Are Multinationals Actively Seeking to Diversify Supply Chain beyond CHINA?

US-China trade war

The US President Donald Trump unhappy with the trade imbalance kicked off a trade war in July 2018, imposing tariffs. In the past 18 months, the two countries have been embroiled in countless negotiations and tit-for-tat tariff war.

US-China tariff war

• Total US tariffs applied exclusively to Chinese goods worth USD 550 billion
• Total Chinese tariffs applied exclusively to US goods worth USD 185 billion

US companies shifting manufacturing away from China

Kearney, a global manufacturing consulting firm, in its seventh annual US Reshoring Index, attributes much of the significant 2019 shift to a 17% decline in US imports of manufactured goods from China, which has long been the leading choice for offshore production. In an interview to Markets Insider, Rashmi Gupta, a money manager at JPMorgan Chase Bank, said that to avoid tariffs on Chinese products, companies shifted or plan to move manufacturing away from China in favour of other Asian countries such as Malaysia, Philippines, Indonesia, Vietnam, Singapore, and India.

Source – World Bank

Covid-19 pandemic woes added to the misery of the US companies

US companies have signaled plans to diversify their supply chains away amid the intensifying trade war and supply disruption due to the Covid-19 pandemic.

US government may consider funding the moving costs for moving out of China

White House National Economic Council Director, Larry Kudlow, has proposed that the US government should pay for the moving costs of every American company that wants to go out of China.

Tangible traction of US companies considering going out of China

iPhone maker, Apple has reportedly asked its major suppliers to assess moving between 15% and 30% of their production capacity from China to countries in Southeast Asia. Apple has also started slowly moving production to India.

HP Inc. and Dell Technologies are supposedly looking shifting up to 30% of their notebook production out of China.

Google and Microsoft are moving production of Pixel and Surface products, respectively to Vietnam. The shift in production is due to the US-China trade war and new concern emanating from the present crisis of sourcing reliably from China.

Abercrombie & Fitch lowered China production exposure from 42% in 2017 to 22% in 2019 and added manufacturing capacity across Southeast Asia.

Japan to fund companies shift production out of China

In March, the Japanese government’s panel on future investment had a discussion on the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia. A survey conducted by Tokyo Shoko Research Ltd., in February, found that 37% of the more than 2,600 companies that responded to the survey were diversifying procurement to places other than China amid the coronavirus crisis. Recently, the Japanese government earmarked USD 2.2 billion of its record USD 992 billion economic stimulus package to help its manufacturers shift production out of China. The financial package for the Japanese corporates includes 220 billion yen (USD 2.0 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move production to other countries.

Japanese companies such as Ricoh, Sony, and Asics Corporation favoured shifting their production units away from China in order to escape the US trade tariffs.

Ricoh moved its production of printers from Shenzhen to Thailand last July. Other supply-chain-dependent firms like Nike also explored shifting their bases to Vietnam, Thailand, or other South-East Asian nations. Panasonic announced that the company was actively looking at alternatives to produce electronic devices outside of China.

Can India replace China as global sourcing base?

HDFC Bank in its report titled “Assessing the impact of the COVID-19” indicated that India has been receiving queries from the European Union and the US for textiles, home-ware, ceramic tiles, engineering goods, furniture, among others seeking to replace China as a supplier.

However, India faces a tough competition from countries such as Vietnam, Malaysia, and Cambodia in manufacturing sector and electronics sector in becoming China’s replacement.

If the central and the state governments addresses the regulatory mechanism in India, limited production capacity, raw material supplies disruptions, and underdeveloped logistics, India stands to gain in becoming the major manufacturer and supplier of pharma, electronic, consumer durable, power, and auto industries to the world.

It would be interesting to see if India can replicate the Make-in-India success of its mobile phone manufacturing in other industries as well.

India stands a good chance to emerge as a reliable substitute

Since the start of the trade war, China’s exports of goods and services as percent of its GDP has dropped from 21.4% in 2015 to 19.5% in 2018, while that of India has maintained it at around 19.8% in the same period.

In April 2019, the US-India Strategic and Partnership Forum had revealed that about 200 companies are seeking to move their manufacturing base from China to India.

Despite all odds, India stands a good chance to emerge as a reliable substitute, given its developing landscape for manufacturing as well as its vast consumer market.

Small loss by China could be a big win for India

Source – World Bank

Only time will tell whether production bases can really move away from China, which itself is one of the largest consuming economy for the US companies.

 

Data Sources:

World Bank-

https://data.worldbank.org/indicator/NV.IND.MANF.CD

https://databank.worldbank.org/reports.aspx?source=2&series=NE.EXP.GNFS.CD&country=CHN

General Administration of Customs of the People’s Republic of China – http://english.customs.gov.cn/statics/report/preliminary.html

http://english.customs.gov.cn/statistics/Statistics?ColumnId=6

http://43.248.49.97/indexEn

US Census- https://www.census.gov/foreign-trade/balance/c5700.html

https://www.census.gov/foreign-trade/balance/index.html

News Sources:

https://www.indiatoday.in/business/story/how-coronavirus-will-fuel-manufacturing-exodus-from-china-1670330-2020-04-23

https://www.businessinsider.in/stock-market/these-8-asian-countries-will-get-the-biggest-boost-if-the-trade-war-forces-us-companies-to-leave-china/articleshow/70879646.cms

https://www.forbes.com/sites/kenrapoza/2020/04/07/new-data-shows-us-companies-are-definitely-leaving-china/#2a9b163c40fe

https://www.china-briefing.com/news/alternatives-china-manufacturing-capacity-op-ed/

https://www.pbs.org/newshour/economy/making-sense/novel-coronavirus-could-be-a-wake-up-call-for-companies-relying-on-china

https://www.scmp.com/economy/china-economy/article/3045141/chinas-manufacturing-exodus-set-continue-2020-despite

https://economictimes.indiatimes.com/news/international/business/us-supports-firms-weighing-india-as-alternative-to-china/articleshow/75437352.cms?from=mdr

https://m.economictimes.com/news/economy/foreign-trade/about-200-us-companies-seeking-to-move-manufacturing-base-from-china-to-india-usispf/articleshow/69068781.cms

https://www.prnewswire.com/news-releases/trade-war-sends-kearney-us-reshoring-index-to-record-high-foreshadowing-test-of-supply-chain-resilience-during-covid-19-pandemic-301036521.html

https://www.cnbc.com/2019/09/01/trump-ordered-us-firms-to-ditch-china-but-many-already-have.html

https://www.washingtonexaminer.com/policy/economy/pandemic-accelerates-push-to-move-supply-chains-out-of-china

https://www.bgr.in/news/google-moves-pixel-4a-and-pixel-5-production-to-vietnam-due-to-coronavirus-outbreak-878672/

https://www.forbes.com/sites/kenrapoza/2020/04/10/kudlow-pay-the-moving-costs-of-american-companies-leaving-china/#5d731f5513c6

https://auto.economictimes.indiatimes.com/news/industry/japan-to-fund-firms-to-shift-production-out-of-china/75053048