Logisticians: Are you prepared for war in the South China Sea?

It would be difficult to overestimate the threat to logisticians' best laid plans for trade with Asia than the worsening relations between China and its neighbours over the former's illegal territorial claims to 'islands' it has developed from reefs and shoals in the South China Sea, around which there may be rich reserves of oil and gas. These 'islands' are up to 650 miles from China's coast but less than half that from other nations like the Philippines and Vietnam who are also claiming rights over the Spratly and Paracel islands.

The permanent court at the Hague recently ruled against China's so-called nine-dash line that lays claim to almost all of the South China Sea, through which about US$5.5 trillion of sea-borne trade passes every year, but China has intimated that it has no intention to respect the Hague's rulings. The sabre rattling has consequently risen. The AFP, for example, reported that a Beijing minister urged preparations for a "people's war at sea."

China's state-backed media is awash in bluster over the subject of their military and sovereignty. China's Global Times even went so far as to challenge Australia directly, saying: "If Australia steps into the South China Sea waters it will be an ideal target to warn and strike. Lian Fang, a professor at the military-run National Defence University, said: "The Chinese military will step up and fight hard and China will never submit to any country on matters of sovereignty."

Beijing has even gone so far as to unilaterally announce a "no sail zone" in international waters which directly violates international maritime laws. Such Chinese insouciance will undoubtedly invite a response from the US Government whose Navy regularly patrols the South China Sea where it now faces new militarised islands.

"The People's Liberation Army is ready," a military source told Reuters. "We'll go in and give them a bloody nose like Deng Xiaoping did in Vietnam in 1979". Not all Chinese commentators are such belligerent sabre rattlers. One Chinese source seemed especially aware of the potential catastrophe of a shooting war which could so easily emerge from the military posturing. In a statement to Reuters he said: "We cannot take on the Americans. We do not have the technology yet," implying that when they do the risk of unpleasantness will rise. He want on: "The people who would suffer would be the ordinary Chinese." But the problem is that in the Chinese psyche losing face is worse than losing honour and irrespective of the enormity of a hot war it would not take much to tip the Chinese government hotheads over the edge.

If wise counsel prevails the Chinese authorities will realize that globalisation of trade has made them more interdependent on foreign markets to sustain the growing ambitions of ordinary Chinese people who want nothing more than to be left alone to scratch an honest living in an atmosphere that nurtures working people's labour conditions. China has enough internal problems from unsustainable debt levels to rising discontent among the people over living conditions (Google my blog: China facing a double bust?). If that were not bad enough, there is always Nature preparing for the next costly disaster through earthquakes and typhoons.

In my blog of June 2015 headed: "Should China's South China Sea ambitions be thwarted?" I warned that "The potential of the rising tension has huge implications for global logistics that stretches far beyond the cost of higher insurance and the re-routing of ships to avoid the South China Sea." Since then, the tension has risen sharply and so logisticians should review their South-East Asia supply pipelines by making sure they have robust plan Bs in the event of supply disruptions. This could mean having alternative supply centres ready to swing into action, especially given the amount of trade flows geared to JIT deliveries. Logisticians, for example, might like to consider sourcing their rare earths from outside of China, which dominates the market. Another precaution could be a temporary increase in component stocks until signs of tension have eased, even if that does mean rising costs.

The alternative, if push comes to shove, could be a re-run of the 2011 Japanese tsunami chastisement in which the asininity of western corporations over reliance on Japan for 100 key products geared to JIT deliveries left car plants and other industries around the world idled for want of parts, incurring multi-billion pound losses in sales and profits.
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