China still holds the cards for global supply chains, whether or not Covid lockdowns frustrate businesses in the short term. An employee works on the production line of screens for 5G smartphones at a factory on May 13, 2022 in Ganzhou, China’s Jiangxi province.
Zhu Haipeng | Visual Group China | Getty Images
BEIJING — China still holds the cards for global supply chains, whether or not Covid lockdowns frustrate short-term businesses.
Companies and analysts have been discussing moving factories out of China for years, especially as labor costs have risen and trade tensions between the United States and China have escalated.
The pandemic has reignited these conversations. Foreign companies talk about how executives can easily travel to factories in Southeast Asia, but not to China. Some cite Vietnam’s increased exports as an indicator that supply chains are leaving China.
“Supply chain diversification is quite tricky because people always talk about it and boards love to discuss it, but often, in the end, people find it difficult to implement,” said Nick Marro, head of global trade at The Economist Intelligence Unit.
When companies had these discussions in 2020, it turned out that “China could stay open, while Malaysia and Vietnam disconnect,” Marro said. “Really, the critical factor right now is how China plans to maintain these [Covid] control as the rest of the world opens up.”
China’s so-called zero-Covid strategy of rapid lockdowns helped the country quickly return to growth in 2020. However, implementation of these measures has since tightened, particularly this year as China makes facing a resurgence of Covid in Shanghai and other parts of the country.
“Significant” interest in Vietnam
In numbers, China’s exports rose 3.9% in April from a year earlier, the slowest pace since a 0.18% increase in June 2020, according to official data accessed via Wind Information.
By contrast, Vietnam saw its exports jump 30.4% in April from a year ago, after rising nearly 19.1% year-on-year in March, Wind showed.
The level of manufacturing interest in Vietnam is “very significant,” Vishrut Rana, Singapore-based economist at S&P Global Ratings, said in a phone interview. “Vietnam has become a key supply chain node for consumer electronics.”
But Vietnam’s exports totaled $33.26 billion in April, about one-eighth of China’s $273.62 billion in global exports that month, according to Wind.
“From China’s perspective, moving away from local manufacturing will not be significant enough to really change the nature of China’s role in the global supply chain,” Rana said. “China always remains at the very center of the electronic network in APAC.”
Companies are still investing in China
In the first four months of the year, foreign direct investment in China rose 26.1 percent year on year to $74.47 billion, China’s Ministry of Commerce said Thursday. During this period, investments from Germany jumped by 80.4%, while those from the United States increased by 53.2%.
In contrast, Vietnam saw a 56% year-on-year decline in foreign direct investment to $3.7 billion in the first four months of the year, according to data from Wind. Foreign direct investment from the United States fell by 14%.
China’s latest Covid lockdowns have slowed the ability of trucks to haul goods across China, while keeping many Shanghai-area factories at limited or no production for weeks. Pictured is the workshop of a textile company in neighboring Jiangsu province.
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“It’s very difficult to match the scale and reach of Chinese supply chains outside of China at the moment,” Rana said. Only supply chains for very specific products – like semiconductors or electric vehicle parts – could shift to Vietnam, Malaysia or other countries, he added.
China’s supply chain dominance, built over years, also supports new business models.
One of the best known is Shein. Backed by funds such as Sequoia Capital China, the company has combined big data analytics and its supply chain network in China to become an international e-commerce giant in fast, low-cost fashion.
“China’s supply chain advantage is not just about labor cost,” said James Liang, managing partner of Skyline Ventures, in Mandarin translated by CNBC.
According to his analysis, at least 20% of the selling price of clothing and furniture manufacturers is spent on labor costs, compared to only 5% for electronics producers.
China’s advantage is the advantage of having supply chain hubs, which Liang says paves the way for companies to increase efficiency by integrating all of their suppliers into one digital system.
He said his company invested $5 million in October in a furniture company called Povison, which is trying to replicate Shein’s model for clothing. Additional investment plans have been delayed due to Covid-related travel restrictions, he said.
“A Story of Hesitation”
The latest Covid lockdowns have also slowed the ability of trucks to haul goods across China, while keeping many Shanghai-area factories at limited or no production for weeks. This is in addition to Beijing’s policy since 2020 requiring a two or three week quarantine on arrival in China – if the traveler can book one of the few flights.
Moving operations out of China is difficult, but “what our survey indicates is that there will be less investment in China and more investment in Southeast Asia,” said Joerg Wuttke, president of the EU Chamber of Commerce in China, during a webinar.
He noted that it is now much easier to transport executives to Singapore or other countries in the region than to China.
Following the latest Covid checks, almost a quarter of 372 respondents to the EU Chamber of Commerce’s China survey at the end of April said they were considering moving current or planned investments to other markets.
But 77% said they had no such plans. A survey of American companies in China found similar trends.
These survey results indicate that “companies don’t want to exit the market, but they don’t know what to do,” said EIU’s Marro. “At the moment, it’s more a story of hesitation.
“Foreign companies are going to be unhappy with these [zero-Covid] policies, but at the end of the day, there aren’t many companies that are going to jeopardize their position in a decades-old market based on a temporary shock,” he said.
Even companies like Starbucks, which suspended forecasts due to the unpredictability of Covid, said they still expect their business in China to become larger than the United States in the long term.
Many analysts expect China to start easing its zero Covid policy after a policy reshuffle in the fall.
Asked about the results of the EU Chamber’s investigation on Thursday, China’s Ministry of Commerce noted only the global impact of the pandemic on supply chains. The ministry also said China will improve its foreign investment services and increase opportunities for foreign companies.
“Reconfiguring supply chains isn’t as easy as flipping a switch on and off,” said Stephen Olson, senior research fellow at the Hinrich Foundation.
“Of course the board would be reconfigured if the blockages drag on indefinitely,” he said. “In this case, the pressure will intensify on companies to consider changing supply models, and the economic and commercial implications of this decision will be much more favorable.”