Supply chain adjustment doesn't mean market exit
  ·  2020-09-25  ·   Source: NO.40 OCTOBER 1, 2020
Both domestic and foreign-funded companies in China have been readjusting their supply chains amid dynamics in total costs, uncertainty in tariffs, vulnerabilities of globalized supply chains and governmental push for reshoring.

Nonetheless, the supply chain shifting outside of the global manufacturing powerhouse doesn't mean companies are leaving China, according to experts.

The globalization of supply chains over the past quarter century has improved economic efficiency, but at the cost of economic resilience and sustainability, partner and emerging market strategist with Macro Research Board Partners Mehran Nakhjavani said recently.

The novel coronavirus disease (COVID-19) pandemic, arriving on the back of the U.S.-China trade tensions, has clearly demonstrated the vulnerability of global supply chains, Lucy Qiu, strategist at UBS Global Wealth Management, told Xinhua on September 16.

It is likely that some supply chain duplication will be necessary to improve resilience in the face of mounting policy risk, Nakhjavani told Xinhua.

Following the pandemic crisis, companies and governments will likely seek to diversify their supply chains or bring them closer to home, Qiu said. It doesn't necessarily mean onshoring to high-wage countries in Western Europe or North America, but perhaps Eastern Europe, Mexico, or other Asian countries.

Economies such as India and some Southeast Asian or sub-Saharan African countries could possibly emerge as future "workshops of the world" at a time when the perils of protectionism have been understood, according to Nakhjavani.

"Considering the high wage costs, if companies decide to onshore, we see automation and robotics as long-term beneficiaries of this trend," Qiu said.

Qiu added that the importance of multilateral trade and economic integration should in fact grow in light of the challenging growth environment amid COVID-19.

Amid higher labor costs and China's effort to climb up the value-added ladder, supply chains have been gradually shifting out of China. This structural trend is accelerated by U.S.-China trade tensions, not caused by them, Qiu said.

With China increasingly striving to become self-reliant in high-value technology products like semiconductors and investing more in this area, low-end manufacturing should gradually leave the country, Qiu said.

There is no evidence of any hollowing out of the Chinese industrial base, however, because much of the current supply chain targets the domestic and non-U.S. markets, Qiu added.

Industrial companies are not moving the supply chain outside of China, "but what they are doing is something called China plus one," chief economist of Horizon Financial Kevin Chen told Xinhua recently.

"So basically they want to keep their facilities in China. They want to tap into the huge market in China, but also to mitigate the risk," Chen said.

Industrial companies will build up the new factories outside of China in Viet Nam, India, Malaysia, Italy and other countries, according to Chen.

U.S. companies remain committed to the China market, with 78.6 percent of companies reporting no change in their investment allocations, a 5.1-percent increase compared to 2019, according to a recent survey of 346 U.S. companies associated with AmCham Shanghai.

Business communities from Europe, China and the United States do want to be in one another's marketplaces, regardless of what's happening at the policy level, Craig Stronberg, China analysis leader with PwC Intelligence of PwC U.S., said at a recent panel discussion.

"They want to be in China," Stronberg said referring to U.S. companies' operations in China, adding that they also want to produce Chinese goods.

In an increasingly multipolar world economy, the primary strategic objective of any multinational corporation is to maintain a strong and competitive presence in each of the major economies like the United States, the EU, China and others in order to maintain market share, supply chains and regulatory approvals in each economic zone, Nakhjavani said.

One of the few corporate defenses against tit-for-tat sanctions and other protectionist measures is the leverage afforded in each jurisdiction by having a large domestic workforce paying significant domestic taxes, according to Nakhjavani.

Financial institutions also follow similar approaches by going to China and investing a lot, but doing risk management by building other investment at the same time, according to Chen.

This is an edited version of an article published by Xinhua News Agency

Copyedited by Madhusudan Chaubey

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