China is decoupling from the world, not the other way around
- The increasing nationalism of Chinese consumers, as much as supply chain issues and Covid-related disruptions, is the reason international firms are moving overseas
- China will lose some foreign talent, but domestic demand will shift towards perfectly good locally made products. The real winner, though, is Vietnam
In addition, when Covid-19 shut borders across the globe, companies’ reliance on a single source of components for manufactured goods was suddenly thrown into the spotlight. The cost-savings from operating with a single point of failure would have to be weighed against the cost of limited availability and higher prices for components.
More than one year into the pandemic now, the best way to illustrate what has been happening may be to give some examples.
With China clearly looking to catch up in semiconductor manufacturing, and probably hoping to take the lead in time, Intel has also carefully moved some of its production out, again favouring Vietnam. Nintendo did the same for some of the manufacturing of its Switch console.
German sports brand Adidas has also been near the front of the pack sprinting out of China, with Puma in hot pursuit according to the German Chamber of Commerce. Much of this big brand production is moving to Vietnam, Bangladesh, Cambodia, and Indonesia. Cotton sourcing has not been the only reason cited, with some firms also worried about stories of forced labour in China. Chinese consumers took offence and shunned those brands too.
In case you hadn’t noticed, there are recurring themes here:
As countries fall from grace in the eyes of the Chinese government, Chinese consumers change their buying patterns, revealing a certain nationalistic impulse that trumps other concerns. Until recently the target of such ire was usually Japanese companies, but more countries are feeling the sting.
Chinese consumers can choose from an increasing range of competitive domestic products, which suggests to me that China is leading the decoupling from the rest of the world – rather than the other way around as has commonly been assumed. A similar trend has occurred around the world as consumers in Covid-stricken countries have tended to support their local economies when they can.
Although many companies are moving production out of China, only a few are opting for a complete withdrawal. Most are spreading their manufacturing across several countries, which in time will increase the resilience of their manufacturing and supply chains. However, if future global pandemics are as disruptive as this one, or more, I’m not convinced that more distributed manufacturing is a fix for the problems we have witnessed recently. Logistics companies would be up a creek without a paddle in any case.
It’s clear that Vietnam has been a favoured destination for countries to relocate at least past of their production. With a highly educated, young workforce that can compete with China’s it is a logical choice. Anyone who has visited the dense and colourful cities of Ho Chi Minh and Hanoi will wonder how on Earth people can live with the 24/7 hustle and bustle, let alone brave crossing the street in the path of mopeds carrying an entire family.
But there is another side to Vietnam, one that is accommodating to manufacturing and offers the “nuoc ngoai” – your average gweilo – a relatively serene lifestyle once out of the city. And all the international staff that have to get brand new factories up and running over the next decades will need a good familiar pub, and given the British government has taken such an interest in Vietnam recently, it gets me thinking.
What does this all mean?
Perhaps, in the short term, Vietnam is the winner here. And as an investor or business owner, you certainly could do worse than to follow the money.
China will lose some manufacturing and foreign talent, but on balance domestic demand will shift towards perfectly good products made by domestic companies – which is not to be scoffed at.
International firms have executed the strategy they promised; the question now is how Chinese firms react in the long term. If a Huawei or a Xiaomi urgently needs parts at the same time as Apple does, then who gets priority deliveries?
As all this continues to unfold, I am about to become a grandfather. Consequently, I am wondering where I set up my retirement business in 10 years or so: a British pub with 50-year-old Duran Duran tunes playing non-stop, London Pride on tap with chow mein and sweet and sour pork on the menu. I missed out on doing that during Thailand’s boom as I was too young at the time. Perhaps I’d better get a self-study course in Vietnamese.
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets