Most U.S. companies have no plans to relocate manufacturing outside of China
Recent surveys of U.S. companies with manufacturing in China show that 80% have no plans to relocate manufacturing outside of China. Instead, most U.S. companies are reported as focusing on operational improvements, digital transformation, and strategic supply chain transformation.
The surveys, updated in March 2020, were jointly conducted by AmCham China, AmCham Shanghai, and PwC China to study the supply chain impacts of recent events on American companies operating in China.
Key findings of the surveys:
- Due to the rapid spread of COVID-19 and the ensuing operational constraints, around half of the respondents were running below normal capacity and 68% reported that demand for their company’s products and services was below normal.
- Logistics-related challenges were reported as the greatest anticipated challenge in the immediate term; suppliers unable to operate at full capacity was the next most critical challenge.
- With respect to government actions, accelerating government “return to work” approvals is seen as the most helpful action by 56% of respondents. All respondents reported that Chinese government support measures are available to foreign companies and domestic Chinese businesses.
- In the short term, over 70% of respondents have no plans yet to relocate production and supply chain operations or sourcing outside of China due to COVID-19. Twice as many (24% vs. 12%) reported they plan to shift sourcing activities as were planning to shift production.
- Around 40% of respondents say that their long-term supply chain strategy for China will remain the same regardless of the impact of COVID-19, while the 52% percent of companies believed it is too soon to tell.
- With respect to the impact of COVID-19 on their import and export activities, around one third of the companies believe the impact will be limited.
- 68% of respondents expect their China supply chain operations to return to normal in less than 3 months and 96% of respondents expect to return to normal within 3 to 6 months.
- Respondents indicated greater potential for economic decoupling between the US and China as compared with the 2019 survey, with one third fewer reporting they believe decoupling is not possible and one in five reporting they believe that decoupling will be accelerated by COVID-19.
See the full survey here.
In the fall of 2019 and well before the COVID-19 outbreak, Trade Link reported how the escalating US-China trade war was acting as a catalyst for multinational clients to rethink and redesign their supply chains for the future. We observed how multinational clients were increasingly looking to emerging markets as an alternative to China manufacturing and sourcing, with Vietnam, Malaysia, Thailand, South Korea, Taiwan, Japan, India, and Pakistan being the largest beneficiaries. While China, we concluded, would remain an important market for our multinational clients, the diversification to other regions would be one strategy clients would adopt to mitigate the impact of tariffs and minimise disruption to global supply chains.
China competitive barriers
China is, and likely to remain, the world’s biggest exporter of manufactured goods. A special briefing issued by global business research firm Dun & Bradstreet in Q1 2020, reported that at least 51,000 (163 Fortune 1000) companies around the world have one or more direct or Tier 1 suppliers in the impacted region, and at least five million companies (938 Fortune 1000) around the world have one or more Tier 2 suppliers in China’s pandemic impacted provinces.
Most multinationals clients have a significant portion of their supply chain in China, with longstanding supplier relationships and well-established procurement processes that are not easy to migrate. The impact of tariffs, volatility in trade conditions and even the COVID-19 crisis – while arguably eroding China’s cost advantage and creating a desire by companies to move, the business case (and money) are just not there.
A recent article from WIRED argues how it would take trillions of dollars to relocate all those supply chains and how the Japanese government unveiled a $2 billion program to help manufacturers do just that. The article goes on to give the example of Foxconn, the Taiwanese electronics giant that builds most iPhones, who last year unsuccessfully sought a buyer for its display-panel factory in Guangzhou at $8.8 billion. Comparative infrastructure project investments by the local government to improve airport, transportation links, and housing were estimated at more than $10 billion. Suddenly, the $2 billion Japanese fund looks small.
Diversifying away from China or expanding manufacturing operations in at least one other location is a more likely option for our multinational clients. In tandem, Trade Link has focused on building capacity and capability in regions most likely to benefit from a shift in production – including Vietnam, Malaysia, Thailand, South Korea, Taiwan, Japan and India. Our extensive partner network provides the flexibility and scale to meet the most demanding of supply chain requirements.
While the COVID-19 pandemic and recent trade war between the U.S. and China has undoubtedly created short-term instability and economic uncertainty, we see multinational clients seizing on the opportunity to reassess their operations and sourcing strategy. The consequent reassessment is allowing clients to build greater resilience into their supply chains, that will inevitably lead to new investments in new locations. Those that move to mitigate risk in their supply chains are poised to emerge stronger and better able to withstand future disruptive shocks.
For now, it remains business as usual in China.
For more information on this topic or to discover how we can assist you, contact us.