Tuesday, December 27, 2022

China is losing its place as the center of the world's supply chains.


China is losing its place as 

the center of the world's supply chains.

Here are 5 places supply chains

are going instead.

  • China's COVID-19 policies are pushing companies to diversify supply chains away from the country.

  • They had already begun moving out over geopolitical tensions and tariffs from the Trump era.

  • India, Vietnam, Thailand, Malaysia, and Bangladesh are stepping up to replace the world's factory.

China has been the factory of the world for the past four decades. The pandemic triggered a reckoning of this status.

Chinese factory economy
China is the factory of the world, but COVID-19 has shown the world needs more than China to keep supply chains robust.
  • China's COVID-19 policies are pushing companies to diversify supply chains away from the country.

  • They had already begun moving out over geopolitical tensions and tariffs from the Trump era.

  • India, Vietnam, Thailand, Malaysia, and Bangladesh are stepping up to replace the world's factory.

China has been the factory of the world for the past four decades. The pandemic triggered a reckoning of this status.

An employee works on the assembly line of electric bicycles at a workshop of Yadea Technology Group Co., Ltd.
China's draconian COVID-19 restrictions have hit global supply chains

China's rise as the world's factory spanned four decades and ushered in an era of globalization and integrated supply chains.

That facade started to crumble around 2018 after President Donald Trump launched a trade war against the East Asian giant. This, in turn, has prompted investors to reassess their geopolitical risks.

While some investors did move parts of their manufacturing facilities out of China at the time, it was the pandemic — and China's zero-COVID policy — that drove home the importance of not depending on one country for manufacturing needs.

"The geopolitical tensions, in themselves, may not have resulted into this level of realignment of supply chains, but COVID certainly provided that extra vision, extra fillip, the extra fuel to the fire," Ashutosh Sharma, a research director at the market-research firm Forrester, told Insider this month.

And the effects of the trade war linger. President Joe Biden hasn't put the kibosh on the elevated tariffs Trump imposed on China — in fact, in October, he imposed export controls on shipping equipment to Chinese-owned factories making advanced logic chips. This further burdened a strained relationship.

To navigate this complicated web of US-China trade tensions, multinationals are, now more than ever, looking to hedge their business risks.

Here are five countries where China's supply chains are moving to.

India is trying to unseat China in higher-end manufacturing, with the iPhone maker Apple and chipmakers eyeing its vast land and young population.

An Indian employee works on an air conditioning unit at the Panasonic 'eco ideas' factory at Jhajjar in Haryana on December 12, 2012.
India has vast land and a young population

With its vast land and large, young population, India is a logical alternative to China as the world's factory.

India is set to surpass China in 2023 as the most populous country, the UN's Department of Economic and Social Affairs said in a July report.

Apple has already moved some of its iPhone production to the Indian states of Tamil Nadu and Karnataka and is exploring moving its iPad manufacturing to the South Asian nation. JPMorgan analysts expect Apple to move 5% of its iPhone 14 production to India by the end of 2022, they wrote in a September note. They said they believed 1 in 4 iPhones would be made in India by 2025.

"India has a large labor pool, a long history of manufacturing, and government support for boosting industry and exports," Julie Gerdeman, the CEO of Everstream, a platform for supply-chain risk management, told Insider. "Because of this, many are exploring whether Indian manufacturing is a viable alternative to China."

The move is easier said than done.

Indian Prime Minister Narendra Modi has been working on attracting foreign direct investments since he took office in 2014, sending FDI to a record $83.6 billion in the past fiscal year, according to government data.

But significant hurdles still exist — even though the Indian government is boosting its appeal for foreign investments, it's harder to do business in the country than in China, partly because of bureaucracy and multiple stakeholders that prolong decision-making.

Vietnam has been undergoing rapid economic reform since 1986, which has yielded significant returns.

Garment factory workers working in a factory in Hanoi, Vietnam.
Garment-factory workers in Hanoi, Vietnam.

As a communist country, Vietnam — like China — has been undergoing rapid economic reform since 1986.

The reforms have yielded results, propelling Vietnam from "one of the world's poorest nations to a middle-income economy in one generation," The World Bank said in a November post.

In 2021, Vietnam attracted over $31.15 billion in foreign-direct-investment pledges — up more than 9% from the prior year, according to the country's Ministry of Planning and Investment. About 60% of the investments went into the manufacturing-and-processing sector.

