Chinese firms outpace regional counterparts in ‘de-risking’ supply chains as trend grows in Asia-Pacific, survey finds

Poll of 800 business leaders in Asia-Pacific region suggests geopolitical and regulatory risks are overtaking cost as a determining factor
China’s leadership has been very vocal in wanting to diversify supply chains away from risky external environments, with an inward-looking approach

China trade

Su-Lin Tan

Published: 4:30am, 14 May 2021

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Mainland Chinese businesses and their Asia-Pacific neighbours are increasingly directing their focus towards supply chains and investments closer to home as fears over trade disputes and protectionism rise, according to a poll by multinational law firm Baker McKenzie.

Among Chinese business owners, most are sticking close to the reliably large Chinese market and opting for nearshoring – using nearby countries for business services and insourcing – or relying on affiliated and in-house suppliers, according to the firm, which compiled the poll results in its “State of Play: Supply Chains and Trade Realignment” report.

For others in the Asia-Pacific region, many businesses have started changing their supply chains by adopting similar strategies of nearshoring, insourcing and onshoring, which is the transfer of supply chains back home from an overseas location.

Both approaches point to increasing protectionism born out of a need by businesses to guard against trade wars and political conflicts.

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The survey involved 800 business leaders from across the Asia-Pacific region in the first quarter of the year.

“Collectively, this equals a huge realignment of global supply chains, as companies with operations in Asia-Pacific seek to de-risk their sources of supply, and as geopolitical and regulatory risks overtake cost as a key determining factor,” the report said.

Indeed, businesses in the Asia-Pacific region – pointing to the US-China trade war and the conflict between China and Australia – said that given these trade disputes and protectionism, it will be unsurprising if governments put more emphasis on internal development and prioritise local businesses after the pandemic.

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China, for one, made a big deal out of doing this last year when President Xi Jinping unveiled his dual-circulation strategy of relying on the domestic market as the outside world turns increasingly unstable and hostile.

More than half of those surveyed by Baker McKenzie “are actively seeking legal support or advice to mitigate this risk”.

One mainland pharmaceutical firm told the law firm that investing in the domestic supply chain and business was more likely to get “revenue numbers back up to 2019 levels” as the world rebounds from the pandemic. And more than half of those surveyed expected their sales to recover by the end of the year.

“While the news is relatively positive overall, however, across various industries much starker differences are apparent,” the report said. “Business leaders in the technology, health care and consumer goods and retail industries see a full recovery in the short term. Conversely, industrial, transport and energy companies, among others, say they may struggle for the next two to three years before they see a return to growth.”

And Chinese firms appear to be relatively more sanguine about the economic recovery, due to China’s success in containing the spread of the coronavirus, the report added.

For direct investments, sentiment also seems to be muted.

A mainland Chinese bank said its focus will be on domestic investments for the next three to five years, as overseas investments have become riskier.

In the past year, for example, the Asia-Pacific region saw Australia step up its restrictions and screenings of foreign investments. This was seen by some analysts as being aimed at China, with whom Australia has been locked in conflict for the past year.

Australia’s tighter foreign investment laws have toppled large deals such as the A$600 million (US$467 million) sale of Kirin Holdings’ Australia-based asset Lion Dairy & Drinks to China Mengniu Dairy in August.

But most Chinese firms said in the survey that they see promise in the world’s largest free-trade pact – the recently signed Regional Comprehensive Economic Partnership (RCEP) – in boosting business opportunities and making it easier to do business across the region.

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“This does not come as a surprise. The RCEP is of great significance to China,” said Anne Petterd, Baker McKenzie’s head of international commercial and trade for the Asia-Pacific region. “It also marks the establishment of free trade for the first time between China, Japan and South Korea.”

Once RCEP enters into force, she said, trade volume between those three countries “is expected to increase considerably as a result of tariff concessions and trade facilitation”.

Petterd also emphasised the important role that trade pacts play in strengthening bilateral relationships and defusing tensions between countries.

“Initiatives like the RCEP that include mechanisms to tackle non-tariff barriers to trade can help facilitate trade and mitigate some of the wider global risks,” she said.