agility, and flexibility. Yeah, and flexibility and all of that. But as I said, if a meteorite falls on us, COVID just stopped the world for one year. I mean, we could have had all plans, so we were able to recover. I mean, to manage and handle and monitor the short supply from supplies in the Wuhan area and things like that. Yes. Was it pleasant? Was it cheap?

No.

Jean-Luc, your recommendation?

Yes, so I agree with Hervé. In order to manage this kind of crisis, You have, you need to have agility and you need to shorten the command of decisions. There won't be stuff for everywhere, for everyone. So the question is not that how to get the stuff you need, because there won't be stuff for everyone, but how to get it before your competitors. And this is how agility is extremely important. And how you can get agility first is to have maximum visibility. So we, we spoke a lot during the pandemic about supply chain digitalization. This will continue at full speed and this will provide full visibility. And to my view, the companies who have full visibility on their supply chain will have an advantage compared to the others.

Okay, Art.

Yeah, if I can add to that, for the fun of it, if you can try and invite someone who knows about epidemics to give you a lecture, they will tell you that there has been an epidemic for the last 150 years, roughly every 4 years. So everyone who thinks that COVID was unexpected, actually statistics and history prove you wrong. So step 1 is identify your risks, but step 2 is act on it, right, in a decisive way, because otherwise it, it still means nothing. So agility is really good, and you need to be prepared for the unprepared. And I, and I like that statement, if you want peace, be prepared for war. But also really act on the data, act on the numbers. And, and sometimes it means you need to have uncomfortable discussions with your executive stakeholders, right? But flush it out and bring it to actionability. Otherwise, next, next crisis, you're going to be among all of those that look around and say, how did this happen to us?

All right. Jean-Philippe, do you want to wrap up?

Okay. Thank you. Thank you very much for participating.

Nothing to say.

All good.

Yeah. I just want— I wanted to quickly thank everybody for attending today. And again, apology for some of the technical issues that we had earlier. But I think it was an interesting discussion. Thanks for all those questions. We were not able to take all of them. But one thing we could do with you, Hervé, is we'll put them together and then maybe share those, you know, those questions we did not get answered back with the panelists and speakers. And then we'll then share those responses in our thank you email sent to all the participants. Also, this was recorded. So if you missed part of this discussion, you can rewatch and replay, you know, this discussion. We'll be sending you the link also after the event, so everybody can watch it at your convenience. So I want to thank again all the panelists, Hervé, Ard, and Jean-Luc, for joining us today for this discussion. It was great to have you joining us, and obviously it's a big topic, but we'll probably talk about it again at some other discussions here. Thanks again.

Thanks for having us.

Thank you.

Peace and happiness.

Thank you. All right, we'll see you next time. Thank you. Thanks for joining. Thank you.