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China still key in post-Covid global logistics

China’s relationship with the world was changing before COVID-19 hit. What will be the impact of the pandemic on this trend, and the implications for supply chains? Dave Berridge, Secretary of the Automated Material Handling Systems Association (AMHSA), considers the future.

The coronavirus pandemic has dealt a huge body blow to global trade and investment. Multinational companies initially faced a supply shock – as they struggled to source raw materials, components and packaging – followed by a demand shock as lockdowns began around the world. COVID-19 has exposed the fragility of complex global supply chains built on the principles of lean manufacturing and cost minimisation. Nowhere has this been more evident than in the healthcare sector, where governments scrambled to secure PPE for frontline workers.  

Global exposure

As the country hit first by COVID-19, China’s economy – the world’s second largest –was the first to suffer. Its first-quarter GDP figures show a 6.8% contraction over the previous year, the largest decline since the 1990s. With its reputation as the ‘factory of the world’, COVID-19 has affected China’s global exposure, but changes in its relationship with the world economy were already underway.  

China had been reducing its global exposure over the past decade due to rapid expansion of domestic consumption, which now accounts for 60-70% of its GDP growth. In response, the country’s supply chains became more localised. Added to these economic factors was the pressure of the geopolitical situation – particularly the US-China trade dispute – which increased risk and uncertainty. McKinsey Global Institute’s China-World Exposure Index measures the relative importance of economic flows – in terms of trade, capital and technology – for China and six other economies (France, Germany, India, Japan, UK and USA), with the value of 1.0 being the average exposure. On this scale, China’s exposure to the world fell from 0.9 in 2007 to 0.6 in 2017. Over the same decade, the exposure of the rest of the world to China increased from 0.4 to 1.2, due to global procurement and the rising importance of China as a consumer market.  

Growing unease

However, by last year many multinational companies operating in China had begun to feel sufficiently uneasy to think about leaving. A survey conducted by the American Chamber of Commerce in 2019 found that almost 40% had considered moving production to areas such as Southeast Asia or India, mostly due to the imposition of tariffs in the Sino-American trade dispute. Another factor was that wages in China, although still much lower than in the West, have been rising steadily for over a decade – partly due to the effects of the one-child policy on reducing labour availability.  

COVID-19 effects

The pandemic has certainly intensified the debate over whether companies should localise – or at least regionalise – their supply chains. With growing anti-China sentiment in the US, multinationals there are particularly under pressure to ‘decouple’ from China. There is also pressure from governments elsewhere in the world to reshore supply chains. For example, Japan has allocated $2.2 billion to assist its manufacturers in shifting production capacity out of China. And all this is exacerbated by the restrictions that containment of the virus has placed on mobility and trade. The World Trade Organization estimates that global trade may fall by 13-32% in 2020, a figure higher than the 12.5% contraction in 2009 resulting from the financial crisis. 

China still key

There won’t be a mass exodus from China, though. The global economy has evolved to be significantly more interconnected in recent years than ever before, which makes any restructuring complicated. The country has contributed about 25% of global GDP growth over the past couple of decades. The latest IMF forecast suggests that, while 90% of the world will experience negative GDP growth this year, the Chinese economy may still grow by 1.2% – so China will remain an engine of growth for the global economy. In addition, some argue that alternative bases for production – such as Vietnam, Mexico and Bangladesh – lack the logistics networks, quality control and legal standards to rival China, while reshoring to the West would mean that the cost advantage is lost. 

Automation set to grow 

As globalisation is reversed, digitsation and automation will be the means to build smarter and more resilient supply chains. Logistics automation and analytics will not only help to improve visibility and control of supply chains but will also help to keep employees safe by reducing the risk of virus transmission. 

 

TAGS: COVID-19 News
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