China may become one of many hubs as companies diversify manufacturing after coronavirus shock

CNBC PUBLISHED MON, MAY 25 2020


Evelyn Cheng@CHENGEVELYN

KEY POINTS

The coronavirus is “a wake-up call for pretty much every company,“ said Gerry Mattios, expert vice president at Bain. “The number one item on the agenda is, ‘how do I build resilience in my supply chain?’”

“China is still a very attractive total supply chain solution,” said How Jit Lim, a managing director with consulting firm Alvarez & Marsal. “There are very few countries in the world where you can find almost everything you need to build something.”

Exports are still important for China’s economy, which contracted by 6.8% in the first quarter amid the height of the coronavirus outbreak within the country.


Workers assemble vehicles primarily for the domestic market at a factory operated by Daimler-BAIC Motor’s joint venture, Beijing Benz Automotive (BBAC).
Evelyn Cheng | CNBC


BEIJING — For many businesses, adjusting supply chains in the wake of the coronavirus pandemic means expanding from China, not necessarily leaving, some analysts say.

Since the disease Covid-19 first emerged late last year in the Chinese city of Wuhan, lockdowns on business activity that began in the world’s second-largest economy have have highlighted just how significant a role China plays in the production of global goods ranging from children’s toys to pharmaceutical drugs.


“It’s been a wake-up call for pretty much every company,“ Gerry Mattios, expert vice president at Bain, said in a phone interview last week. “The number one item on the agenda is, ‘how do I build resilience in my supply chain?’”

A key component of that strategy is building flexibility — the ability to switch quickly from different production sources in response to future challenges, Mattios said.

“We’re not going to see China drying up on manufacturing all of a sudden,“ he said. “A big (portion) of the exporting manufacturing capacity that China had could potentially be shifting out of China, but a lot of the capacity for internal consumption in China will stay in China.”

The Asian nation accounts for 35% of global manufacturing output, McKinsey Global Institute pointed out in a report last summer. The country has also become the largest market in the world for many products such as automobiles, luxury goods and mobile phones, accounting for roughly 30% or more of their consumption worldwide, the McKinsey report added.

Ultimately where we’re heading to is more fragmented manufacturing — many small factories of the world.Gerry MattiosEXPERT VICE PRESIDENT AT BAIN

Covid-19 has infected more than 5.4 million people and killed at least 345,000 people, including more than 4,600 in China. The pandemic disrupted the global flow of goods, which in some industries was already shifting in light of U.S.-China trade tensions and cheaper labor costs in countries outside China.


In an effort to control the virus, more than half of China extended the Lunar New Year holiday by at least a week. Those regions accounted for 90% of the country’s exports, according to CNBC calculations of data accessed through Wind Information.

From a business perspective, building resilient supply chains in the wake of the coronavirus also means recognizing that a pandemic could happen anywhere, said How Jit Lim, a managing director with consulting firm Alvarez & Marsal. Lim is based in Shanghai and focuses on supply chain management.

He pointed out that a decision to move production requires long-term planning and commitment, and is not something that can happen overnight, especially as businesses try to conserve costs as they struggle in an economic downturn.

“China is still a very attractive total supply chain solution,” Lim said. “There are very few countries in the world where you can find almost everything you need to build something ... The labor force maturity and the talent pool around is still very attractive in China.”

Still, a key factor that could affect supply chains is politics, Lim said, noting such changes do not necessarily result in greater business efficiency.
Political drivers on all sides


Just as some countries are pressuring companies to leave China and return to their home countries, Beijing is building its case for why companies should stay.

In press conferences this month, Chinese officials have emphasized the attractiveness of their market to businesses.

China’s economy contracted 6.8% in the first three months of the year, with exports plunging 11.4% in yuan terms. The secondary, or manufacturing, sector accounted for 27.6% of jobs in 2018, at more than 214 million, according to official data.

Authorities did not share a growth target for the year at a highly anticipated annual parliamentary meeting on Friday. A day earlier, spokesperson for the congress, Zhang Yesui, said that foreign businesses have not been leaving the country in a major way, and that the U.S. and China should work together for open supply chains and global growth.

In April, exports unexpectedly rebounded more than 8% in yuan terms as reopened factories rushed to fulfill orders, particularly for medical supplies.

Cross-border financial payments platform Payoneer, which works with e-commerce sellers, saw an “explosion” in business activity in March that has trickled into May, according to James Huang, Payoneer vice president and country manager for Greater China.

Huang expects shifts in consumer behavior will drive more online purchases. He said he’s still cautious in the short-term, but quite confident about growth for the medium term.
Challenges for growth ahead


While China may be the first economy to emerge from economic lockdown, other countries may not be ready to buy in a big way. Even Chinese officials remain cautious.

“With the global spread of the virus, international market demand has declined sharply, and China faces unprecedented challenges in overseas trade,“ Commerce Minister Zhong Shan told reporters last week, according to a CNBC translation of his Mandarin-language remarks.

Political pressure on businesses’ international operations also looks only set to grow, and greater scrutiny on China’s role in global markets could accelerate diversification. The rest of the world has become more dependent on China, while the country has become more self-sufficient as it tries to rely more on domestic consumption for growth, the same McKinsey report last summer found.

“We will start seeing new areas around the world, new locations around the world, starting to grow manufacturing capacity … that they didn’t have in the past,” Bain’s Mattios said, pointing to Europe in particular.

“Ultimately where we’re heading to is more fragmented manufacturing — many small factories of the world,” Mattios said, rather than the idea of the “factory for the world.”