Over the past two decades, China has become the main manufacturing centre in Asia and its share of global trade in some sectors now exceeds 50%.
In recent years a rise in operation and labour costs, coupled with the global economic balance of power shifting and tensions between China and the US rising, has prompted manufacturers to consider changing their production chains to be less dependent on the world’s second largest economy.
However, much of the discussion remained on paper until the outbreak of Covid-19, which has brought serious multiple disruptions to the supply chain. As China locked down to contain the pandemic, many countries were also unable to receive goods including vital components for their domestic production.
According to The Economist Intelligence Unit (EIU), the Covid-19 crisis and consequent supply shock is likely to accelerate the move towards regional supply chains, with several businesses considering relocating parts of their production away from China to enhance resilience.
Geopolitical tensions have also become another catalyst on onshoring. Several governments are now offering incentives to exit China to reduce reliance on that country as well as generating more jobs at home.
In April, Japan earmarked an economic stimulus package of US$2.2 billion to encourage manufacturers to reshore production out of China. Meanwhile, the US is also considering a US$25 billion “reshoring fund,” according to a report by Reuters, which includes tax breaks and subsidies.
Conversely, China is promoting its special merits as a production centre and is expected to focus on developing its high-tech manufacturing infrastructure.
Is diversifying production chain feasible?
Among different manufacturing sectors, diversifying production is easier for lower-value sectors - several apparel manufacturers have left China for Vietnam, Cambodia and Ethiopia.
But technology and consumer electronics companies are more reliant on China’s infrastructure, skilled labour pool and major consumer market, finding it harder to diversify. Additionally, a company which moved its production away from China might still have to rely on component manufacturers producing there.
Businesses choosing to diversify are also faced with a difficult decision: where next? Manufacturers must consider labour costs, infrastructure, country risk, market size, consumers’ reaction. For instance, sales from remaining facilities in China could drop if customers respond negatively to factories closing, while shifting production to countries with unreliable infrastructure causes longer and costlier journeys, shipping costs, etc.
Fuel prices are also worth monitoring. While prices dropped this year due to Covid-19, PwC argued in 2012 that transportation fuel prices rising made long supply chains more expensive and local productions more attractive.
All considered, the impact of onshoring/reshoring on global trade might not be that significant. According to IHS Markit, once Chinese factories reopened after closing due to Covid-19, the portion of US imports from Asia coming from China rose in May to an eight-month high of 64.8%.
The intelligence provider argued that this showed it can take years for US importers to considerably move production away from China to other Asian countries. According to KPMG, although China could experience some activity loss and more competition from lower-cost realities like Vietnam, China’s skilled workers, infrastructure, social stability, and capacity for high-end projects suggest it will remain an important manufacturing location.
Building Flexible Supply Chain Solutions
For businesses wishing to reduce supply chain risks while keeping manufacturing in China, and to companies considering shifting production away from China, comprehensive logistics solutions providers like Contship Italia can be valuable allies.
For corporations that started relocating their productions to other emerging countries, Contship’s hubs provide well-connected networks and weekly direct calls to countries including India and Pakistan, or via transhipment from Indonesia, Malaysia, Vietnam etc.
For corporations that choose to maintain and expand their production capacity in China, Contship supports EU-China trade offering the possibility to combined diversify transport modes from/to China using both sea and rail thus reducing supply chain risks. Several combined transport solutions are today available between Italy and China, including the recent Xi’an-Melzo intermodal service via Rail Hub Milano (RHM) allowing a 14-day transit.
Meanwhile back in Europe, Contship’s strong intermodal network can reduce the risks linked to a heavy reliance on trucking, a transport mode easily impacted by unexpected events. For instance, current road checks, maintenance and improvements in Italy’s Liguria region caused disruptions to trucking services and paralysed road connections to/from Genoa, Italy’s first gateway for containerised imports/exports.
To reduce the impact, Contship’s Multimodal Transport Operator Hannibal promotes the use of intermodal transport and services connecting daily Genoa, La Spezia and Ravenna with RHM in Milan-Melzo, Padua freight village and Dinazzano (RE) terminal.
To support trade from Genoa to the Lombardy region, a Fast Corridor between Genoa and Milan-Melzo will also be activated by the end of summer 2020.