The Business Relationship between China and the Rest of World Post COVID-19 Pandemic
Against the context of the relationship with the US, China also has a view for the rest of the world, in particular, the relationship with the rest of the West. Of course, Europe plays a big part in this. The Chinese look at Europe with a somewhat more than a binary perspective. In other words, there’s not a single view on how to think about Europe. First of all, the UK is now going through Brexit and the European Union does not necessarily mean unity. From the Chinese standpoint, it’s always a little bit difficult to grasp that. The Chinese sometimes see Europe as going along with the US, which adds on to the complexity. But, in many cases, the European leaders actually don’t go along with Donald Trump. Therefore, from a Chinese perspective, they feel that there’s a strategic role that Europe can play to help or to work with China in order to advance China’s global agenda. I personally and genuinely believe that the priority of Xi Jinping, is not only to help China become stronger, but also to towards a global agenda in his own benign way.
Europe is important to China. China thinks very carefully about how to work with the European countries and this will be different for every country. Countries such as Italy and Croatia are seemingly wanting to get closer to China. Some other countries like Denmark seems to be moving away. China has lots of admiration for countries like Germany and Switzerland who have deep, world-class capabilities in engineering and technology. But anyway, this is an interesting dynamic that’s going on between the bilateral relationship with the US and the evolving relationship with the rest of the West.
The next area to highlight is how this affects multinational corporations (MNCs). During the pandemic, I talked to a lot of my clients. First of all, most of them were focusing on the short-term operational and cash flow issues. They were also aware of the broader issues like strategy and supply chains. But almost nobody really had the time to think through these issues thoroughly. Now as the pandemic is a little bit more stabilized in China, more and more companies are beginning to think about these issues. On the supply chain issues, there have been a lot of talks about supply chains moving out of China. There have also been a lot of talks about the “end of globalization” which I think is the headline story or cover page story for leading media this week. Last week on the Economist, they called this “End of Globalization,” which was quite alarming actually. Let’s take a more careful look at this issue. Broadly speaking, one can divide China’s supply chain into three types.
One is the low-labor cost manufacturing that produces relatively simple products, such as toys, apparel, and shoes. That of course got started in China about 30 years ago. But even about 10-15 years ago, this type of supply chain has already been moving out of China because China’s labor cost was going up. Rapidly, China had begun to be not as cost competitive as compared to countries like Vietnam, Cambodia and Bangladesh. It’s not new news; and the moving out is still going on and will continue to go on. In fact, over 10 years ago, I started helping some Taiwanese sporting shoes contract manufacturers who manufactured for companies such as Nike, Adidas and Converse. They had factories in Guangdong and they were already relocating the factories to Vietnam.
The second type of supply chain is the one that the destination market is the US or mostly the US. With the trade war causing tariffs increases, many companies’ decision makers felt that they could not afford to continue staying in China. They had to move their operations to other countries where the tariffs are lower and where there are more affordable economics. Some companies moved their production from Southern China to places like Malaysia where tariffs for the US export are more reasonable. But that’s because of tariffs, a comparatively artificial situation. One day when the trade war ends and Donald Trump says “okay, no more tariffs”, I think many of these companies would want to go back to China because of the conditions that China presents.
The third one is probably the most important one. It is what I called “sophisticated” manufacturing. This is the type of manufacturing that is surrounded by clusters of suppliers which has been built over the years and requires an intricate set of suppliers with a lot of capabilities in components and parts. That also requires the manufacturers to have integrated capabilities to assimilate or integrate the supply components and to use the factory for the testing, prototyping and packaging. The Chinese have built this up over the last several decades in various locations, often with help from local governments. This applies to sectors like smartphones, tablets, and increasingly IoT (internet-of-things) products or AIoT products (Artificial Intelligence plus IoT products).
This type of supply chain is pretty sticky actually. Would some of this kind of supply chains leave China? Maybe. Would they leave China in droves? Unlikely. The stickiness is strong because of the capabilities and the clusters that Chinese manufacturers have formed. By the way, when I say Chinese manufacturers, I refer to companies including Foxconn. They are Taiwanese, but they are rooted in mainland China. While Foxconn can build a new plant in India for Apple because Apple would want to target the Indian market with some specific products, that doesn’t mean that it’s going to replace the existing capacity in China. They are two different things. In fact, Foxconn had tried that in India and also tried to build a plant in Wisconsin. Both have not been very successful.
Anyway, that’s my view. In the future, there will be some degree of “reshoring”. There will also be some degree of localization and regionalization. But that won’t be the mainstream trend at least not for the “sophisticated manufacturing” type we mentioned above. The mainstream trend is going to be globalization, however the form and shape of globalization is going to evolve.
Due to the development in technology, in particular cloud computing, robotics and automation, and the development of software. Increasingly, manufacturing can be done on a distributed manner. You won’t need to have everything physically within one area. Manufacturing can take place in multiple locations. But this is not to replace China. It is a way for some companies to begin to leverage technologies to create risk mitigation measures. Managing risks versus taking a supply chain out of China are two different things. Globalization and the supply chain of sophisticated products will remain largely in China or centered around China. But at the fringes there will be new developments.
The last point I’d like to make is the one beyond the borders of China – the Belt and Road Initiative that is spearheaded by President Xi Jinping. This is very important, even though it is not as visible as it was a couple of years ago. It is also another way for the Chinese to try to break out from what they view as a threat from the US. So, I expect the Belt and Road Initiative to re-energize, but the form and shape, or the way that the Belt and Road Initiative will manifest could be quite different. Whereas in the past it was mostly around physical infrastructure, such as ports, bridges, and so on, increasingly the Chinese are now talking about building the “Digital Silk Road”, leveraging China’s unique ability in digital e-commerce. To this end, entrepreneurial companies like Alibaba, ByteDance and other companies who are pioneering the expansion out of China will play important roles here.
Thank you for your attention.