Vietnam's key strengths are in the manufacturing of apparel, footwear, and electronics and electrical appliances.

Apple has already moved some iPhone manufacturing to Vietnam and is planning to move some of its MacBook production to the Southeast Asian nation.

Other companies that have shifted some of their production lines out of China to Vietnam are Nike, Adidas, and Samsung.

Thailand's FDI rose threefold between 2020 and 2021.

Natawut Lorboon works at the production line of Dunan Metals Thailand Co., Ltd, in the Thai-Chinese Rayong industrial zone in Rayong Province, Thailand, Nov. 8, 2022.
Thailand is a key auto and electronics manufacturing hub.

As Southeast Asia's second-largest economy, Thailand has been moving up the value chain in manufacturing and is a production hub for car parts, vehicles, and electronics, with multinationals such as Sony and Sharp setting up shop there.

Sony said in 2019 it was closing its Beijing smartphone plant to cut costs and relocated some of the production to Thailand. Sharp said in the same year it was moving some of its printer production to Thailand because of the US-China trade war.

It's not just international firms. Even Chinese companies have relocated parts of their supply chains to Thailand. Companies producing solar panels, such as Shanghai's JinkoSolar, are moving their production to the island nation to take advantage of lower costs and avoid geopolitical tensions, the South China Morning Post reported in July.

"Setting up manufacturing plants abroad didn't come from [the pursuit of] opportunities, it is more of a strategy to deal with challenges to gain market access," Zhuang Yan, the president of Canadian Solar, said at an industry event in July, SCMP reported.

Foreign direct investments rose threefold to 455.3 billion Thai baht, or about $13.1 million, between 2020 to 2021, the Thailand Board of Investment announced in February.

Bangladesh is already a beneficiary of the supply-chain shift away from China. It now wants a bigger slice of the pie.

Women manufacturing clothes in Bangladesh.
Bangladesh is home to a huge garment-manufacturing sector.

Even before the COVID-19 lockdowns crippled China's manufacturing sector, Bangladesh was a rising star in the garment-manufacturing sector.

Bangladesh's rise was primarily due to rising labor costs in China predating Trump's presidency.

The cost difference is large — the average monthly salary of a worker in Bangladesh is $120, or less than one-fifth of the $670 a factory worker takes home in the southern-China manufacturing hub of Guangzhou, Mostafiz Uddin, the owner of the Bangladeshi apparel manufacturer Denim Expert, told Insider.

"Moreover, rising material costs is pushing apparel companies to look for alternative destinations like Bangladesh where production prices are comparatively low," Uddin said.

Despite a high-profile building collapse that killed at least 1,132 people in April 2013 and dented Bangladesh's work-safety reputation, its garment-manufacturing industry is a key pillar of its economy, accounting for nearly 85% of shipments, or over $42 billion of the country's exports, in 2021. The country is also the world's second-largest garments exporter, after China.

Bangladesh is now working to attract investments beyond the garment sector into others, including pharmaceuticals and agriculture processing.

Malaysia has for years been eyeing opportunities emerging from companies shifting away from China.

An attendant checks bottles on a production line at the Coca-Cola bottling plant in Nilai on the outskirts of Kuala Lumpur.
Malaysia's FDI inflows hit a five-year high of $48.1 billion in 2021.

Malaysia has been eyeing opportunities from the manufacturing shift out of China for the past few years.

It has made some headway with the efforts, as it has attracted at least 32 projects that have relocated from China to Malaysia, the Malaysian Investment Development Authority said in July 2020. The authority didn't provide details of the projects or of the companies that moved.

But even before the pandemic, tech investments into Malaysia had been rising because of lower labor costs and US-China trade tensions. Major deals over the past few years included a 1.5 billion Malaysian ringgit, or $339 million, investment by the US chip giant Micron over five years starting in 2018. Jabil, a US company that makes iPhone covers, has also expanded its operations in Malaysia.

"We knew quite a number that have expressed their intention to shift from China and we have engaged them. The only thing is timing," Azman Mahmud, then the CEO of the Malaysian Investment Development Authority, told The Malaysian Reserve in 2020.

Malaysia's FDI inflows hit a five-year high of $48.1 billion in 2021, with manufacturing of electronics and vehicles being the main contributor, according to official government information.

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