In an interview with Mark Millar, internationally renowned keynote speaker and Advisory Board Member of the Foundation for Future Supply Chain, I asked him about the effects of Covid-19 on global trade and how this has affected two prominent supply chain strategies – the ‘China Plus Option’ and ‘In China for China’.
China Plus Option
Many companies who base all their production within China have been looking at diversification for some time, searching for locations with low-cost manufacturing and labour, which will supplement China or be a substitute for China.
There are now two accelerators for this – US tariffs on Chinese produced goods exported into the US, but more importantly, Covid-19. The Covid-19 lockdowns and related restrictions in China exposed just how dependent global supply chains are on one country.
The leading location being considered for production outside China, is Vietnam. It has a large population, at 98,514,613, based on projections of the latest United Nations data in 2021, and the labour costs are lower than China’s. It is near to China geographically and open to foreign direct investment.
Moving production from China to lower cost locations has its risks. There has been 30 years of investment in China on an unparalleled scale and it has a very well-developed freight transport infrastructure. Other lower-cost places are far behind. Also, the highly efficient labour force is hard to replicate. It’s easy to compare the hourly factory rate with cheaper countries, but the output of employees per hour can be very different.
Another risk is geopolitical. China has been hit with US tariffs on Chinese produced goods exported into the US, so Vietnam may also get hit with this in the future. Furthermore, many of these new locations under consideration for diversification of production, such as Thailand, Bangladesh and Indonesia, raise questions around transparency, governance and political stability.
In China for China
Covid-19 has also been a catalyst for products being manufactured in China to sell to China. Inbound investment over recent decades has bred a massive consumer market. China has more middle-class consumers than the whole of Europe. Because of Covid-19, China has shut down entire cities and borders, whilst global shipping and airfreight is still in a state of chaos – concentrating the supply chains in China, gets around this hiatus.
During Covid-19, the Chinese have been buying more and more goods online and together with this additional demand there has been a shift in consumer sentiment, from desiring foreign goods produced outside China to wanting Chinese-made products. Under 30’s are proud of this patriotic, reverse shift.
In summary, Covid-19 has further driven the need to diversify production beyond China as well as driving reshoring and near shoring. By bringing production closer to home and shortening supply chains, fuel consumption and therefore emissions are also reduced, but it’s obvious that sustainability is a by-product. The avoidance of risk and lower costs are the main drivers, which have been accelerated by the Covid-19 crisis.
Source: Foundation for Future Supply Chain, January 17th, 2022
Author: Julia Swales