Why the coronavirus may not make a big dent in supply chains in China

Even if a supply chain reshuffle now looks inevitable, it might not come about as soon as some expect. As lockdowns spread across the world, it doesn’t make sense to move production out of a country starting to recover from the Covid-19 shock

Reading Time:3 minutes

Tesla has started delivering Model 3 electric cars built at its Shanghai factory. Photo: Reuters

Published: 9:00pm, 17 Jun 2020Updated: 10:15pm, 17 Jun 2020

The Chinese economy has been confronted by great challenges over the past two years. The US-China trade war and the Covid-19 pandemic have not only caused short-term shocks but are also leaving lingering long-term questions.

Perhaps the most important of these questions is whether the supply chain fragility that has been exposed – whether as a result of tit-for-tat trade tariffs, or production disruption during the pandemic – will prompt multinational companies to shift their production out of China.

Before answering this question, we need to understand why China became the centre of the global supply chain, attracting companies from all around the world. The following factors are vital.

The first, and most obvious, is the low cost of production. Very competitive labour, land and utility costs made China a magnet for foreign direct investment, leading to an economic take-off in the 1980s and 1990s.

Second, China boasts the world’s most comprehensive manufacturing ecosystem. With 41 large industrial categories, 207 medium industrial categories and 666 small industrial categories, China is the only country in the world that covers all the categories included in the United Nations’ industrial classification, according to the State Council Information Office.

The comprehensiveness of this ecosystem, coupled with an abundant supply of low-cost, highly educated workers, is a key reason global firms manufacture sophisticated products, such as electronics, in China.