Talking Point

Globalisation in retreat

Will the pandemic reshape China’s position in the supply chain?

Factory1-w

Back to work: car factories in Wuhan, the original epicentre of the coronavirus, have resumed production

Thomas Friedman was puzzled. “This new Chinese-owned computer company headquartered in New York with factories in Raleigh and Beijing will have a Chinese chairman, an American CEO… and it will be listed on the Hong Kong stock exchange. Would you call this an American company? A Chinese company?” he asked.

The firm in question was IBM’s personal computer unit, which had just been acquired by Chinese counterpart Lenovo. The takeover was highlighted in Friedman’s bestselling book The World is Flat as an illustration of how globalisation had allowed for new forms of commercial collaboration across geographical boundaries.

That was in 2004. Free trade was the most prominent principle of international relations and China and the US were becoming closer trading partners, following the former’s WTO accession.

Yet in his New York Times column last month Friedman was penning new concerns about a gamechanging divide – what he termed as “B.C. and A.C.” – that is, the world before the coronavirus pandemic and the world after it.

Globalisation has driven a lot of economic growth, the three-time Pulitzer Prize winner reckoned. But it’s also meant that when things go wrong in one place, the impact is often felt in others. A case in point is the Covid-19 outbreak that started in Wuhan late last year and then spread mercilessly through the global supply chain.

­Hence even as Chinese policymakers go all out to revive the country’s economy – now that the virus is seemingly contained at home (see WiC489) – the pandemic is stoking questions about the merits of globalisation in general.

Laid low by the virus, developed markets are talking about the need to decouple from Chinese manufacturers. The outcome of this debate – particularly in Europe, the US and Japan – will reshape economies and business supply chains.

Is China’s economy coming out of the shadow of the Covid-19 pandemic?

The economic signals have been mixed at best. The purchasing managers’ index (PMI) for China’s manufacturing sector firmed up at 52 in March from a dismal 35.7 in February (a reading below 50 indicates contraction). Foreign trade looked stronger than expected in March too, with exports dipping just 3.5% year-on-year (in renminbi terms), while imports climbed 2.4% last month.

Both data points were better than the market’s grimmer expectations. But the relatively positive readings could be illusory: they were taken from a period where production was starting up again in China but before the crunch in demand in overseas markets was becoming fully apparent.

The country’s urban unemployment rate improved slightly in March to 5.9% down from a record high of 6.2% in February. That compares with an anticipated unemployment rate of “around 5.5%” from the State Council for last year (the 2020 target has not been published because China’s annual legislative session has been postponed).

According to Reuters, analysts expect nearly 30 million job losses in China this year, outpacing the 20 million lay-offs during the 2008 global financial crisis.

Thanks to the efforts of state censors, news about business failures and redundancies is harder to find in the media. But the government has been keen to point to more encouraging signs in showing that industrial activity is gradually returning to normal. For instance, as of March 28, a very specific 98.6% of major industrial firms had restarted work, the Ministry of Industry and Information Technology said last week.

The more insightful data on the government’s resolve to hit its growth targets might come in the form of excavator sales. As local governments ramp up infrastructure spending, sales of earth moving equipment hit 49,408 units in March, up 11.6% from last year. (To put that in context, sales surged 23% to 95,000 units back in 2009, as a Rmb4 trillion stimulus package boosted the construction sector.)

Activity tracked by Manbang Group, China’s largest truck logistics platform, also climbed 47% in March from February, Xinhua reported. The sight of heavy trucks lining up to enter southern cities such as Dongguan was another sign that the country’s manufacturing zones are getting back on track, the state news agency suggested.

How is production being rebooted?

At an online press conference on April 8 – the same day that the 11-week lockdown of Wuhan was lifted – a spokesman for the Ministry of Commerce (MoC) said that more than 76% of the “key firms” in the export sector had restarted over 70% of their production capacity.

Yet the spokesman also noted that some enterprises, especially those in the textile industry, were suffering from cancelled orders as the pandemic disrupted other parts of the global supply chain.

In a bid to bolster trade, the MoC said it would strengthen policy coordination to speed customs clearance and help the shipment of important raw materials.

Local governments have also weighed in with support for favoured companies.

Take Shenzhou International, a knitting manufacturer for global brands such as Nike and UNIQLO. It told local media it had resumed 95% of its production capacity, but only because the Ningbo government had coordinated 700 buses to bring migrant workers back to work in the coastal city.

Similarly, the Shanghai government has gone into overdrive to help the major automakers based in the city restart production (plus 600 or so auto parts makers). Most notably, state media reported that Tesla’s Shanghai factory was gifted 10,000 facemasks, disinfectant and other medical equipment. These moves by the municipal authorities allowed the American firm to restart its Gigafactory on the first working day after the extended Chinese New Year break ended. Eight of the key suppliers in Tesla’s local production chain received similar government support.

Shortly before the World Health Organisation classified the Covid-19 outbreak a pandemic last month, the State Council unveiled a slew of measures to support small and medium sized enterprises in foreign trade too. The policy package included shortening the list of industries where foreign investment is forbidden and enabling more bank loans for trade with international counterparties.

In another effort to help local manufacturers, the State Council said earlier this week it would approve 46 new cross-border e-commerce pilot zones, on top of the 59 existing ones. Value-added tax and consumption taxes would not apply to goods sold from these pilot zones.

