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Mentor’s Comment: UPSC mains have always focused on China as a threat to the USA (2021), and China is using its economic relations and positive trade surplus as tools (2017).

In mid-January, reports said China blocked its engineers and technicians from working at Foxconn in India and recalled those already there. It also restricted exports of key manufacturing equipment, which China dominates. While Foxconn brought in Taiwanese workers, the lack of equipment is a bigger challenge. This move threatens India’s goal of becoming a global manufacturing hub.

Today’s editorial discusses challenges arising from China’s dominance in the global supply chain. This topic is relevant for GS Paper 2 and GS Paper 3 in the UPSC Mains.

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Let’s learn!

Why in the News?

Recently, China has stopped its engineers and technicians from travelling to work at Foxconn’s facilities in India.

How is China using e-supply chains as a strategic tool?

• Monopoly Over Critical Manufacturing Equipment: China dominates the production of high-tech manufacturing equipment required for semiconductor and electronics production. Example: In early 2024, China restricted the export of specialized manufacturing machinery to Foxconn in India, slowing down iPhone assembly and production.
• Control Over Key Raw Materials: China holds a significant share of the global supply of rare earth elements (REEs) essential for electronics, EV batteries, and defense technology. Example: In 2023, China imposed export restrictions on gallium and germanium, two critical metals used in semiconductor and military applications, impacting global supply chains.
• Workforce and Knowledge Transfer Restrictions: By preventing its engineers and skilled technicians from working in foreign manufacturing hubs, China restricts the transfer of tacit knowledge to competitors. Example: Chinese engineers working at Foxconn’s Indian facilities were recalled, creating a skills gap that affected Apple’s production capacity.
• Disrupting Supply Chains to Gain Geopolitical Leverage: China can manipulate logistics, trade policies, and export restrictions to pressure countries and corporations dependent on its supply chains. Example: During the U.S.-China trade war, China imposed export controls on key components for companies like Huawei and Apple, demonstrating its leverage in global electronics production.
• Deep Integration into Global Manufacturing Networks: Through initiatives like the Belt and Road Initiative (BRI) and heavy investments in industrial zones, China ensures that multinational corporations remain reliant on its supply chains. Example: Despite U.S. sanctions, companies like Tesla and Apple continue significant operations in China due to its well-integrated and cost-effective supply chain ecosystem.

What are the risks and vulnerabilities posed by China’s control over e-supply chains?

• Disruptions to Critical Industries: China’s dominance in semiconductor manufacturing, rare earth metals, and electronics components makes other nations vulnerable to supply chain shocks.
  • India depends on China for over 75% of electronic components, affecting smartphone and telecom industries. The 2020 global chip shortage, worsened by China’s export controls, severely impacted industries like automobiles, defence, and consumer electronics.
• Geopolitical and Economic Coercion: China can weaponize supply chains to exert diplomatic pressure or punish countries for political disagreements.
  • Post-Galwan clash (2020), India faced delays in customs clearance for Chinese goods, disrupting industries reliant on imports.
  • Lithuania faced trade restrictions in 2021 after allowing a Taiwan representative office, showing how China uses supply chains as leverage.
• Vulnerability in Strategic Sectors (Telecom, Defense, Energy): Dependence on Chinese technology in strategic sectors poses risks related to cybersecurity, espionage, and sabotage.
  • India banned Huawei and ZTE from 5G trials due to concerns over data security. The U.S. and EU have imposed restrictions on Chinese telecom firms citing national security threats.
• Supply Chain Manipulation and Price Volatility: China’s control over rare earth metals, batteries, and semiconductors allows it to manipulate prices and supply.
  • Despite efforts to develop local lithium-ion battery production, India still relies on China for key materials, affecting the EV sector. In 2023, China restricted gallium and germanium exports, leading to price spikes for these critical semiconductor materials.
• Stifling Competitor Growth and Technological Dependence: China restricts the transfer of critical machinery and skilled labor to competitors to maintain its manufacturing edge.
  • China’s ban on engineers working in Indian Foxconn plants and export curbs on key equipment have slowed India’s smartphone manufacturing expansion. U.S. firms like Apple, Tesla, and Intel remain dependent on China’s supply chains, despite attempts at diversification.

How can countries and companies safeguard themselves from China’s influence over e-supply chains? (Way Forward)

• Supply Chain Diversification (China Plus One Strategy): Countries and companies should expand production to alternative locations to reduce reliance on China.
  • Example: Apple is shifting iPhone production to India, Vietnam, and Mexico to mitigate risks from China. The U.S. has passed the CHIPS Act (2022) to boost domestic semiconductor manufacturing and reduce reliance on Chinese supply chains.
•  Strengthening Domestic Manufacturing and R&D: Governments should invest in local industries, incentivize component manufacturing, and build advanced R&D ecosystems.
  • Example: India’s Production-Linked Incentive (PLI) Scheme supports domestic electronics and semiconductor manufacturing. Japan and South Korea are increasing investments in semiconductor fabs to reduce dependence on China.
•  Forming Strategic Trade Alliances and Technology Partnerships: Nations should collaborate on trade agreements and secure alternative sources for critical materials and technology.
  • Example: India, the U.S., Japan, and Taiwan are working together under the Chip 4 Alliance to strengthen the semiconductor supply chain. The EU-U.S. Trade and Technology Council (TTC) is securing alternative semiconductor and rare earth suppliers.