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

China still holds the cards for global supply chains, whether or not the Covid shutdown frustrates businesses in the near term. An employee works on a 5G smartphone screen production line at a factory on May 13, 2022 in Ganzhou, Jiangxi Province, China.

Zhou Haiping | China Optical Group | Getty Images

BEIJING – China still holds the cards for global supply chains, whether or not it Covid lockdowns frustrate businesses in the near term.

Companies and analysts have debated moving factories from China for years, especially as labor costs have risen and trade tensions between the United States and China have worsened.

The pandemic has reignited those conversations. Foreign companies talk about how CEOs can easily travel to factories in Southeast Asia, but not China. Some point to rising exports from Vietnam as an indication that supply chains are leaving China.

Diversification of the supply chain “It’s very challenging because people are always talking about it, and boards love to discuss it, but often at the end of the day people find it difficult to implement,” said Nick Marrow, global trade leader for the Economist Intelligence Unit.

When companies had these discussions in 2020, Maru said, it turned out that “China was able to remain open, while Malaysia and Vietnam were offline.” “Really, the deciding factor at the moment is how China plans to maintain it [Covid] It controls as it unlocks the rest of the world.”

China’s so-called “zero-Covid” strategy of rapid lockdown helped the country quickly return to growth in 2020. However, implementation of these measures has been tightened since then, especially this year. China faces a resurgence of Covid in Shanghai and other parts of the country.

Great interest in Vietnam

in numbers, China’s exports rose 3.9% in April from the previous year, the slowest pace since a 0.18% increase in June 2020, according to official data accessed through Wind Information.

Wind showed that Vietnamese exports in contrast saw a jump of 30.4% in April from a year ago, after a nearly 19.1% year-on-year increase in March.

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

China remains at the heart of the electronics network in the Asia Pacific region.

Fishroot Rana

Economist, S&P Global Ratings

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

“From China’s point of view, the exit from domestic manufacturing will not be large enough to change the nature of China’s role in the overall supply chain,” Rana said. “China remains at the heart of the electronics network in the Asia-Pacific region.”

Companies are still investing in China

China’s Ministry of Commerce said Thursday that foreign direct investment in China during the first four months of the year rose 26.1% year on year to $74.47 billion. During that time, investments from Germany jumped 80.4%, while investments from the United States rose 53.2%.

In contrast, Vietnam saw a 56% year-over-year drop in foreign direct investment to $3.7 billion in the first four months of the year, Wind data showed. Foreign direct investment from the United States decreased by 14%.

The recent Covid-19 shutdowns in China have slowed the ability of trucks to move goods across China, keeping many factories in the Shanghai area in limited or no production for weeks. Pictured here is the workshop of a textile company in neighboring Jiangsu Province.

CFOTO | Future Publishing | Getty Images

“It is very difficult to match the size and scope of Chinese supply chains outside of China at the moment,” Rana said. He added that only supply chains for very specific products – such as semiconductors or electric car parts – could move to Vietnam, Malaysia or other countries.

China’s dominance of the supply chain, which has built up over the years, also supports new business models.

One of the most famous is SHEIN. Backed by funds such as Sequoia Capital China, the company has combined big data analytics and its supply chain network in China to become an international e-commerce giant in a fast, low-cost fashion.

“China’s supply chain advantage is not just based on labor cost,” James Liang, managing partner at Skyline Ventures, said in a Mandarin translated by CNBC.

According to his analysis, at least 20% of the cost of goods sold by clothing and furniture producers goes to labor costs, compared to only 5% for electronics producers.

The advantage of China is to benefit from the presence of supply chain hubs, which in Liang’s view paves the way for companies to enhance efficiency by integrating all their suppliers into a single digital system.

He said his company invested $5 million in October in a furniture company called Buvison, which is trying to replicate Shane’s apparel model. He said additional investment plans have been put on hold due to Covid-related travel restrictions.

Frequency story

The recent Covid-19 shutdowns have also slowed the ability of trucks to transport goods across China, with many factories in the Shanghai area keeping in Limited or no production for weeks. This is in addition to Beijing’s policy since 2020 that requires a two- or three-week quarantine upon arrival in China – if a traveler can book one of the few flights in China.

Shifting operations outside of China is difficult, but “what our survey indicates is that there will be less investment in China and more investment in Southeast Asia,” Joerg Woetke, president of the European Chamber of Commerce in China, said during a webinar.

He noted that it is now much easier to move executives to Singapore or other countries in the region rather than China.

As a result of the latest Covid controls, nearly a quarter of 372 respondents to a European Chamber of Commerce in China survey in late April said they were considering shifting existing or planned investments to other markets.

But 77% said they had no such plans. Survey of American companies in China Similar trends found.

Maru, of EIU, said the survey results suggest that “companies don’t want to get out of the market, but they don’t know what to do.” “It is now a story of hesitation.”

“Foreign companies will be upset about it [zero-Covid] But at the end of the day there aren’t many companies that will jeopardize their position in a decades-old market on the basis of a temporary shock.”

Read more about China from CNBC Pro

Even companies like Starbuckswhich suspended guidance due to the unpredictability of Covid, said it is still It expects its business in China to become larger than that of the United States The long-term.

Many analysts expect China to begin easing its non-proliferation policy after a policy adjustment in the fall.

When asked Thursday about the results of the EU Chamber survey, China’s Ministry of Commerce referred only to the pandemic’s global impact on supply chains. The ministry also said that China will improve services for foreign investment and increase opportunities for foreign companies.

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

“Of course the chessboard will be reshaped if the closures continue indefinitely,” he said. “In this case, pressure will increase for companies to consider changing supply patterns, and the resulting economic and commercial implications will appear more favorable.”

Correction: This article has been updated to correctly reflect the analysis by James Liang which showed that clothing and furniture producers spend at least 20% of cost of goods sold on labor costs, as opposed to just 5% of electronics producers.

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