Global Supply Chains

Will a Focus on Essential Supply Chains Further Accelerate the Relocation of Manufacturing Out of China?

June 1, 2020 – Globalization took a beating during the COVID-19 pandemic. As the impact of the virus widened, the interconnectedness of the global economy became very visible. Travelers moving from one country to another accelerated the spread of the disease. Corporates found their supply chains were more fragile as inputs sourced from foreign countries became unavailable or manufacturing moved offshore suddenly fell victim to lockdown orders. The pandemic has placed the vulnerability of global supply chains and their extensive reliance on China’s manufacturing sector firmly into the spotlight.

Calls for bringing manufacturing back home, or reshoring, has been getting louder since the great financial crisis. Wages in China have risen and recent trade tensions between the U.S. and China have led more companies to think about where their manufacturing was located. This benefits other low-cost Asian countries as manufacturing shifts to the likes of Vietnam and India. But the shortages that ensued during the pandemic highlighted to policymakers that certain ‘essential’ supply chains may need to remain domestically for emergency situations (i.e., medical supplies). Manufacturing and procurement strategies seeking to reduce that risk suggest new investments by firms may be increasingly located outside of China.

Our Chinese economics team believes there is a low probability high-value added manufacturing supply chains will move out of China. However, duplication of certain supply chains might begin to manifest given concerns about national security. Relocation of manufacturing will be broadly difficult and restrained given China’s market size, high labor productivity, favorable policy and physical infrastructure, extensive and sophisticated supply chains, and the huge investment required to rebuild supply chains in other geographies. Some multinational corporations may need to consider a bifurcated strategy of “In China and For China” and external supply chains in the era of U.S.-China tensions post COVID-19.