On May 9th 2020, Gao Feng Advisory’s CEO Dr. Edward Tse joined the 6th International Finance Forum 2020 Symposium. Along with other guests, he discussed globalization in the post-pandemic world.
The following is a record of this speech.
Recently there have been intense debates, instigated mostly by the media, over the key concerns of MNCs such as whether they should relocate their supply chains from China to somewhere else or back to their home country. I have talked to a number of MNCs’ CEOs and management in Greater China or Asia over the recent months about these issues, while they deal with the impact of the pandemic. My takeaways from the clients’ conversations are as follows.
During the pandemic, MNCs naturally focused on short-term operational efficiency and cash flow. While strategy and supply chain issues are always important, these are important issues that would take careful and elaborate considerations. No MNCs I talked to put such issues as “de-globalization” and “de-China-ization” at the top of their agenda (though they were of course, thinking about them).
The pandemic has hit a slew of industries, especially the automobile industry. China has been the largest auto market in the world, and global manufacturers, be it German, American, or Japanese, rely heavily on the China market. Therefore, the rapid decline of the China market in recent months has propelled these enterprises to ponder upon how to boost sales in China in the short-term. Many of them realized that they will need to learn digital sales and marketing tricks from the Chinese – such as using live streaming.
Granted, CEOs of MNCs and their board members, will have to consider other critical factors in the background, such as geopolitics. For American companies, they are concerned, and most often disillusioned, by certain policy and ideological moves made by Washington. Political rifts between China and the US have created a new set of complexities to what used to be strictly business decisions, leaving company management confused and indecisive. For many global CEOs – American ones in particular – China remains an important market for their businesses, and its importance will continue to grow in the future. Supply chain relocation is not a simple administrative order, for example, from Washington or Tokyo, to move companies immediately back to their home countries. Rather, a supply chain requires intricate engineering and design, and supply chain economics is not a one-time factory relocation expense, but a question of ongoing operational costs and efficiency.
Will supply chains be “de-China-ized?” I have seen a number of reports and opinions, including those from my consulting peers. Unfortunately, most of them made the common mistake of mixing up different types of supply chains, and so their conclusions are actually not very helpful. From my perspective, supply chains in China take primarily three forms.
The first type is the labor-intensive one. It focuses on low costs, and is in categories such as apparel, toys and shoes. Supply chains like these have been moving out of China since as early as more than a decade ago. For example, at that time, Taiwanese-owned sports shoe contract manufacturers for the likes of Nike, Adidas, and Converse, had begun to take their supply chains from the Pearl River Delta to Vietnam. This process is still taking place and will continue to do so in the future.
The second type includes manufacturers for whom the US is the main export market. The US-China trade war and the elevated tariffs by the Trump administration on many goods, had greatly reduced the profits of these companies whose manufacturing operations were largely, if not entirely, located in China. For instance, some Hong Kong-owned manufacturers of consumer electronics have already moved their manufacturing operations from Guangdong province to Malaysia. This is a necessary though reluctant move, but because tariff costs are “man-made,” if at some point the trade war halts and tariffs are reduced, I believe many of those companies that moved out will consider returning to China.
The third type is called a “sophisticated” supply chain. Manufacturers that employ sophisticated supply chains are not however, necessarily sophisticated in technologies, but they do require clusters of numerous different production processes and suppliers. Manufacturers need to integrate seamlessly and efficiently with these suppliers to arrive at an optimal combination of cost efficiency, high quality and a high degree of responsiveness and timeliness. In so doing, these manufacturers also need to possess strong capabilities in design, prototyping, testing, and factory-level processes. Such an ecosystem is essential and prevalent in consumer electronics, the most representative of which include smartphones, tablets, and the increasingly popular Internet of Things (IoT) and Artificial Intelligence of Things (AIoT).
However, since not putting all the eggs in one basket is important, how should MNCs manage risks? With the emergence of essential technologies, especially cloud computing and big data, a new mode of manufacturing has taken shape. Not all production processes have to take place in the same physical space, and a “good” production plant does not have to be the kind of colossal plant with tens of thousands of workers. Instead, now empowered by big data and cloud computing, the “new mode” allows production processes to take place remotely, which is what we call distributed manufacturing. Though in its nascent stage, distributed manufacturing has already captured the attention of CEOs who aim to leverage new methodologies and technologies to manage risks – against the backdrop of globalization on the broader scale, with localization or regionalization on the smaller scale. This ongoing trend, therefore, is not a simple notion of “de-globalization” or “de-China-ization.”
China has ample opportunities in this area. In terms of core technologies, such as semiconductor chips, engines, and precision technologies, China still faces a considerable bottleneck. Yet, for enterprises across the globe, many have come to acknowledge that the Chinese are at the global forefront of business innovations enabled by digital technologies. MNCs also realized that if they are not in China, they are potentially missing out on the most cutting-edge business innovations.
Under these new scenarios, what will be the opportunity for China? New modes of manufacturing and supply chains are emerging, technologies are evolving rapidly, but a global standard is yet lacking. There needs to be a set of “to B” (Business) software that can seamlessly connect manufacturing hubs across the world. This is what China (and for that matter, companies from wherever who have these sorts of capabilities) will have the opportunity and capability to accomplish, potentially in collaboration with enterprises of other countries. China then, can also take a leadership role in this area.
I will stop here. Thank you!