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

Whether or not the Kovid lockdown will disappoint businesses in the near term, China still holds the card for the global supply chain. An employee works on a production line for screens for 5G smartphones at a factory in Ganzhou, Jiangxi Province, China, on May 13, 2022.

Zhu Hypeng | Visual China Group | Getty Images

BEIJING – China still holds the card for a global supply chain, whether or not the Covid Lockdown disappoints businesses in the near term.

Companies and analysts have been discussing moving factories out of China for years, especially as labor costs have risen and US-China trade tensions have worsened.

The epidemic has rekindled those conversations. Foreign businesses talk about how executives can easily travel to factories in Southeast Asia, but not China. Some point to an increase in exports from Vietnam as an indicator that the supply chain is leaving China.

Nick Marrow, global trade leader at The Economist Intelligence Unit, said: “Supply chain diversification is difficult because people always talk about it, and boardrooms like to talk about it, but often at the end of the day people find it difficult to implement.”

When businesses held those talks in 2020, it was found that “China was able to stay open while Malaysia, Vietnam were going offline,” Marrow said. “Really, the important thing right now is how China plans to maintain these [Covid] Controls other parts of the world as it opens. “

China’s so-called zero-quad strategy of rapid lockdown has helped the country return to rapid growth in 2020. However, the implementation of those measures has been tough since then, especially this year as China has faced a resurgence of covid in Shanghai and other parts of the country.

‘Significant’ interest in Vietnam

In terms of numbers, China’s exports rose 3.9% in April compared to a year earlier, the slowest pace since 0.18% growth in June 2020, according to official data accessed through Wind Information.

In contrast, Vietnam’s exports rose 30.4% in April compared to a year earlier, after an annual growth of about 19.1% in March, the wind showed.

The level of interest in manufacturing in Vietnam is “very significant”, said Vishrut Rana, a Singapore-based economist at S&P Global Ratings, in a phone interview. “Vietnam has emerged as a very important supply chain node for consumer electronics.”

China is still at the heart of the APAC electronics network.

Vishrut Rana

Economist, S&P Global Rating

But Vietnam’s exports totaled $ 33.26 billion in April, or about one-eighth of China’s র 273.62 billion world exports that month, according to Wind.

“From China’s perspective, the movement out of local manufacturing is not going to be significant enough to really change the nature of China’s role in the overall supply chain,” Rana said. “China is still at the heart of the APAC’s electronics network.”

Businesses still invest in China

In the first four months of the year, foreign direct investment in China rose 26.1% year on year to $ 74.47 billion, the Chinese Ministry of Commerce said Thursday. At that time, investment from Germany increased by 80.4%, compared to 53.2% from the United States.

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

China’s latest coveted lockdowns have slowed the capacity of trucks to transport goods across China, while many factories in the Shanghai region have limited or no production for weeks. Here is a workshop of a textile company in nearby Jiangsu Province.

CFOTO | Future Publications | Getty Images

“At the moment it is very difficult to match the scale and scope of China’s supply chain outside of China,” Rana said. Only supply chains for very specific products – such as semiconductor or electric vehicle parts – could move to Vietnam, Malaysia or other countries, he added.

China’s supply chain dominance, developed over the years, also supports new business models.

A well-known shin. Supported by funds such as Sequoia Capital China, the company has integrated Big Data Analytics and its supply chain network in China to become an international e-commerce giant in fast fashion at low cost.

“China’s supply chain advantage is not just about labor costs,” said James Liang, managing partner of Skyline Ventures, in Mandarin, translated by CNBC.

According to his analysis, labor costs at least 20% of the selling price of clothing and furniture manufacturers, compared to only 5% for electronics manufacturers.

China’s advantage is the advantage of having a supply chain hub, which in Liang’s view paves the way for efficiency enhancement by integrating all of their suppliers into one digital system for business.

He says his firm invested $ 5 million in October in a furniture company called Povison, which is trying to replicate Shin’s model for clothing. Additional investment plans have been delayed due to the Kovid-related travel ban, he said.

‘A Hesitant Story’

The recent coveted lockdowns have also slowed down the capacity of trucks to transport goods across China, with many factories in the Shanghai area limited for a week or no production. It has been at the top of Beijing’s policy since 2020 to require two or three weeks of quarantine upon arrival in China – if the traveler can book one of the few flights.

It is difficult to relocate activities outside of China, but “our survey indicates that there will be less investment in China and more investment in Southeast Asia,” Jorge Utk, president of the EU Chamber of Commerce in China, told a webinar.

He mentioned how it is now much easier for executives to fly to Singapore or other countries in the region than to China.

As a result of the latest Covid control, a quarter of the 372 respondents to the EU Chamber of Commerce surveyed in late April in China said they were considering moving existing or planned investments to another market.

But 77% say they have no such plan. A similar trend has been found in US business surveys in China.

The results of the survey indicate that “companies do not want to leave the market, but they do not know what to do,” said Marro EIU. “It’s a more hesitant story at the moment.”

“Foreign companies are going to be upset about this [zero-Covid] Policies, but at the end of the day there aren’t many companies that are going to threaten their position in the market for decades based on a temporary push, ”he said.

Read more about China from CNBC Pro

Even companies like Starbucks, which suspended the guidelines due to Covid’s unpredictability, have said they still expect its China business to be bigger than the United States in the long run.

Many analysts hope that after the political turmoil in the fall, China may begin to relax its zero-cove policy.

When asked on Thursday about the results of the EU Chamber’s survey, China’s Ministry of Commerce only mentioned the global impact of the epidemic on the chain supply. The ministry added that China would improve its foreign investment services and increase foreign business opportunities.

“Reconfiguring supply chains is not as easy as turning on and off a light switch,” said Stephen Olson, a senior research fellow at the Heinrich Foundation.

“Of course, the chessboard will be reconfigured if the lockdowns are dragged on indefinitely,” he said. “In that case, there would be pressure on companies to consider changing supply patterns, and the economic and commercial implications of doing so would be much more favorable.”

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