China is often referred to as the "world's factory," given its huge manufacturing and export base. However, whether the country can maintain that status going forward is now being thrown into question after the unexpected shutdown during the Covid-19 outbreak caused havoc and severe disruptions to global supply chains network. The disruption came so abruptly at such as unprecedented scale, affected most industries but especially medical supplies, pharmaceuticals, electronics, and consumer goods (we have seen what happened with the toilet papers), with long delay and bottlenecks in order fulfilling and shipping. In the meantime, all around the world, countries are feeling vulnerable without manufacturing of critical supplies onshore.
From my discussions with some of the Chinese manufacturing sector experts in our partner network (although it sounds obvious that multi-nationals should diversify their risks of over-reliance on one country ie China), their argument is that decision makers should keep in mind the strengths and resilience of the established supply chain in China - which suggests that multi-nationals are not able to find the same level of combined excellence in manufacturing design, product development, sophisticated production process and management skillset anywhere else in the world.
The question is: how long will it take for the other Asian countries to catch up with China?
Some say Vietnam is like China 15 years ago and there are pockets of capabilities which offer solid alternatives to China. One of our partners, who helped foreign businesses to set up manufacturing in Vietnam, has argued that Vietnam is limited in terms of their technical skills, and many of their raw materials are also dependant on China, especially for electronics and light industry goods. The Vietnam government is making policy changes to encourage supply chain development locally – so it would not be surprising to see Vietnam producing for the electronics industries in a couple of years’ time. However China is home to manufacturing of nearly all industries. And for some raw materials like rare earth, China has over 80% of the world’s production and supply making it not feasible to move the supply chain elsewhere.
My own research also shows that Vietnam’s cost advantages over China’s are not as high as commonly thought. The production level workers are paid about 2000 to 3000 RMB a month, nearly 50 to 70% of those in T3 cities in China, but local management skills are scarce with most occupied by expatriates. For example, a famous Western women’s lingerie business recently moved its factory from China to Vietnam, but over 20% of its 10,000-strong staff are Chinese and they occupy most managerial positions.
Productivity is another important factor. Chinese businesses manufacturing in Vietnam report that productivity is noticeably lower than China due to the experience and skills. However, my UK client finds Malaysia more expensive but more efficient than China and, together with Indonesia, which has a population of about 200m, the region is a good alternative to China manufacturing with regard to skilled production.
Globalisation had already been under attack prior to the Covid-19 pandemic. Some argue that capital, technology and employment have moved to China as a result of its rising dominance in the global supply chain. However, Western countries had also been talking about bringing manufacturing home, especially with the ongoing spat between the US and China. The attempts by the UK government to encourage the rapid development and production of PPE cross the country is another example of the desperate efforts by the Western world to stay in control of its critical supply chain and reduce its dependence on China.
But China is not winning it all. Since mid April, China’s manufacturing activities have gradually started to resume across many parts of the country, although local governments still face the challenges of balancing the increase in economic activities with a second possible spike of the pandemic. So far, the recovery is much slower than the Government’s desired level and they are facing the worst economic growth in decades. With Chinese domestic flights now returning to almost 50% of pre-pandemic level, the logistics / air transport within the country is helping the economy to recover. On the other hand, the lockdown in Europe and the US has seen a large reduction in orders at what is ordinarily peak production time for Chinese factories. Already, we are seeing factories laying off workers or put them on unpaid leave, and many smaller ones will never open again. For the next few years at least, China may have to rely on its domestic market for growth after relying on exports to the rest of the world for so long.
As a result of Covid-19, the need to optimise the global supply chain is more urgent than ever. But for those businesses that consider China a critical part of their supply chain, the big question is not whether the change should happen now, but how. What factors should companies be considering when working out a new supply chain strategy and how should companies go about implementing it in the so-called “China plus One” model?
To help businesses have a better understanding of these impending challenges and prepare for the strategic changes ahead, Crayfish is holding an online discussion on 16th June, where we will be discussing these important and timely topics with a panel of academic and industry experts in sustainable manufacturing systems, technology and business management, strategic change, mobile, semiconductor, transportation and digital healthcare industries, from both the UK and China.
For more information about the Supply Chain event, visit https://www.crayfish.io/event-detail/Supply-chain-panel