Supply chain adjustment doesn't mean companies leaving China

Updated: September 21, 2020 Source: Xinhua Silk Road
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Both domestic and foreign-funded companies in China have been readjusting their supply chains amid dynamics in total costs, uncertainty in tariffs, vulnerabilities of globalized supply chain and governmental push for re-shoring. 

Still, part of supply chain shifting outside of the global manufacturing powerhouse doesn't mean companies are leaving China, according to experts. 

-- Globalization slows down  

The globalization of global supply chains over the past quarter century has improved economic efficiency, but at the cost of economic resilience and sustainability, said Mehran Nakhjavani, Partner and Emerging Market Strategist with MRB Partners recently. 

The COVID-19 pandemic, arriving on the back of the U.S.-China trade tensions, has clearly demonstrated the vulnerability of global supply chains, said Lucy Qiu, strategist at UBS Global Wealth Management, told Xinhua on Wednesday.

It is likely that some supply chain duplication will be necessary to improve resilience in the face of mounting policy risk, Nakhjavani told Xinhua. 

The rapid globalization phase of the past 20-30 years has come to an end, said Nakhjavani. The major driver of this phase was the rapid industrialization of China at a time of unprecedented regulatory harmony associated with the emergence of the World Trade Organization. Qiu also agreed that globalization will slow.

Still, protectionism and COVID-19 are not the underlying cause of the slowdown in globalization, according to Nakhjavani. 

Following the pandemic crisis, companies and governments will likely seek to diversify their supply chains or bring them closer to home, said Qiu. It doesn't necessarily mean on-shoring to high wage countries in Western Europe or North America, but perhaps Eastern Europe, Mexico, or other countries in Asia. 

For the next several years, global trade will no longer grow at a multiple of global domestic demand, but rather in line with it, said Nakhjavani, adding a future globalization wave is possible, but certainly not on a five-year view.  

Economies such as India and selected Southeast Asian or Sub-Saharan Africa countries could possibly emerge as future "workshops of the world" at a time when the perils of protectionism have again been understood, according to Nakhjavani. 

"Considering the high wage costs if companies decide to on-shore, we see automation and robotics as long-term beneficiaries of this trend," said Qiu.

Qiu added that the importance of multilateral trade and economic integration should in fact grow in light of the challenging growth environment amid COVID-19.

-- China plus one  

Amid higher labor costs and China's effort to climb up the value-added ladder, supply chains have been gradually shifting out of China. This structural trend is accelerated by U.S.-China trade tensions, not caused by them, noted Qiu.

With China increasingly striving to become self-reliant in high-value technology products like semiconductors and investing more in this area, low-end manufacturing should gradually leave the country, said Qiu. 

There is no evidence of any hollowing out of the Chinese industrial base, however, because much of the current supply chain targets the domestic and non-U.S. markets, Qiu said.

Industrial companies are not moving the supply chain outside of China, "but what they are doing something called China plus one," said Kevin Chen, chief economist of Horizon Financial told Xinhua recently. 

"So basically they want to keep their facilities in China. They want to tap into the huge market in China, but also to mitigate the risk," said Chen. 

Industrial companies will build the new factories outside of China in Vietnam, India, Malaysia, Italy and other countries, according to Chen.

U.S. companies remain committed to the China market, with 78.6 percent of companies reporting no change in their investment allocations, a 5.1 percentage point increase compared to 2019, according to a recent survey on 346 U.S. companies associated with AmCham Shanghai.

Business communities from Europe, China and the United States do want to be in one other's marketplaces regardless what's happening at the policy level, said Craig Stronberg, China analysis leader with PwC Intelligence of PwC U.S. at a recent panel discussion. 

"They want to be in China and many of them want to be in China to produce Chinese goods," said Stronberg referring to U.S. companies' operations in China.

In an increasingly multi-polar world economy, the primary strategic objective of any multinational corporation is to maintain a strong and competitive presence in each of the major economies like the U.S., EU, China, etc. in order to maintain market share, supply chains and regulatory approvals in each economic zone, said Nakhjavani.

One of the few corporate defenses against tit-for-tat sanctions and other protectionist measures is the leverage afforded in each jurisdiction by having a large domestic workforce, paying significant domestic taxes etc., according to Nakhjavani. 

Financial institutions also follow similar approach by going to China and investing a lot, but doing risk management by building other investment at the same time, according to Chen.

Editor: Ting Liu