COVID-19 and the Future of China Sourcing and Manufacture
The disruption to global supply chains caused by Beijing’s decision to close factories and lock down cities to contain COVID-19 has jolted Western companies into rejigging their supply chains, with economists predicting that globalisation as we know it will never be the same again.
But global dependence on Chinese manufacturing is mind-boggling…
Dun & Bradstreet researchers, for example say 51,000 companies, 163 of which are in the Fortune 1000, have “tier 1” suppliers in China, while at least 5 million have one or more “tier 2″ suppliers.
The overriding reason for this China-dependence is the cost factor, and weaning manufacturing away from that country comes at a hefty price. In this article, we take a quick look at one possible approach which could help to mitigate against any future widespread supply chain shocks.
Factors That Could Complicate Departure From China
Apart from the enormous costs involved, many other factors weigh against moving manufacturing out of China to other Asian countries, or even further afield:
- Other potential manufacturing hubs often lack parts and materials needed for production.
- Factories in developing countries, where costs would be lower, don’t have the technology or trained workforce to cope with modern demands.
- Many countries lack stable political and/or economic systems.
- Infrastructure, such as rail networks and port facilities, is often weak in other countries.
- China produces most raw materials used in product manufacturing, so even if companies move product assembly elsewhere part of their supply chain will remain in China.
Despite these factors, some companies had begun shuffling their supply chains even before the COVID-19 disease erupted in December, due to uncertainties caused by the US-China trade dispute.
Many large companies have now begun implementing a China + 1 strategy, under which they maintain high-tech, precision manufacturing in China but rope in manufacturers in other countries to handle other parts of their supply chains.
Alternative Manufacturing Hubs: Asia’s Promise
Other Asian countries are the first choice in ‘plus 1’ hubs because, while manufacturing costs are higher than in China, they are still significantly lower than those in Western countries.
Each country comes with a range of specific pros and cons:
India
The Pros: Large population, which means unlimited labour and a sizable market for manufactured goods.
The Cons:
- Infrastructure not as developed as China’s.
- Very regulated economy.
- Labour lacking skills in high-tech manufacturing.
Vietnam
The Pros:
- Geographically close to China, with its raw materials and manufactured components.
- High-tech manufacturing infrastructure in place.
- Stable political environment.
- Many Japanese companies are already manufacturing in Vietnam.
The Cons:
- Relatively small workforce.
- Limited capacity of ports to handle exports.
Indonesia
The Pros:
- Large population and therefore vast market potential.
- Stable economy focused on manufacturing.
The Cons:
- Weak infrastructure.
- Unstable government.
- Religious tensions.
Thailand
The Pros:
- Infrastructure in place for high- and medium-tech manufacturing.
- Government investing in education and infrastructure.
- Stable economy.
The Cons:
- Relatively small workforce.
- A tendency toward political instability.
- Somewhat prone to natural disasters.
Malaysia
The Pros:
- Low labour costs, on a par with China.
- Well-educated English-speaking office staff.
- Experienced engineers on tap in neighbouring Singapore.
- No export tax.
The Cons: Highly dependent on imports of raw materials and machinery.
Taiwan
The Pros:
- Strong supply chain and logistics culture.
- Skilled labour force for engineering and manufacturing.
- High levels of productivity.
- Taiwanese firms dominate the world’s electronics manufacturing and lead the way in Original Design Manufacture (ODM). Brands such as Apple, HP, and Siemens rely heavily on Taiwan’s ODMs.
Taiwan stands out as an example of a country that managed to contain the Coronavirus without resorting to an economy-wrecking lockdown. And the strategy has paid off: Where China saw industrial production plunge 13.5 percent year-over-year in February, Taiwan posted a 21.12 percent increase year on year.
The Cons:
- High labour and overhead costs
- One-China policy hampers global trade.
The Looming Recession and Consumer Sentiment
Economists are warning that the pandemic has triggered a drastic decline in world output and that a deep economic slump and financial collapse worse than the 2008 global economic crisis are unavoidable.
With small businesses in particular under threat, politicians and economists alike are urging consumers to ‘buy local’ while at the same time activists, citing Beijing’s human rights record and its perceived weak handling of the Coronavirus crisis, are ramping up their ‘boycott China’ campaigns.
As a result of these factors, Western consumer sentiment is expected to veer away from made-in-China high-ticket items and durable goods, at least in the short term. Sales of smartphones, TVs, appliances, and cars are likely to take a hit in 2020, according to Forbes.
A rebound is likely once the pandemic has been sufficiently contained, but if the trend away from Chinese products becomes the ‘new normal’, supply chains, especially those of smaller businesses, may well find it worth their while to adopt the ‘buy local’ mantra.
That said, companies already deeply ensconced in raw-materials and manufacturing partnerships with Chinese providers, might not have an easy time responding to political, economic, or societal sentiment, even if they wish to.
Why Breaking up with China is so hard to Do
It will take a brave company to pack up operations lock, stock, and barrel in China, not least of all because, despite the pandemic, it remains the most cost-effective, proficient manufacturing hub in the world.
Furthermore, Chinese suppliers may not look too kindly on the loss of business and may make it difficult for such enterprises if they need to source Chinese-made components or raw materials in their future operations.
Then there is the cost of packing up and shipping machinery, moulds, and equipment to a new location, as well as the need to deal with staff reductions and a tangle of bureaucratic procedures.
But for companies wary of how the China-US trade dispute will play out, and those wanting to be well prepared for major supply chain upheavals somewhere down the line, splitting manufacturing across multiple countries is a necessity rather than a supply chain luxury.
It certainly seems at this point then, that the China+1 strategy could shape up to be the shrewdest post-pandemic business strategy around.
