Multinationals’ China Supply Chains Will Stay Put But Export Less

An electronics factory in Shenzhen. Photo credit: Steve Jurvetson. Licenced under Creative Commons Attribution 2.0 Generic.

REPATRIATING US MULTINATIONALS’ supply chains from China is a nagging obsession for US President Donald Trump. On Monday, he returned to the theme, holding out the prospect of tax credits for US companies that do so, and threatening the denial of government procurement contracts to those who do not. However, China’ anchoring of global supply chains will not be slipped easily or quickly.

Governments in all the advanced economies are now talking about the need for their home companies to diversify or repatriate their supply chains (different things, though conflated in the political discourse). The coronavirus pandemic has revealed their dependence on China for healthcare products and pharmaceutical supplies. However, China’s centrality to global manufacturing across a range of industries from vehicle-making to consumer electronics has been hiding in plain sight for a decade.

China has been the world’s leading manufacturing nation since dislodging the United States from that position in 2010. Accounting for 28.4% of global manufacturing output, it is now more than ten percentage points ahead of the United States, according to the United Nations statisticians looking at the 2018 data, the latest full set available.

The United States is leading discussions with regional allies including Australia, Japan, South Korea, Vietnam and India about co-ordinating incentives for Western multinationals to lessen their value-chain dependence on China. This Bystander does not expect those discussions to go very far, mainly because supply-chain reconfiguration is primarily a business, not a political decision.

Supply-chain ecosystems

Nor is it a decision companies take casually. Manufacturing is long beyond the point where the lowest wages determine the place of production. Building supply chains is arduous. It takes time to find the suppliers, sub-suppliers and sub-sub suppliers who can be trusted to deliver with the quality and reliability at the scale that a multinational requires. Once assembled, such a network of relationships is not cast aside lightly.

Beyond the production chain is an ecosystem of hard and soft infrastructure that has to be in place to make the shipping and logistics work: seaports, airports, roads, railways and storage facilities, and trained staff to operate them efficiently and continuously both inbound and outbound.

Supply chain managers also need to be sure that there is a qualified labour force of adequate size and quality to tap into. Legal, regulatory and administrative regimes also need to exist that are supportive of international business, can ensure that contracts are enforced and can provide the transparency needed for monitoring compliance with international standards in areas like child and forced labour.

Places like Thailand, Indonesia, Vietnam and the Philippines all have some of that and are trying to create more. Yet even collectively, they do not have them on the scale that exists in China, let alone China’s track record in process engineering and innovation.

Small-scale shifts

Those are all reasons that, for all the talk of multinationals moving their operations out of China, the evidence remains anecdotal or small scale. That is not to say that some low-end production has not shifted from China. Even Chinese companies have been outsourcing to regional neighbours.

Nor does it mean that every time a multinational makes a new investment in its production that it will go to China by default. Foxconn, one of the big technology hardware contract manufacturers for multinationals like Apple, is adding capacity in Vietnam and India as well as at home in Taiwan. However, it says it still expects the share of its output produced in China not to fall below 70%. It is currently 80%.

Such decisions are driven more by long-term trends that were in place long before the current trade and technology war between Washington and Beijing and the Covid-19 pandemic broke out.

Changing trade

Changing patterns of global trade, particularly the rise of South-South trade relative to North-South trade, have driven the creation of regional supply chains, often around regional trading blocks. All trade routes no longer lead only to the United States or Europe. These regional supply chains service the markets that have emerged in emerging economies the likes of India, Brazil and most of all, China. It is in East and Southeast Asia that the rise of South-South trade has been most pronounced.

Surveys of US and European multinationals operating in China show scant indication of downsizing of production in China. These firms still see the domestic Chinese market to be rich with opportunity, so they want to produce close to market. All the signs are that when China’s next five-year plan is announced, it will emphasise import substitution and the securing of domestic supply chains. This will make the Chinese market and the necessity of producing inside it, of yet greater importance to multinationals.

Regional resilience

Yes, multinationals will do the same in other regional markets, albeit it on a lesser scale. Yes, they will take the reputational brownie points for reducing their carbon footprints through shorter supply chains. And, yes, they will take some of their home and other governments’ bribes to increase the resilience of their global supply chains by building in more redundancy elsewhere than in China.

Japan’s inclusion in its pandemic stimulus in April of 248.6 billion yen (2.3 billion dollars) for Japanese businesses to evaluate their value chains, supports its existing ‘China +1’ policy to encourage production diversification back home or to ASEAN. Beijing responded by reminding Japanese companies in China that it remains a critical market for them and that relocating operations would be expensive and disruptive. That is true for all multinationals.

More blatantly, in March, India offered electronics and pharmaceutical manufacturers a payment equivalent to 4-6% of their incremental sales over the next five years if they switch production from China. Some two dozen companies involved in making mobile phones, including Foxconn and Samsung, have expressed interest, although unpicking what is de novo investment and what is moving from China may prove difficult. Nonetheless, India is considering expanding the programme to the auto, textiles and foot processing sectors.

In the longer-term, technological change, including the application of big data and blockchain technologies to streamline value-chain management, automation to reduce costs, and 3-D printing to allow production at or near the point of sale, may change multinationals’ calculations again. The direst forecast of trade and technology decoupling of the world’s two largest economies may come true, prompting the need for parallel manufacturing worlds with standards and supply chains to match. Even then, China’s sphere would likely be economically larger. But for now, little production capacity will move out of China, even if more of the output stays there.

3 Comments

Filed under China-U.S., Economy, Industry, Trade

3 responses to “Multinationals’ China Supply Chains Will Stay Put But Export Less

  1. Pingback: A US Ban On WeChat Would Hold Deeper Decoupling Threat | China Bystander

  2. Pingback: Fostering Luxshare As The Next Foxconn Suits Apple And Beijing | China Bystander

  3. Pingback: Why Supply Chains Are Not Moving Out Of China In One Chart | China Bystander

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