China’s position as the world’s factory has been solid for a decade now, demarcating itself the 3rd place in the list of 2023’s Most Powerful Countries. It has also been leading, with only a few contenders when it comes to ‘moving’ the world a.k.a supply chains. However, the COVID-19 pandemic, which originated in the belly of the dragon, has been pivotal in changing this narrative. In this month’s cover story, we bring to you our perspective, as well as that of the supply chain industry’s eminent knowledge centres, about how China is being replaced as the tides of time progress, and its implications for the future of global manufacturing and logistics.
Many years ago, multinational corporations realised that over-reliance on a single manufacturing base, namely China, exposed them to various risks, including geopolitical uncertainties, rising labour costs, and supply chain disruptions. These concerns were further amplified by the trade tensions between China and the United States, which culminated in the imposition of tariffs and trade restrictions. As a result, businesses began to seek alternative locations to diversify their manufacturing and logistics operations.
What started as an economic cold war between the most powerful and the second most powerful country, was triggered even further as COVID-19 hit the world. It is believed that the pandemic spread like wildfire from its epicenter in Wuhan to China’s most economically strategic cities like Guangzhou, Ningbo, Hong Kong, Shenzhen, and Shanghai, weakening the nation’s economic pillars.
A part of the pandemic’s aftermath was the strengthening of ‘China plus one’. The strategy has been said to be a game-changer for challenging conventional wisdom and signaling a shifting global landscape. It gained traction with the increasing need for diversification and risk mitigation when thousands of big and small companies saw billions of dollars getting stuck in China’s overly long lockdown.
Companies are now seeking new manufacturing and logistics hubs in Southeast Asia, South Asia, and other regions with favourable business environments, cost advantages, and robust infrastructure. In that direction, Japan, Vietnam, India, Thailand, Malaysia, and other emerging economies have been attracting big investments.
As an increasing number of companies look for ways to expand their manufacturing and supply chain horizons beyond China and somewhat even replace it, we asked a few experts about the various factors that come into play as the process unfolds. Let’s dive right in!
Will the king lose the crown?
No matter the kind of product, for decades, China has been hailed as the unrivalled powerhouse of global manufacturing and logistics, with its vast industrial infrastructure and competitive production capabilities. It is one of the fastest economies when it comes to developing and applying futuristic technology.
However, lately, there have been many other European and South Asian countries that have been swift to jump at the newest technology and bring it home to up the ante in the manufacturing and supply chain industries.
But does that really make it easier to challenge China’s status as the world’s factory?
Abhishek Agarwal, Senior VP – Supply Chain & Sourcing, Bombay Shaving Company shares, “We can see a concentrated effort to get manufacturing closer to base location, and many vendor companies have shelved plans to be in China, to avoid being slapped with a tariff (on the imports), or to reduce the lead time and uncertainty in shipping lead times.”
The rapid technological progress witnessed across the world can definitely be considered a factor to challenge China’s long-standing status as the world’s factory. The availability of advanced manufacturing technologies empowers nations to enhance their production capabilities and deliver higher-quality products at competitive prices, thereby, making the global arena for manufacturing, more competitive. Automation enables increased productivity, reduced labour costs, and improved efficiency.
Undeniably, countries must invest heavily in R&D and innovation to stay ahead in the global manufacturing landscape. But by investing, they have also been able to and will continue to reap the long-term benefits in manufacturing as well as supply chains. And that includes the reduction in labour cost differentials between countries, which had been a primary factor in China’s manufacturing dominance.
However, even though automation and modern technology provide opportunities for countries to compete with China, it is also essential to note that the other factors contributing to China’s dominance, such as its scale, logistics capabilities, established supplier networks, and domestic market size, still rather prevail.
Anil Kumar Mishra, National Logistics Head – India (South Asia), Pladis enunciates a similar thought, “The competition to challenge China’s dominance is not solely reliant on automation but encompasses a broader range of factors, including infrastructure, skilled workforce, market access, and government support for innovation and manufacturing.”
So what is fueling China’s possible downfall?
Tushar Jani, Group Chairman, Cargo Service Center says, “China, despite its numerous advantages, is currently confronted with several challenges. One such challenge is the escalating labour costs that diminish the appeal for companies to establish manufacturing operations in the country. Additionally, the ongoing trade tensions with the US further complicate and increase the costs of conducting business in China, negatively impacting its manufacturing sector. Furthermore, China is under mounting pressure to enhance its environmental regulations and standards.”
Adding on, Pallavi Chaudhuri, Director – Procurement Services, Perfetti van Melle says that the 3 biggest factors of China’s dominance are not playing to its favour now, leading to a weakening hold on the world. “Slow speed and lack of agility displayed by Chinese local authorities in executing projects, combined with the central government’s incapacity to implement policies, has resulted in a situation where local governments are presently encumbered by debt and incapable of commencing substantial projects. “Multiple investors are now viewing the position of an authoritarian one-party state as highly unpredictable.“
Moreover, China is vocal about replacing the West-led world order with its own. Such deepening Sino-American challenges are forcing countries to rethink their reliance for chips and semiconductors on China (Dell, the American Computer maker aims to stop using China-made chips by 2024).”
In an additional point, Ms. Chaudhuri mentions that even Chinese companies are moving away their manufacturing and supply chain base from their country to Thailand (an American ally) and other countries. Today even Chinese EV car makers are setting up manufacturing outside China to leverage external markets.
Gurpreet Gill, Group Practice Head – Logistics, Tech Mahindra points out, “Beyond the abovestated reasons, the recent US tariffs imposed on Chinese goods have compelled several Chinese companies themselves to shift their operations to other Southeast Asian countries. The labor costs in these countries are equally affordable and serve as an additional motivation.”
Earlier this year, there was also some momentum around the ‘Minus China’ strategy, apart from the existing ‘China Plus One’. While the underlying sentiment is the same – distancing your base from China – the methods are completely different. The ‘Minus China’ thought is about taking the dragon out of the equation altogether – winding up operations in China and ceasing to exist in the country. All factors considered, companies have been triggered to pack up their bags and exit the country. Even though the world is currently hush-hush about riding the Minus China wave, there are companies who are seriously considering the strategy.
“The U.S.-China trade war and the supply and demand shocks brought on by COVID-19 are forcing manufacturers everywhere to reassess their supply chains. For the foreseeable future, they will face pressure to increase domestic production, grow emp”loyment in their home countries, reduce their dependence on risky sources, and rethink strategies.” Sourab Singh (Head Supply Chain, and Category Management, McCoy Mart)
“The transition has to be from China +1 to Minus China to ensure interruption free supply chains. With India focusing on and coming up as an alternate manufacturing hub, the ease of doing business index improving drastically, and industry favoring policies by the government, we should be able to make India a major supplier to the world.” Radha Mohan Gupta (SVP Supply Chain, Devyani Industries)
This is an abridged version of the Cover Story published in the July edition of the Logistics Insider Magazine. To read the full story, click here.