Is China, The Factory Of The World, Actually Moving?

In the last decade, China very successfully earned the sobriquet ‘factory of world’. Today, China contributes almost 20% to world GDP and is basically the fulcrum of the global supply chain. According to research by German supply chain consultant Kloepfel Consulting, “Every third company has Chinese customers and 81 per cent of the companies rely on Chinese suppliers”. In addition to the wage advantage that China offered, it has also over the years built top of the line manufacturing facilities and infrastructure and invested heavily in research and development, enabling it to become the supply chain hub of the world.

However, the ongoing pandemic has very painfully revealed the high costs of globalisation. Since the onset of the virus in December 2019, manufacturing activity in Wuhan (the epicentre of the virus) came to a complete standstill, impacting businesses and even economies across the globe. Since most of the companies across the world are dependent on China for a variety of products, from finished goods to the smallest of components, the shutdown in China impacted them severely. This also brought to fore the high risk of having a concentrated or minimally diversified supply chain. The question now is whether in an attempt to mitigate this risk, companies will completely move out of China or will they partially diversify to other low-cost countries like Malaysia, Brazil and India.

The immediate reaction seems to be one of a complete shift as countries incentivise domestic companies to onshore or nearshore manufacturing. For example, Japan created a $2 billion package for companies who would like to shiftproduction back to Japan and $218.5 million for those seeking to move production to other countries. However, building supply chains is not an overnight activity. It requires the investment of a significant amount of time, resources and energy. Which means that it is unlikely that all companies across the globe will shift away from China. The country continues to hold significant advantages like scale, infrastructure and speed to execution, over many other geographies. Additionally, China also has a large stock of rare earth minerals that are used in everything from magnets to electronics.

Having said that, a supply chain reshuffle is inevitable. Businesses can no longer afford to place all their bets on one country. While the going was good, it yielded companies immense benefits. However, it has now become evident that in the case of a concentrated game, when you lose, you lose big!