News Analysis: Supply chain adjustment doesn't mean companies leaving China

Source: Xinhua| 2020-09-18 16:53:38|Editor: huaxia

by Xinhua writer Liu Yanan

NEW YORK, Sept. 18 (Xinhua) -- 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 reshoring.

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


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 Partner and Emerging Market Strategist with MRB Partners Mehran Nakhjavani 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, 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.

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 onshoring to high-wage countries in Western Europe or North America, but perhaps Eastern Europe, Mexico, or other Asian countries.

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

"Considering the high wage costs if companies decide to onshore, 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.


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 added.

Industrial companies are not moving the supply chain outside of China, "but what they are doing is something called China plus one," chief economist of Horizon Financial Kevin Chen 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 up 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 percent 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 of 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," said Stronberg referring to U.S. companies' operations in China, adding that they also want to produce Chinese goods.

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 United States, the EU, China and others 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, according to Nakhjavani.

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