Measures have also been taken to improve international freight connections, such as increasing the frequency of the China-to-Europe freight trains that run through Central Asia, in a bid to stabilise supply chains and fast-track the resumption of work.

Will US and Japanese manufacturers move away from China?

Despite all of these efforts, there are signals that some countries are reassessing the risks of relying too much on other nations as a source of production.

That was a trending topic in China this week after details were published of Japan’s latest stimulus package. The Japanese government earmarked ¥243 billion ($2.2 billion) for its manufacturers to move more of their production back to Japan, plus ¥23.5 billion for companies seeking to move production ‘elsewhere’. The policy statement did not mention China specifically but given the sizable amount of Japanese investment (Toyota, for one, is about to invest another $1.2 billion in an electric vehicle plant with local partner FAW Group in Tianjin), foreign media outlets were quick to point out that the subsidies are aimed at helping Japanese firms shift out of China.

Less than 24 hours later, White House economic adviser Larry Kudlow joined the chorus by suggesting that the only way to lure US firms’ production back from China would be “100% immediate expensing across the board”, including plant, equipment and intellectual property.

“In order words, if we had 100% immediate expensing we would literally pay the moving costs of American companies from China back to the US,” Kudlow told Fox Business News.

The pandemic seems to have strengthened the Trump administration’s determination to bring American manufacturers home. Even in the early stages of the Covid-19 outbreak, commerce secretary Wilbur Ross was saying that the epidemic could help to “accelerate the return of jobs to North America” as businesses reviewed their supply chains.

But Kudlow’s suggestions have upped the ante on the ‘re-shoring’ campaign.

“[His] proposal seems more like a bluff, indicating that the White House would continue to pursue decoupling from China. But there is no need for China to panic about such a clichéd decoupling threat,” the Global Times responded, predicting that American returnees would find it tough to hire enough skilled workers in the US.

American firms still control some of the most valuable parts of the supply chain, such as technology and design, Huxiu, a news website, also noted. Yet the sheer availability of supply chain options in China is compelling for many American firms.

Case in point: the New York Times has reported that Apple was planning to move some of its MacBook laptop production back to the US but the plan was shelved as it couldn’t find an adequate supply of the screws it required in its home market.

These tricky realities could be trumped if geopolitical tensions escalate to a point that other countries no longer see reshoring as a commercial issue but instead one of national security. In such a situation, the pressure will increase on governments to rebuild their own industrial production bases, no matter the cost. That would have an immense impact on China’s position in the global supply chain, Huxiu said.

Longer supply chains, or more concentrated ones?

Despite the paralysis that the pandemic has created, it is still too early to declare the death of globalisation. But people like Thomas Friedman aren’t alone in rethinking whether the internationalisation of supply chains is running close to its limits.

He made the same point to Huawei’s boss Ren Zhengfei in an interview published by the New York Times last September, asking what he thought about Donald Trump’s threat to block Huawei from US markets.

“When you look at America today, with our president saying, no Huawei, nothing. You’ll never eat in this town again. We’re going to pull American businesses out of China. I’m going to win, you’re going to lose. What do we look like to you?” Friedman asked.

“If the US opts out from globalisation, how would it win?” Ren replied, albeit agreeing that the world could still face “a digital Berlin Wall and an end to globalisation”.

One of the more qualified businessmen to discuss the new challenges in the supply chain is Cao Dewang, the chairman of Fuyao Glass, a Chinese firm that has bucked some of the dominant trends by setting up a huge new factory in the US.

Cao agrees that industrialised countries will struggle to rebuild their former manufacturing capacity at home, yet he also warns that the Chinese should be alert to the trend of multinationals trying to shift more of their production to their home markets or to third-party countries after the coronavirus crisis is over.

“After the epidemic, the global industrial chain will reduce its dependence on China,” Cao told Beijing News this week (for more on his company see this week’s “Economy”).

“The earth is round and our world is not that flat after all,” Huang Qifan, the former mayor of Chongqing and now a key economic advisor to the central government, also predicted when he published his latest research last month.

Huang believes that the existing supply chain is now too stretched and too vulnerable to disruption triggered by “global events” such as the Covid-19 pandemic. The most reasonable way forward, he says, is to shorten the chain and streamline different activities into specific regions, based around vertically integrated industrial clusters.

Many Chinese firms are in danger of bankruptcy because of the disruption of normal business ties with Europe and the US, Huang points out. But business has been better for firms making electronics in cities like Suzhou and Chongqing. “This is because these places had already formed industrial clusters which produce more than 80% of accessories and parts for electronics manufacturing. The cluster-based model has reduced the risk from buying parts and components globally and demonstrated its competitiveness amid the virus.”

Some of the most sophisticated “regional global supply chains” are found in Shenzhen and other regions such as the Xiongan New Area (see WiC361) are now copying the Shenzhen model, Huang added.

Meanwhile, the Chinese government is more anxious than ever to move the most productive parts of the economy up the value chain. The Economist pointed out in its last issue that some of the contingency measures deployed to get production going again in February and March – greater factory automation, remote operations and ‘contactless services’, for instance – are set to change Chinese manufacturing forever.

Even the 63 year-old China Import and Export Fair, aka the Canton Fair, China’s best known trade fair, will be going online for the first time in its history.

Starting in mid-June, an online platform for international traders will run for 10 days. Internet-based promotions, chat groups and supplier-purchaser matching will help businesspeople to place orders and make sales while staying home, the fair’s organisers have promised.


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