Some factories may leave China, but the big picture doesn’t matter

China still holds the cards in the global supply chain, regardless of whether the coronavirus lockdowns will set back companies in the short term. An employee works on a 5G smartphone screen production line at a factory in Ganzhou, Jiangxi province, China, on May 13, 2022.

Zhu Haipeng | Visual China Group | Getty Images

BEIJING — China still holds the cards for global supply chains, whether or not Covid lockdown frustrates businesses in short term.

Companies and analysts have discussed moving factories out of China for years, especially as labor costs climb and U.S.-China trade tensions worsen.

The pandemic has rekindled those conversations. Foreign companies talk about how easily executives can travel to factories in Southeast Asia, not China. Some pointed to the surge in Vietnamese exports as a sign that supply chains are moving away from China.

Supply Chain Diversification It’s very tricky because people talk about it all the time and boards love to talk about it, but often at the end of the day, people find it difficult to implement,” said Nick Marrow, global trade director at the Economist Intelligence Unit.

When companies had these discussions in 2020, it turned out that “China can stay open while Malaysia, Vietnam are offline,” Maro said. “Really, the key factor now is how China plans to maintain these [Covid] As the rest of the world opens up, take control. “

China’s so-called zero-virus strategy of rapid lockdowns has helped the country quickly return to growth in 2020.However, the implementation of these measures has been tightened, especially this year China faces Covid resurgence in Shanghai and the rest of the country.

‘Major’ interest in Vietnam

Numerically, China’s exports up 3.9% in April Compared with the same period last year, it was the slowest pace of growth since June 2020, when it rose 0.18%, according to official data obtained through Wind Information.

Wind showed Vietnam’s exports rose 30.4% year-on-year in April, compared with a nearly 19.1% year-on-year increase in March.

Vishrut Rana, a Singapore-based economist at S&P Global Ratings, said in a telephone interview that the level of interest in Vietnam’s manufacturing sector is “very important.” “Vietnam has become a very critical supply chain node for consumer electronics.”

China remains the center of the Asia-Pacific electronic network.


Economist, S&P Global Ratings

But Vietnam’s exports totaled $33.26 billion in April, about one-eighth of China’s total global exports of $273.62 billion for the month, according to Wan De.

“From China’s perspective, the withdrawal of local manufacturing is not enough to really change China’s role in the overall supply chain,” Rana said. “China remains the center of the Asia-Pacific electronic network.”

Companies are still investing in China

In the first four months of this year, direct investment in China rose 26.1 percent year-on-year to $74.47 billion, China’s Commerce Ministry said on Thursday. During this period, investment from Germany increased by 80.4%, while investment from the United States increased by 53.2%.

By contrast, foreign direct investment in Vietnam in the first four months of this year fell 56 percent year-on-year to $3.7 billion, Wind data showed. Foreign direct investment from the United States fell 14%.

China’s recent coronavirus lockdown has slowed the ability of trucks to move goods across the country, while many factories in the Shanghai area have limited or shut down production for several weeks. The picture shows the workshop of a textile company in nearby Jiangsu province.

Chief Financial Officer | Future Publishing | Getty Images

“It’s hard to match the size and scope of supply chains outside China right now,” Rana said. He added that only supply chains for very specific products – such as semiconductors or electric vehicle parts – could be diverted to Vietnam, Malaysia or other countries.

The supply chain dominance that China has built over the years is also supporting new business models.

One of them is better known as Shein. Backed by funds such as Sequoia Capital China, the company has combined big data analytics with its supply chain network in China to become an international e-commerce giant in low-cost fast fashion.

“China’s supply chain advantage is not just based on labor costs,” James Liang, managing partner of Skyline Ventures, said in a Mandarin translation from CNBC.

According to his analysis, clothing and furniture makers spend at least 20 percent of their sales on labor costs, compared with just 5 percent for electronics makers.

China’s advantage lies in the benefit of having a supply chain hub, which Liang believes paves the way for companies to improve efficiency by consolidating all 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 clothing models. Other investment plans have been delayed due to Covid-related travel restrictions, he said.

‘A hesitant story’

The latest Covid lockdown has also slowed the ability of trucks to move goods across China, while many factories in the Shanghai area remain closed. Limited or no production weeks. This is on top of Beijing’s policy since 2020 requiring two to three weeks of quarantine upon arrival in China — if travelers can book one of the few flights.

Joerg Wuttke, president of the European Union Chamber of Commerce in China, said in a webinar that moving operations out of China will be difficult, but “our surveys show that investment in China will decline, while investment in Southeast Asia will decline. Investment will increase.”

He noted that it is now much easier to fly executives to Singapore or other countries in the region than to China.

Nearly a quarter of 372 respondents to a survey by the European Union Chamber of Commerce in China in late April said they were considering shifting current or planned investments to other markets due to the latest Covid control measures.

But 77% said they had no such plan. Survey of U.S. Businesses in China Similar trends were found.

The EIU’s Marro said the findings showed that “companies don’t want to get out of the market, but they don’t know what to do”. “It’s more of a hesitant story now.”

“Foreign companies will be uncomfortable with these [zero-Covid] policy, but at the end of the day, not many companies will jeopardize their position in a decades-long market with a temporary shock,” he said.

Read more about China from CNBC Pro

Even companies like StarbucksThe company suspends guidance due to the unpredictability of Covid, but still says Its China business is expected to surpass that of the U.S. in the long term.

Many analysts expect China may begin to loosen its zero-virus policy after a political shake-up in the fall.

When asked on Thursday about the EU Chamber of Commerce’s findings, China’s Ministry of Commerce only mentioned the global impact of the pandemic on supply chains. The Ministry of Commerce also said that China will improve foreign investment services and increase foreign investment opportunities.

“Reconfiguring the supply chain is not as easy as turning the lights on and off,” said Stephen Olson, a senior fellow at the Hinrich Foundation.

“Certainly, if the lockdown drags on indefinitely, the chessboard will be reconfigured,” he said. “In this scenario, companies will be under pressure to consider shifting supply models, and the economic and commercial implications of doing so will look more favourable.”

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