When the world emerges from the coronavirus crisis, it will be different. Working from home will be common; our attitudes to healthcare will change – and companies may question whether they have become too reliant on China's factories.
Global supply chains are already changing. Foreign direct investment into China tumbled 8.6 per cent in the first two months of 2020 compared with last year as the spread of COVID-19 closed many parts of the country.
Firms that traditionally sourced low-price goods from China are investigating new suppliers elsewhere in South-east Asia. Others have adopted a 'China +1' strategy – sourcing products from Chinese suppliers plus at least one other country. Some governments are encouraging 're-shoring' – bringing factories home. Japan plans to subsidise companies' relocation costs, for example.
Nevertheless, there are companies using the current situation to increase operations in China, with the Chinese government offering incentives to attract foreign investment.
But highly complex production networks established over decades cannot be easily re-shored or relocated. Where products are highly specialised or where mainland China is dominant, as with 5G telephony or cosmetics, it is nearly impossible – or it will take considerable time – to move those supply chains.
Indeed, there are products where China has specialised to such an extent that the rest of the world does not have sufficient capacity to offset any decline in production there. And even when Chinese firms do not dominate global supply – say for crude materials or farm produce – supply chains might not easily shift.
However, for industries where China is a small participant, where most global supply chains are outside of the country, and where products are not complex, supply chains might move out of China.
Meanwhile the pandemic might have an impact on competition with weaker companies exiting. In uncertain times, companies and consumers prefer to buy from larger firms, which they consider safer. The Chinese car industry is consolidating, for instance, and the low demand for chemicals following COVID-19 could be a final blow for inefficient smaller companies.
But consolidation may also be driven by changing consumer preferences. The crisis means more people are working from home or requesting food deliveries and larger companies seem better positioned to serve them.
Meanwhile, tensions between Beijing and Washington could accelerate plans for China to become self-sufficient in energy, power and technology.
About one-fifth of US exports to China are agricultural products such as soybeans and lumber but other major items include civilian aircraft and semiconductors. Some Chinese industries rely on US components and have few alternative suppliers. To avoid this dependence, China may choose to construct its own home-based production networks – especially in the energy, power and technology sectors.
China imports over 70 per cent of its oil and 40 per cent of its natural gas, and while it wants to reduce that dependence on external energy sources, it also wants to reduce its reliance on polluting hydrocarbons, particularly coal and oil. It is thus shifting to renewables, and over 80 per cent of the equipment being used in wind and solar is produced domestically.
First published 27 April 2020.
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