Will Rethinking Supply Chains Lead to a China Manufacturing Exodus?

The coronavirus pandemic has led to a reevaluation of how businesses should diversify their supply chains. Enterprises are looking to eliminate single points of failure by minimizing their reliance on specific strategic suppliers or expanding the geographic diversity of their supplier base to reduce over-concentration.

As a result, certain regions are now seeing the impact and experiencing long-term headwinds and tailwinds as businesses begin to redeploy their supply chains. One area that has seen considerable headwinds is China, specifically in its long-growing manufacturing capacity.

According to the Wall Street Journal, Global manufacturing production has fallen as many factories have closed, faced labor shortages, struggled with deliveries, or have implemented social distancing measures. In particular, manufacturers in China report operating at 50% capacity, with 56% of their usual staff. While these numbers will undoubtedly continue to improve, many businesses are still shell-shocked from when the pandemic ravaged China’s industrial region earlier in the year.

It got so bad that, according to Dun & Bradstreet, some 51,000 companies worldwide, and 163 Fortune 1000s, have had one or more tier-one suppliers impacted in China. At the same time, over 5 million companies, and 94% of Fortune 1000s, have had one or more tier-two suppliers affected in the region.

So it should come as no surprise that potentially a third of Chinese exports are now at risk of relocation over the next decade. A UBS sampling of U.S. companies indicated that 82% of those surveyed were looking to repatriate some level of production back to the United States, and 75% of CFOs were reinforcing their goal to diversify some of their production away from China.

It’s easy to identify the coronavirus as the catalyst for this shift, but it’s been brewing for years. Businesses around the world have been concerned by China’s political instability, IP theft, and the ongoing trade war with the United States. These concerns led to a strategy known as China Plus One, which looks to address the over-concentration and reliance of suppliers in China.

The impact of shifting supply chains away from China

It’s probably too soon to know whether the current environment will lead to real disruption of the Chinese export sector, or if it’s just a short-term overreaction with minimal ramifications. After all, there are plenty of challenges in trying to diversify manufacturing away from China. There is skilled labor, technical expertise, and domain knowledge that would be wasted, contracts that would need to be broken, and the looming threat of Chinese economic and political pressure. It’s likely a shift towards diversification away from China or the adoption of a China Plus One strategy will take some time. But that doesn’t mean there aren’t some short term beneficiaries.

Let’s explore where production capacity is likely to go and what industries expect to move with it as businesses consider a shift away from China.

The United States
The United States would probably benefit considerably from many U.S. firms choosing to repatriate some of their manufacturing. There has also been a significant focus on trying to ensure domestic production of strategic products such as rare earth minerals, pharmaceuticals, and medical supplies so that they are on-hand during a future disaster. With the costs of international shipping skyrocketing and America’s position as a strategic consumer market, it’s also possible we’ll see international firms expand production capacity in the United States.

The Rest of Asia
Pakistan and India are also likely to benefit in the pharmaceutical sector. India and Vietnam offer experience in textiles, extensive manufacturing capacity, and a very cheap labor market. Meanwhile, the advanced economies and populations of Taiwan, South Korea, and Japan are highly skilled and starting to move semiconductor manufacturing back domestically or to the United States. These nations also could move a sizable portion of their auto or other high-tech industries away from China.

Businesses need to build resilient supply chains

It remains to be seen how much the coronavirus will ultimately impact Chinese manufacturing. But as the virus rages on, it’s clear that supply chains worldwide are adapting and becoming more resilient. Diversifying suppliers is just one important element to consider when trying to mitigate disruptions. Businesses should also ensure the financial health of their suppliers and develop and appropriate strategy for inventory management.

For more insights on the coronavirus’ impact on global supply chains and how your business can improve resiliency check out our free on-demand webinar: Future-Proof Your Supply Chain Against Disruptions.