Gonzalo de Cadenas-Santiag, director of Economic and Financial Research at MAPFRE Economics
In 1990, China produced less than 3 percent of the global manufacturing output in value terms. Its share now is almost a quarter. “Factory Asia” now produces almost half of the world’s goods, especially intermediate goods, making it the housekeeper for most global consumer products, at least for which this is not the design.
However, the coronavirus outbreak has highlighted the problems associated with the world’s near-monopsonistic relationship with China, due to its value chain integration. It has also revealed that the problem is not only in Southeast Asia, but actually extends around the globe.
This is demonstrated by the supply chain survey results published by the Institute for Supply Management, with more than half of companies around the world experiencing delays in deliveries of basic components from China. Most respondents also said that they are not prepared to tackle continuous supply disruptions. In other words, Covid-19 has accelerated the trends that have been clear for some time in relation to the size of China’s production capacity.
As expected, the problem has once again given political weight to the strategy of relocating production, in Spain too. The pandemic has shown that supply chains in the electronics and technology, pharmaceutical and medical, automotive and consumer sectors rely on China as their primary, and practically only, global provider of intermediate materials and components.
Recognizing the risk to domestic industries posed by this dependence on China, some governments are offering manufacturers incentives to shift away from China and ease the pain of diversification.
The pandemic could speed up pre-existing plans to reduce reliance on China’s supply chain. In addition to rising labor costs, the escalation of trade tensions between China and the United States had already pushed a host of global companies to reassess their monopsonistic dependence on Chinese (state-owned) companies.
Ensuring greater supply chain resilience is also likely to be a future expectation of investors, who will now look at a company’s ability to mitigate this risk in case of further outbreaks or other events typical of this Knightian uncertainty we are current facing.