Will the coronavirus pandemic be the final nail in the coffin for China’s manufacturing dominance?
- While some labour-intensive supply chains and those that target the US market may move out of China, sophisticated manufacturing clusters related to electronics and the internet of things are not easy to replicate quickly
A March survey by the American Chamber of Commerce in South China indicates that all 237 respondents have seen their supply chains affected, and 15 per cent of respondents were already out of some supplies.
Soon after, US National Economic Council director Larry Kudlow suggested that the White House should “pay the moving cost” of American companies wanting to get out of China.
American Factory boss says virus will change China’s role in supply chain
In early April, US journalist Daniel Greenfield wrote in an article, titled “Pandemic hardening can make America great”, that Covid-19 would lead to a “re-ruralisation” of the US. Instead of massive malls selling a plethora of “Made in China” goods, smaller businesses would sell products made locally for “a more decentralised shopping experience”.
The third type involves a myriad of suppliers, often located in clusters, to support a main manufacturer, which needs to optimise cost-effectiveness, quality, timeliness and responsiveness. Achieving optimum performance requires an agile combination of scale, operational efficiency and technological sophistication in development, design, testing and prototyping.
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Designing and maintaining this sort of sophisticated supply chain is not a trivial matter. Manufacturers in China, including their supplier clusters, often with local governmental support, have built this system up over several decades.
In our conversations with clients, we found that senior executives of many global multinationals are now focused on ensuring their companies’ operational stability and cash flow sustainability. They have no immediate plans to leave China.
These perspectives echo a March survey by the American chambers of commerce in Beijing and Shanghai and consultancy PwC, which found that most US firms in China have no plans to relocate production elsewhere. Likewise, according to Jörg Wuttke, head of the European Union Chamber of Commerce, European manufacturers are also “not eager to exit China”.
Multinationals take their China strategy very seriously and won’t rush into a decision without evaluating several factors, including the post-pandemic global order and the changing nature of globalisation. Of course, for many global executives, the political overhang on top of the pandemic-derived arguments triggers emotional responses and sometimes bewilderment.
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With the emergence of cloud technologies, industrial internet and automation, the future of manufacturing will become more intelligent and distributed, potentially resetting how companies optimise their global manufacturing footprint.
China is likely to remain the core manufacturing hub, or one of the core hubs, for multinationals with the third type of supply chain.
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China’s manufacturing industry is suffering from core technology bottlenecks, such as in semiconductor chips. The country is currently a key purchaser from US chip makers such as Nvidia, Intel and Qualcomm, contributing a large portion of their total revenues. Nonetheless, China is expected to up the ante in the future to address these bottlenecks.
Looking ahead, we will see a surge in demand for digital infrastructure, built using technologies such as cloud services, the internet of things, artificial intelligence, 5G and blockchain technology, as the backbone of China’s next-generation smart cities.
We are unlikely to see a mass exodus of foreign companies from China. Most will carefully evaluate their strategy, both globally and with China at its core. In a new world order, which will combine globalisation with some degree of regionalisation and localisation, as well as some “reshoring”, companies need to adapt strategies and recalibrate global supply chains.
The post-pandemic “new normal” in China will continue to offer multinationals new opportunities in innovation, investment and fresh demand patterns.
Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China