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Last Updated : May 21, 2020 03:24 PM IST | Source: Moneycontrol.com

The COVID-19 zeitgeist: Notes from China on supply chain realignment

Even as the coronavirus steadily claims more lives across the world, there has been talk of a trade impact in terms of a diversification of the supply chains away from China.

Moneycontrol Contributor @moneycontrolcom

Sumeet Chander

Social media forwards from outside China proclaiming the need to re-shore or nearshore manufacturing and supply chains out of China have been rising in recent weeks.

Yet, the ground reality from within China looks a little different. Last week, a senior executive who manages the supply chain for an automotive major mentioned how ‘there is a huge disconnect between what politicians outside China speak and the business realities on the ground’.

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So, exactly what are those business realities on the ground? China retains its steadfast determination to keep its business. Let me start with my own experience.

We moved our office within Shanghai (it was a pre-planned move as we needed to move to a better facility for the team) during the Labor weekend around May 1. After barely a fortnight (May 15), government officials from the district where we were previously located visited us with a bouquet of flowers and cake to wish us well for our future. They hoped that we would be back in the old district at some point.

Such pleasant surprises are quite unlikely in most other countries which are vying for a slice of the global supply chains. Of course, China has its share of inefficiencies. And now China is battling a heightened perception of risk in the Covid-19 world. Despite being the factory of the world, China and its government retain their hunger for more. That counts for something.

As a business, whenever we have had meetings with Shanghai government officials, most times, we have emerged from these meetings smiling. Recently, when we resumed work we had reached out to one of the local Shanghai government organizations for help in arranging masks for our team members. We received a supply of 5,000 high quality masks within a couple of days.

That has not been an experience exclusive to Evalueserve. Electric mobility company, Tesla witnessed stark differences while re-starting their manufacturing plants in Shanghai and California. And no points for guessing which was a better experience.

If we look at the COVID-19 pandemic and resultant disturbance from the perspective of manufacturing firms, China had the shortest break (2-4 weeks for most provinces with a few exceptions) before manufacturing lines started humming again.

Over the last two decades, China has established an ecosystem for the supply chains of different industries. At this juncture, no other country has such an ecosystem. Or the associated physical and technology infrastructure which is often better than a lot of first world countries.

As a result, the business imperatives for manufacturers to do a wholesale lift-and-shift of manufacturing out of China are very low. And they are weakened further by the diligent and proactive approach of the Chinese authorities.

Most of the regional governments have announced policies to help firms offset rental costs; waive off or halve a part of the social security contribution for firms for a period of time. Our social security bill has reduced significantly for the second quarter of the year. Many firms have access to low interest rate loans and some sectors have access to huge incentives.

The ultimate clincher is likely to be the heft of China’s large and growing market. For a lot of industries, China is the largest or second largest market in the world.

That, however, does not mean that no re-alignment will take place. Some areas where I see change:

Most countries will identify certain strategic industries where they would like to move manufacturing on-shore. Biggest example would be healthcare-associated businesses. Many countries would want  on-shore manufacturing for personal protective equipment, critical care equipment and medicines. Countries will prioritize these strategic investments with subsidies, even if they remain sub-scale.

China has been going up the cost curve over the last decade due to trade tensions and cost increases. Some low value added manufacturing had already moved to other geographies such as South East Asia (Vietnam, Thailand) or South Asia (Bangladesh, India, etc.). This trend would only continue.

Many firms will also choose not to rely on a single geography for all their supplies – they would want to de-risk their business through geographical diversification while continuing with China as their primary location.

Another point of note is that financial stress that most businesses are facing right now will constrain their ability to execute on alternative locations. At least, in the short term.

The bogey of rising anti-China sentiment among consumers across the world too is unlikely to sustain for long. Consumers, ultimately, are rarely eager to pay higher prices for similar quality products. Somebody will have to bridge the gap of higher prices. I do not see either consumers, producers or governments doing it longer term. Government coffers across the world are already under strain and they would rather spend money onshoring strategic industries. This movement of ‘shunning of Chinese goods’, thus, does not have very steady legs.

(The author is Country Head, Greater China, Evalueserve, a leading analytics partner that helps companies with management and business processes across all functions. Based in Shanghai, Chander plans to share his perspective of the world's second-largest economy in a series titled 'The COVID-19 zeitgeist'. This is the third of his post-lockdown articles from Shanghai in China)

You can read the first part here and the second part here.

Follow our full coverage of the coronavirus outbreak here

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First Published on May 20, 2020 05:36 pm
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