The Concept And Logic Of Close Produce – Analysis

By Zhou Chao

The concept of “deglobalization” has been prevalent and widely discussed for several years. Meanwhile, the Western countries’ significant push towards “nearshore outsourcing” and “offshore outsourcing” has also become a focal point of industrial theories and discussions in this era of deglobalization. Undoubtedly, after three years of profound impact from the COVID-19 pandemic and the sustained tension in U.S.-China relations since 2012, the global industrial chain is undergoing a deep and uncertain adjustment process.

The conclusion concerning deglobalization was made by Mr. Kung Chan, ANBOUND’s founder during the time when the Ministerial Conference of the World Trade Organization held in Hong Kong in 2005. This conclusion was derived from observations. The Hong Kong conference took place after the Mexico conference, yet the problems caused by global trade extended from Mexico to Hong Kong, persisting and expanding, hence the conclusion was made by Mr. Kung Chan. In policy research of various countries, the emergence of the concept of “deglobalization” was an early trendsetter; other later debates and consensus related to it are comparatively trivial as it has become a fact that resulted in significant financial losses for businesses.

The academic circles around the globe have now generally agreed that “deglobalization” is an undeniable reality. The current issue lies in the controversies surrounding the adjustment trends and logic of the global industrial chain during this phase, including the potential impact of this adjustment process on China itself.

Some viewpoints suggest that the “nearshore outsourcing” advocated by the U.S. overly emphasizes geographical proximity, yet the geographical space of its neighboring countries and its own is limited, making it almost impossible to fully absorb a large portion of the global industrial chain. An article in Nikkei Asia in mid-September last year pointed out that despite the vigorous promotion of “friendshoring” in the West, Chinese capital still plays a very important role. Almost simultaneously, in early September, at the annual meeting of the Federal Reserve Bank of Kansas City held in Jackson Hole, Wyoming, results presented by relevant researchers showed that although there have been changes in global trade patterns, the U.S. supply chain still heavily relies on China, albeit not directly. The U.S. dependence on the Chinese supply chain has shifted from overt to covert, but it still has a long way to go before truly breaking away from this dependence.

Such optimistic commentators believe that whether it’s “decoupling” or “de-risking,” whether Western preference leans towards “nearshore” or “offshore” outsourcing, the U.S. and the West have no way to completely free themselves from dependence on the Chinese supply chains, hence unlikely to pose a major negative impact on China.

In contrast to these views, Mr. Kung Chan has pointed out that the process of deglobalization will be lengthy and complex. Moreover, the industrial chain adjustment process will not proceed straightforwardly. Regarding the current wave of industrial chain adjustments, the most effective summary of its phased characteristics is not simply “nearshore” or “offshore,” but rather a concept called “close produce”, which combines certain characteristics of both and presents a considerably diverse form. This concept was first proposed by Mr. Kung Chan in 2022 and serves as a macroscopic tool for understanding and analyzing the industrial chain adjustments in the process of deglobalization.

It is worth noting that “close produce” is a macro concept, not a micro-production concept. It involves the layout of industries and enterprises, as well as issues related to supply chains. Nearshore outsourcing, which became popular around 2020, primarily refers to the study of trade phenomena between the U.S. and Mexico. It can be seen as research based on the North American Free Trade Agreement (NAFTA); hence it has characteristics of regional phenomenon studies rather than being comprehensive.

Mr. Kung Chan’s concept of “close produce” focuses on one of its main characteristics, which is the strong emphasis on the common order between the supply side and the demand side. This common order represents and reflects consistency in aspects such as finance, law, and ideology. The previous production methods of multinational companies did not fully consider this prerequisite condition, which has caused significant problems today. The impact of geopolitical conflicts, in essence, lies in the lack of respect for this common order or the absence of it altogether.

The second characteristic of the “close produce” concept is the attention to improving production efficiency. The so-called “super factories” are now not uncommon, which means that large-scale production aimed at the global market can be conducted in relatively small economies or production environments. As a result, new geopolitical production relations will be formed.

The third characteristic of it is that it helps reduce costs. The idealized production mode of multinational corporations, which involves global layout and networked production, becomes unsustainable as globalization collapses. Frequent geopolitical conflicts, intense confrontations among major world powers, and bloody wars between countries lead to excessively high and unstable production costs. The disruption of the global automotive industry’s supply chain during the COVID-19 pandemic is frightful enough for many, and it is doubtful if the old way of production can continue. After all, such high production costs are unbearable.

Another characteristic is the close relationship between production centers and consumption centers, with close contact and interaction, enabling efficient communication and response between supply and demand ends in the production layout of “close produce, thus minimizing the risk.

The fifth characteristic is that “close produce” can create the possibility of integration between supply and demand ends. This integration is a phenomenon of integration beyond physical distance. It does not necessarily require countries to be physically adjacent like the U.S. and Mexico. With Argentina’s liberalization reforms, industrial cooperation between the U.S. and Argentina may further strengthen. On the other hand, although the distance between the U.S. and India is far, the production relationship between these two countries is becoming much closer. Therefore, distance is not an issue for integration.

The last characteristic of “close produce” is that the era of “market for technology” is over, and the conditions for exchange have undergone tremendous changes. With the existence of global logistics and the widespread adoption of intelligent logistics, there is no longer a need for a physical global layout. Goods produced in Mexico can be directly sold to countries around the world. In the future, it will be increasingly rare to see situations where production is specifically set up in China for the purpose of selling products unless under extreme circumstances. Tesla is actually an extreme case, and it is entirely possible for it to divest from China like other foreign investments.

In the new global industrial layout, due to the participation of many Chinese companies, there is even talk of a “fifth wave of industrial transfer”. This concept and proposition have limited utility and may even be misleading for understanding the current industrial trends because the involvement of Chinese companies is essentially a transitional phenomenon.

At first glance, many of the industrial chains that are currently being relocated still have a very close association with production in China. Take India, for example; while Apple vigorously promotes the construction of the iPhone industry chain in India, where nearly 90% of the components used in iPhones manufactured in India come from Mainland China, with items such as brackets, industrial adhesives, screws, mesh, pressure-sensitive adhesives, and metal parts are all shipped from China. Similar situations exist in the steel industry in India, as well as in countries like Vietnam. However, it is worth noting that most of these outwardly relocated industrial chains associated with China are mainly in the middle to lower reaches of the manufacturing industry and do not involve core technological areas. This means that the production of these products does not face any truly challenging barriers. Workers in the recipient countries can master the required technology through relevant training and can independently produce without relying on supply from Chinese domestic enterprises. For example, in the steel sector, India, which has long relied on Chinese products, has successfully transformed into a net exporter of steel; in the field of solar panels, Indian companies have already begun competing with Chinese companies in South Asia.

With the continued outward migration of industrial chains, and considering the serious geostrategic conflicts with China in many recipient countries like Vietnam, it is an inevitable policy choice to expedite the digestion and achieve the independent operation of the relevant incoming industries. What China was able to achieve during its past poverty-stricken era, there is no reason to doubt that other countries cannot achieve the same now. Therefore, the notion of a “fifth wave of industrial transfer” aiding Chinese companies in regaining a foothold in foreign countries and markets may be a somewhat wishful thinking.

“Close produce” may become an important tool for future geopolitical and geostrategic considerations due to its impact on both the supply and demand ends. If geopolitics and geostrategy can be likened to a superstructure, then “close produce” is the productive forces and production relations that constitute the economic foundation.

Zhou Chao is a researcher at ANBOUND