Multinational Supply Chains in a Post-Pandemic China

China’s consumer spending, factory output and private investment experienced a boost in the second half of last year as China recovered from a COVID -induced recession. In the end, the Chinese economy grew by 2.3 percent, making China the only country to record growth in 2020. Still, supply chains around the world experienced shocks as countries scrambled for masks and medical products. Other goods, such as semiconductor French fries, are still experiencing shortages today.

Last week, President Biden ordered a comprehensive review of critical supply chains in the U.S., a first step toward avoiding the shocks that wreaked havoc last year. National security concerns aside, economic growth projections suggest that shifting manufacturing away from China could be a long and arduous journey.

Companies that stay local

Less than a year ago, the United States was dealing with the worst U.S.-China rift in 50 years, and the COVID -19 pandemic had forced millions of Chinese to go on lockdown. At the time, China hawks predicted that U.S. companies would leave China in droves.

Nearly a year later, China has yet to see a mass exodus. Some companies have scaled back their China exposure and established secondary and tertiary supply chains in Southeast Asia, while others have set up smaller “security” factories closer to home to be ready for future supply chain shocks. But these are the exceptions rather than the rule.

Japanese companies, for example, remain optimistic about China. In a recent survey conducted by the Japan External Trade Organization, only 7.2 percent of Japanese companies said they were considering moving production out of China. that compares with 9.2 percent in 2019.

Similarly, the German Chamber of Commerce in China reported in a February survey that 96 percent of German companies intend to stay in China and 72 percent intend to invest more in China. And among U.S. companies, the percentage of those planning to move operations out of China has remained relatively constant since 2015, according to a survey of U.S.-China Business Council members conducted last year.

Last year’s closures were not enough to drive Kingston Technology, a major computer memory manufacturer, out of China. Kingston has moved some of its production to Taiwan to limit the risk of tariffs, but has no plans to move its Chinese operations, most of which are in Shanghai, although the company suffered four months of COVID -related closures last year. Other markets cannot compete when it comes to advanced infrastructure, business-friendly regulations, a highly skilled workforce and scale.

Foreign investment on the rise

Kingston has committed to investing another $20 million to $30 million in China over the next few years. “That’s a given,” says John Tu, Kingston’s CEO. And with China leading the global economic recovery, companies plan to keep investing.

Wal-Mart recently announced plans to invest $400 million in China over the next 5 years, while Starbucks announced a $150 million project to open a roasting plant in Kunshan. Overall, the list of companies with expansion plans in China reads like a “who’s who” of business.

Multinationals such as Tesla, Disney, Astra Zeneca PLC, Honeywell and Adidas are all striving for greater market share.

Tetsuro Homma, CEO of Panasonic’s Chinese operation, told Nikkei Asia last month that he “does not think the Japanese manufacturing industry could survive globally without being present in a market as big as China”

The reasons for having a presence in China continue to evolve. In the 1980s, it was low production costs that attracted companies to the market. Then the country moved up the food chain as companies wanted to sell to the thriving middle class and emerging unicorn companies. The fact that China has withstood the pandemic and the trade war may give companies even more incentive to double down, even in the face of calls for economic decoupling.

What does this mean for Biden’s new supply chain review?

So far, Biden’s executive order is just a first step in making critical U.S. supply chains more resilient and encouraging domestic manufacturing. The first assessment will look at supply chains for pharmaceuticals, rare earths, semiconductors, and large capacity batteries for electric vehicles. The second, in-depth assessment will focus on identifying critical and essential supply chains. At the end of this process, there will be recommendations to address any weaknesses in the supply chains.

earth processing technologies. The United States lost its production of pharmaceuticals and rare earths more than 30 years ago and would need a significant amount of time – 10 years or more– – to catch, According to Jack Lifton, founder of Technology Metals Research, China and other countries have invested billions in manufacturing infrastructure, including rare h up with competing countries, let alone be cost-effective. While it is impossible to predict what conclusions and recommendations will come from these reviews, what is certain is that supply chains will not see drastic changes in the short term.

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