Exodus out of China gathering pace

Rate at which manufacturing capacity is shifting outside of China is expected to accelerate for those selling into the US, says new PwC research

The impact of the Covid-19 pandemic and continuing trade tensions between China and the US are encouraging companies to re-assess their global supply chains, according to a 2020 survey by PwC.

The survey found that 16% of US companies operating in China were already considering options to adjust production and supply within China, partially outside of China or completely out of China.

The new hubs

Mexico and other Asian Low-Cost Countries (LCCs) are being considered, with operating costs being reduced by an estimated average of 23% if companies near-shore to Mexico and 24% if companies move to other LCCs according to PWC’s analysis.

Mexico is likely to be the option of choice for North American manufacturers, particularly given that the new USMCA takes effect from 1 July 2020, giving legal certainty of access to the US market for Canada and Mexico. 

Resiliency, improved customer experience as well as landed costs, risk and fulfilment lead times are cited as benefits of dispersing supply chains to alternative locations outside mainland China. LCCs have made significant inroads in improving their supplier bases and manufacturing labour forces in the last three years.

Companies producing Croc shoes, Yeti beer coolers, Roomba vacuums and GoPro cameras are already producing goods outside China to avoid US tariffs on Chinese imports.

Furniture maker, Lovesac Co. has reduced its manufacturing in China from 75% to 60% since the start of 2020, shifting production to Vietnam. Shawn Nelson, Lovesac chief executive, says there are plans to have no production capacity in China by the end of the year. “Once you move, you don’t go back, “said Nelson.

Apple Inc. is also considering relocating final assembly of some of its devices out of China to avoid US tariffs.

There is a wide expectation that medical production, especially of personal protective products will be reshored with domestic production fuelled by low-cost loans, financial subsidies and long-term contracts.

In industrial manufacturing and transportation companies will reorganise their supply chains to reduce exposure to single-source suppliers.

New locations not without limits

However, Mexico and Vietnam need to improve their overall business environments if they are to really capitalise on shifts in global supply chains. Both rank lower than China on the World Bank’s Ease of Doing Business Index. Inadequate infrastructure and domestic security problems in Mexico and poor logistics-related infrastructure and inadequate customs procedures in Vietnam need to be addressed. Both countries need to improve their skilled labour pool by investing in education and training if they are to move into high-tech global value chains.

Push and pull will keep China relevant even as other rise

Findings of the PwC survey are backed up by research from BakerMcKenzie, focusing on global expert market share data collated across 350 product categories and 150 countries. Deteriorating US-China trade relations have meant China has lost global export market share at an accelerated pace in 2019.

Companies are increasingly expected to adopt supply chain diversification strategies, with Southeast Asia seeing manufacturing capacity, including land, labour and logistics, determining potential supply-chain hub growth.

However, China remains strong in the area of emerging markets where its importance to key sectors such as industrials, manufacturing and transport, and energy, mining and infrastructure industries continues to grow.

Foreign multinationals are using China as a manufacturing base to sell into emerging markets and China’s global market share of exports to these markets has risen across almost all categories. Some 65% of replies to a European Chamber of Commerce’s Business Confidence Survey in June 2020 said that China is still among their top destinations for new investment.

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