China still holds the cards for global supply chains, despite the fact that Covid’s blockades are disrupting business in the near future. An employee works on the production line of screens for 5G smartphones at the factory on May 13, 2022 in Ganzhou, Jiangxi Province, China.

Zhu Haipen | Visual China Group | Getty Images

BEIJING – China still holds the cards for global supply chains, despite the fact that Covid’s blockades will disrupt the business soon.

Companies and analysts have discussed relocating plants from China for years, especially after labor costs have risen and trade tensions between the U.S. and China have worsened.

The pandemic has resumed these talks. Foreign companies are talking about how executives can easily travel to factories in Southeast Asia, but not to China. Some point to the growth of exports from Vietnam as an indicator that supply chains are leaving China.

“Diversifying supply chains is quite challenging because people are always talking about it, and boardrooms like to discuss it, but often people end up finding it hard to implement,” said Nick Moreau, world trade leader at The Economist Intelligence Unit.

When businesses held these discussions in 2020, it turned out that “China was able to stay open, while Malaysia, Vietnam went offline,” Maro said. “Indeed, the most important factor now is how China plans to support them [Covid] controls how the rest of the world opens up ”.

The so-called Chinese strategy of rapid shutdown of Covid helped the country quickly return to growth in 2020. However, since then, the implementation of these measures has become tougher, especially this year as China faces a revival of Covid in Shanghai and other parts of the country.

“Significant” interest in Vietnam

In numbers, Chinese exports rose 3.9% in April from a year earlier, the slowest rate since rising 0.18% in June 2020, according to official data available through Wind Information.

In Vietnam, by contrast, exports grew by 30.4% in April compared to the same period last year, after growing by almost 19.1% in March compared to the same period last year.

The level of interest in production in Vietnam is “very significant,” Singaporean economist S&P Global Ratings economist Vishut Rana said in a telephone interview. “Vietnam has become a very key supply chain hub for consumer electronics.”

China still remains at the heart of the APAC electronics network.

Rana’s route

Economist, S&P Global Ratings

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

“From China’s point of view, the exit from local production will not be significant enough to really change the nature of China’s role in the overall supply chain,” Rana said. “China still remains at the heart of the APAC electronics network.”

Businesses are still investing in China

In the first four months of the year, foreign direct investment in China increased by 26.1% over the same period last year and amounted to 74.47 billion dollars, the Chinese Ministry of Commerce said on Thursday. During this time, investments from Germany grew by 80.4% and from the United States – by 53.2%.

In contrast, in Vietnam in the first four months of the year, foreign direct investment fell by 56% over the same period last year to $ 3.7 billion, according to Wind. Foreign direct investment from the US fell by 14%.

Recent Covid locks in China have slowed down the ability of trucks to transport goods across China, while many plants in the Shanghai region have been limited or non-existent for weeks. Pictured is a textile company workshop in neighboring Jiangsu Province.

CFOTO | Publishing House of the Future Getty Images

“It is currently very difficult to compare the scale and volume of China’s supply chains outside of China,” Rana said. He added that only supply chains for very specific products, such as semiconductors or parts for electric vehicles, could be moved to Vietnam, Malaysia or other countries.

China’s dominance in the supply chain, which has been growing over the years, also supports new business models.

One of the more famous is Shein. With the support of 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 inexpensive and fast.

“China’s advantage in the supply chain is not just based on labor costs,” said James Liang, managing partner of Skyline Ventures, in Chinese translated by CNBC.

According to his analysis, at least 20% of the selling price of clothing and furniture manufacturers goes to labor costs, compared to only 5% of electronics manufacturers.

China’s advantage is the advantage of having supply chain centers, which, according to Liang, open the way for businesses to increase efficiency by integrating all their suppliers into a single digital system.

He said in October his firm had invested $ 5 million in furniture company Povison, which is trying to replicate Shane’s clothing model. Additional investment plans have been postponed due to travel restrictions related to Covid, he said.

“History of fluctuations”

Recent Covid locks have also slowed trucks ’ability to transport goods across China, while many plants in the Shanghai region have been restricted or not produced at all for weeks. This is in addition to Beijing’s 2020 policy, which requires a two- to three-week quarantine on arrival in China – if a traveler can book one of the few flights.

It is difficult to move operations from China, but “our survey shows that there will be less investment in China and more investment in Southeast Asia,” said Jörg Wutke, president of the EU Chamber of Commerce in China, during the webinar.

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

As a result of Covid’s latest monitoring, nearly a quarter of 372 respondents from the EU Chamber of Commerce in a survey in China in late April said they were considering moving current or planned investments to other markets.

But 77% said they have no such plans. A survey of US businesses in China found similar trends.

These survey results show that “companies don’t want to leave the market, but they don’t know what to do,” said Morro of the EIU. “Now it’s more a story of hesitation.”

“Foreign companies will be upset by this [zero-Covid] politicians, but in the end not many companies are going to jeopardize their position in the market, which lasts for decades, because of the temporary shock, “he said.

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Even companies like Starbucks, which suspended management because of Covid’s unpredictability, said they still expect their business in China to be bigger than in the US in the long run.

Many analysts expect that China may begin to weaken its zero-covid policy after the political reshuffle in the fall.

Responding on Thursday to a question about the results of a poll by the EU House of Commons, China’s Commerce Ministry noted only the global impact of the pandemic on supply chains. The ministry also said China would improve its foreign investment services and expand opportunities for foreign enterprises.

“Reconfiguring supply chains is not as easy as turning lights on and off,” said Stephen Olson, a senior fellow at the Hinrich Foundation.

“Of course, the chessboard will be reconfigured if the locks are tightened indefinitely,” he said. “In this case, the pressure on companies to consider changing the supply structure will increase, and the economic and commercial consequences of this will look much more favorable.”

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