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When China’s Supply Chains Break, so Will the Delusion the U.S. Economy Is Invulnerable

When China’s Supply Chains Break, so Will the Delusion the U.S. Economy Is Invulnerable

Was it ever plausible that China’s economy could grind to a halt and there wouldn’t be any consequences for the U.S. economy? No.

Many commentators talk about supply chains in China, but how many have actually visited factories in China, other than carefully choreographed PR visits to suitably high-tech facilities? I’ve visited many factories in China, and not with a staff of minders who swiftly guide the visitors through the happy story of high-tech wonderland.

I’ve visited some high-tech facilities but also many low-tech factories, where most of the supply chain originates, usually with one or two bored local government functionaries. You get a much less distorted view of the supply chain on the ground, away from the carefully guided tours.Since we weren’t important visitors, nothing was staged. Workers glanced at us, as in what are they doing here?, but otherwise we simply observed everyday operations.

As I’ve reported here for a decade, profit margins in the vast majority of these supply chain companies are wafer-thin, with 1% being bandied about as a typical profit margin. Due to the extremely distorting way imports and exports are recorded, as little as $10 of every $400 iPhone “imported” from China actually stays in China as wages, overhead and profit. We estimate China only makes $8.46 from an iPhone.

Most of the high-value components are manufactured elsewhere in the world, and all the profit and overhead flows to Apple HQ in Cupertino, California.

The reality is that much of the supply chain is at risk of financial collapse. Many if not most of the thousands of spontaneous protests in recent years in China are not political; they’re workers demanding back pay or promised bonuses from shuttered supply-chain companies.Here’s how bankrupt supply-chain factory owners deal with bankruptcy: they leave in the middle of the night and vanish.

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