Exit from China after corona? Think again.
By Henrik Bork
April 22, 2020
“Goodbye, China”?
The coronavirus crisis has ignited a new debate about an over-reliance of certain industries on China. Has the time come, especially for the manufacturing industry, to say farewell to China?
Many observers are predicting a more or less severe reorganization of global supply chains in the wake of the crisis. The shock of the initial shutdown of factories in China, then later of supply bottlenecks for ventilators and PPE (or “personal protective equipment”) like face masks have made the global dependency on “made in China” painfully obvious.
Exit from China?
It is understandable that many pundits are now predicting an “exit from China”. Yet, prognosis have a tendency to be unreliable, and this one may be another example. At the moment, the opposite seems more likely: The coronavirus crisis will slow down the exodus of manufacturers from China, at least in the short and medium term.
As I have been arguing in a recent edition of China Market Insider, the epidemic and the global economic crisis following widespread lockdowns mean that relocations will have to wait, as many manufacturers won't have the money for too many new investments. (You can find the link to the article, in German, below.)
“Nobody wants to invest during a recession”
In a global crisis, industry players will have to prioritize differently, and finding new suppliers in Vietnam or Mexico or relocating factories may not be at the top of their list. “Relocation means investment, and nobody wants to invest during a worldwide recession”, writes Robin Xing, chief economist for Morgan Stanley in China, in the Chinese edition of “Caixin”.
The experienced market watcher notes that some multinational corporations (MNC) that have considered to leave China due to the trade war between Washington and Beijing or for cost reasons are now postponing such plans. And where the MNC stay, their suppliers will also have to think twice before exiting China.
There is more. The most important reason why companies are manufacturing in China will remain unchanged by the coronavirus crisis. For all industries, China is one of the most important and fastest-growing markets in the world. No brand with any international ambitions can afford to loose this market, despite all the difficulties.
Rising labor-costs in China are important, but comparatively less important for many manufacturers as a location factor. That has been the case before corona, and that will be the case in the future.
More FDI on the way
As if they wanted to make this point, the material science company Dow has just announced new investments of 300 million US-dollars (around 280 million Euro) to expand their production capacities at their Zhangjiagang location in China’s Jiangsu province. They signed in the second half of March, while China was arguably still very much in the grip of the virus.
“Foreign Direct Investment or FDI may fall in China in the first quarter of 2019, but some multinational corporations are still committed to the Chinese market and are even increasing their investments”, wrote “Diyi Caijing” when reporting about the Dow investment. This is not just propaganda.
Asia Waypoint, my company, is advising clients in several industries in China about their strategic communications and assisting them with various change projects, from Health Care to Performance Materials, from Finance to International Organizations, and they often tell us that they are very committed to the Chinese market. As far as we can tell, there is no trend suggesting otherwise.
Exodus in slow motion, if at all
What will the future bring? Nobody can tell for sure right now. Undeniably, the coronavirus crisis will bring along change. Should there be a certain exodus from China, then the most likely scenario is that this will be a “movie in slow-motion”, to quote Xing from Morgan Stanley . I believe that he is right.
Another reason not mentioned so far is that many MNC and SME are increasingly selling into the Asian market from their base in China. Mauro Gregorio, President of Dow Performance Material and Coating, talked about his clients “in China and Asia Pacific” when talking about their fresh investment.
Of course, the pictures differs from industry to industry. If you are making toys or if you are in textiles, producing in China may look less and less attractive. But for the machinery, automobile or chemical industries there is currently no way that they could indulge in exit phantasies in China.
Exiting China often not an option
Diversification of supply chains, mitigation of risks, resilience, “Plan B” and “Plan C”, all of these are topics for them. But exiting China is not. China as a market is far too important.
In the short term, China’s importance is even growing. While the coronavirus is giving politicians around the world reason to shut down production lines, China is starting to get back to work.
A good example here is the TNT industry (telecommunications, media, technology). Many MNC have just witnessed that China was the first country to be hit by the coronavirus crisis, but “also the first country to get out of the crisis again”, writes Robin Xing of Morgan Stanley in is analysis.
Decoupling but a dream?
In addition to that, the Chinese communist leadership, as part of their efforts to revive their domestic market reeling from the coronavirus lockdowns, has just announced targeted investments into future technologies like 5G, IIOT (industrial internet of things) and artificial intelligence.
Politically, China may have suffered huge image losses during the coronavirus crisis. That does not mean, however, that “decoupling” from China has become any easier economically. At the same time it is true that the debate about the high dependence on China has grown more lively.
In certain areas, for example for certain medical devices or PPE, where countries just had to beg China for deliveries of goods vital for protecting lives of their citizens during the pandemic, we may see changes. Several countries have already announced initiatives to that extent.
PPE and 5G are exceptions
Here is what the US trade representative Robert Lighthizer had to say about this topic during a recent virtual meeting of with his colleagues from the G20: “Unfortunately, like others, we are learning in this crisis that over-dependence on other countries as a source of cheap medical products and supplies has created a strategic vulnerability to our economy. For the United States, we are encouraging diversification of supply chains and seeking to promote more manufacturing at home”, said Lighthizer.
There are also several high-tech industries, notably 5G, automation or batteries for electric vehicles, for which a debate about the safeguarding of national capacities has been going on for years. This debate will now grow louder after the coronavirus crisis, and the discussion about Huawei ’s participation in countries’ 5G rollouts is the most prominent example.
The Japanese government wants to support Japanese companies which would like to China with a budget of 2,2 billion USD (around two billion Euro). The Trump administration is flirting with similar ideas. That is why those who are now predicting a “massive restructuring of supply chains” not totally off the mark, for example Alex Capri, who has lots of experience as a trade bureaucrat and is now teaching at Singapore’s National University.
The end of globalization? Don’ t hold your breath.
It is true that a certain diversity of manufacturing locations will seen as more important during or even after the coronavirus crisis. But this is not yet a “global rearrangement of supply chains”. And it is not the “end of globalization”.
The Chinese government is aware of this debate. Their officials are quoting from surveys suggesting that the majority of American, Japanese and European companies have no intention to change their investment plans in China because of the coronavirus crisis. “98 percent of all Japanese companies in southern China have restarted production again”, said a Chinese government spokesperson during a recent press conference.
You may argue that where there is smoke, there must be fire.
It is a fact, however, that many locations that might be an alternative to China, like Vietnam, are still lagging in terms of infrastructure development, skilled labor or in terms of the ever more important digitalization when compared to China.
The Chinese entrepreneur Cao Dewang, who has opened a glass factory in the US, puts it this way: “In the short term it will be hard to find an economy that can replace China in the global value chain.”
—
This analysis has been adopted from an article I co-authored with Benedikt Hofmann, editor-in-chief of MM Maschinenmarkt for China Market Insider”:
https://bit.ly/2xM2xss
You are also welcome to subscribe to Asia Waypoint’s newsletter on the menu bar on the right.
Thank you. If you would like to leave a comment, please feel free to do so below.
