The West got it very wrong about Covid bringing an end to ‘Made in China’ goods

Dial back to early 2020, and the Western media was full of predictions that the global supply chain would leave China because of Covid-19. That hasn’t happened… If anything, Beijing is in a stronger position than ever.

Google just made the surprise announcement that it will produce its new Pixel 6 smartphone in China, after previously confirming it would be manufactured in northern Vietnam. But as the latter battles with an extreme wave of the Delta variant of Covid-19, requiring military assistance to enforce lockdowns, Google’s plans have changed.

Instead, parent company Alphabet Inc. has turned back to China, something that few would have thought possible a year ago, given the incessant political talk in the media and political circles over ‘decoupling’. This was the idea that global supply chains would leave China altogether and look to other countries, such as India and Vietnam, who have cheaper workforces and could feasibly replace Beijing as the ‘world's factory’.

The outbreak of the virus in Wuhan and its impact on global supply chains, as well as President Trump’s tariffs on Beijing, encouraged these arguments. As investor Mark Mobius told CNBC in April 2020, “A lot of buyers and a lot of the people depending on the supply chain in China are now having second thoughts, and are beginning to diversify their supply chain as much as possible to be closer to home.”

Yet 16 months later, that hasn’t materialized. With China announcing that it has crushed the highly contagious Delta variant and reporting no new Covid cases, it’s clear that the country remains the most resilient, stable, and reliable supply chain in what continues to be an extremely uncertain world. Numerous pundits and outlets, largely out of political bias, got it completely wrong.

The reality is that Beijing has not lost its grip on the global supply chain through the pandemic, but has in fact consolidated it. Misjudgements elsewhere have been based on a lack of understanding as to how supply chains work, and wishful promotion of other countries based on geopolitical preferences rather than economic realities.

In discussing this, it’s important to recognise what a supply chain actually is. Broadly, it might be defined as an integrated network of companies and businesses concentrated in one geographic region that complement each other’s needs in making a given product.

For example, if you are seeking to set up a car factory, where are you going to get all the elements required to make the car? You need a comprehensive range of parts, tools, and services. Logically speaking, you then choose the location for your factory that has the best conditions to deliver this. That’s why you wouldn’t set up in, say, Greenland, for example.

A supply chain works like an orbital system, with lots of small specialised businesses and services revolving around the primary business, which would not be able to function otherwise. The viability of a supply chain is not determined by how expensive the workforce is – it’s about a number of different elements, including the quality of infrastructure, such as access to energy, roads, ports and so on, all of which contribute not to just making a successful product but getting it to the consumer. The convenience and accessibility of the supply chain add to its affordability. As a result, building a successful supply chain is not something done on a whim.

Now, amid the current geopolitical climate, many people have increasingly argued that supply chains should not be based in China, with Covid-19 often cited as an excuse for moving them. Over a year ago, then-US Secretary of Commerce Wilbur Ross actually said that the Covid-19 outbreak in China could “benefit jobs in America” (before it struck the US).

The argument was readily made that the crisis’ disruption of global supply chains meant China was unreliable, before the debate descended into an outright political onslaught. With Trump signalling a trade war and tariffs, it was assumed that businesses would automatically move away to other countries.

Narendra Modi, for one, promoted his ‘make in India’ initiative in an attempt to exploit anti-China sentiment, claiming he could win businesses over to manufacture in his country instead.

But that hasn’t happened. And the primary reason for this is that countries such as India and Vietnam do not have the infrastructure, capabilities, skillsets or even the resilience to compete with China at a serious level. Moving a supply chain is not just about relocating a factory from one country to the next; it is about building a whole new network from scratch, which is expensive and a huge risk. A supply chain is weighted on cost, endurance and speed, and the conditions in China have ensured its appeal has outlasted these political shocks (even allowing for the escalation in tensions).

As 2021 arrived, talks of alternatives began to fade, primarily because the pandemic has lasted longer than people anticipated. The enormous Covid outbreak in India from April ruined Modi’s manufacturing impetus for one, and the current Delta outbreak in Vietnam is doing the same. It says a lot that even Trump’s tariffs – which are still in place – are not preventing China’s exports to the US from growing, showing how the supply chain is about resilience and capability.

Of course, in normal times, places such as Hanoi and New Delhi do have the ability to manufacture low-end items which do not require much sophistication, such as fabrics, and can compete in terms of affordability. But the other side of the coin is that China has continued to move up the supply chain in terms of greater value products. Because manufacturing is not only about producing goods, but also what you produce too – and here is where many people get the ‘Made in China’ stereotype wrong.

China doesn’t simply produce cheap junk, as many people would have you believe, but is manufacturing goods of an increasingly higher quality. As a surprise example, China, as of June holds more suppliers of components for Apple than Taiwan – a high-tech economy – does. This perfectly illustrates how things are changing.

The conclusion is simple: throughout 2020, the media and political pundits got it wrong. As China beats off the Delta variant, it is also shrugging off calls to abandon its ‘zero Covid’ approach and, despite people’s geopolitical preferences, world business leaders are simply saying, “If it ain't broke, don’t fix it.” The key takeaway? You don’t choose your manufacturing hub solely on who the US likes or dislikes.

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