What it means for Asia as supply chains make security the top priority
- As states and companies build redundancies and diversify to lower risks, China’s dominance as a global supplier will weaken in the longer term, while manufacturers in Thailand, Vietnam, Taiwan and Malaysia stand to benefit the most
Just how different it will be is only becoming apparent as detailed analyses of the longer-term impact of Covid-19 and accompanying geopolitical shifts begin to appear. The economic significance for China and other Asian nations in particular will be considerable.
The structure of global production and supply chains could change fundamentally, causing shifts in infrastructure links and human interchange. It will be not so much a brave new world as a more defensive one, with localised production matching more protectionist attitudes.
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As World Economic Forum noted, the “coronavirus crisis has revealed the fragility of the modern supply chain”, and an “urgent need to design smarter, stronger and more diverse supply chains has been one of the main lessons of this crisis”.
The World Bank devoted its World Development Report for 2020 to the anatomy of supply chains and the International Monetary Fund has analysed them. A recent report by Moody’s Investors Services is among the most comprehensive. It suggests that the pandemic will “accelerate fundamental shifts in trade relationships globally and particularly in Asia”.
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The full implications of this for companies and shareholders has maybe not sunk in fully yet but it is clearly going to make doing business more difficult. As Moody’s said, the security of the supply of industrial goods will “become an overarching objective of governments and companies, overtaking cost and efficiency concerns”.
Supply chains (by means of which myriad firms, small and large, in multiple different locations and countries contribute inputs to a final product) will become more regionally focused, “leading to a more fragmented global trade system with a greater range of suppliers of similar products”.
The focus, Moody’s suggests, will be on building “robust” supply chains – meaning the ability to maintain operations during a crisis by increasing inventories and increasing supplier diversification.
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Another key objective will be to avoid concentration of risk and a major source of risk is “reliance on producers in China, which accounted for 20-30 per cent of advanced economies’ total imports in 2019, especially in the case of the US, the European Union, Japan and South Korea”.
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“It will be time-consuming and costly to relocate the productive capacity that has been set up in China over the past 20 years to other emerging economies. Infrastructure, human capital and the sheer scale of the capital stock in China will be difficult to replicate in other countries.”
Meanwhile, “China’s domestic market, already one of the largest in the world, continues to grow. Companies that have established productive capacity in China to service the domestic market will be the least likely to seek to relocate supply chains”.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs