The COVID-19 pandemic is already seeing companies moving out of China. With the Wuhan coronavirus outbreak countries and companies have realized how their over-dependence on China turned into a liability. As China became the world’s largest exporter of intermediate goods used to make final products, every corporation from Apple to Adidas, from Nissan to Toyota, has been left with little or no ability to substitute its products today. Many countries are blaming China for mishandling the early stages of the outbreak. Millions are in lockdown by the unseen enemy Coronavirus (COVID-19). While the coronavirus’s impact on economic growth worldwide is being determined, the one lesson every country and corporation has learned is to isolate its production site from China, reduce its dependence on imports from China, and reduce foreign direct manufacturing investment in China. Due to the corona virus exports from China fell by 17.2 percent in January-February 2020, compared with a year ago. The domino effect has just begun.
The Wake-Up Call for Countries around the World
The Shinzo Abe government of Japan in response to the coronavirus pandemic, is the very first to take drastic action against China by urging Japanese companies to move factories out of China, and back to Japan or any other country. Despite the scheduled visit of the Chinese President Xi Jinping to Japan in April, and ongoing trade relations between China and Japan (China is Japan’s No.1 trading partner), the Prime Minister Shinzo Abe-led Japanese government has taken what one calls ‘a historical decision against China’. China as a hub with the lowest costs of production is slowing dying as countries are preparing to reduce their dependence on China and look for other suppliers.
The government of Japan earmarked a $2.2 billion economic stimulus package to help its manufacturers shift production out of China claiming the coronavirus disrupts supply chains between the major trading partners. This budget aiming to offset the devastating effects of the pandemic, includes 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move the production to other countries. The government panel discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.
A February 2020 survey by Tokyo Shoko Research Ltd. found 37% of the more than 2,600 companies that responded were already diversifying procurement to places other than China amid the corona virus crisis.
Though President Trump signed an initial trade deal with China in January 2020, the underlying message was to bring back manufacturing of items, back to the US and reduce its dependency on China over the coming years. The Trump administration made only a small cut in tariffs on a few Chinese goods, leaving in place hefty 25% duties on about $250 billion of imports from China. On account of these duties, a slow exodus from China was already underway as companies started to shift from their China partners to Vietnam, Bangladesh and throughout Southeast Asia.
For American companies like Apple, Microsoft, Google, and Procter & Gamble, the corona virus crisis highlighted the downside of their dependency on China. P&G, for example, said it has 387 suppliers in China that ship 9,000 materials globally, affecting about 17,600 finished products leading to a major drop in profits. Apple’s chief executive, Tim Cook, when the corona virus spread through China, told investors that it wasn’t going to meet its revenue projections in the current quarter because its contract factories weren’t resuming production as quickly as it had expected. Apple is not only recooking into its supply chain for a major overhaul, but it has taken baby steps to diversify and depend less on China.
The Trump administration need not say it aloud but the current coronavirus has exposed American companies to the downside of relying on cheap goods from China. In the coming months, once the air clears, US-China trade figures will tell another story.
Who could have foreseen the extent of the coronavirus in Italy? Italy blames Matteo Renzi ex-prime Minister when in 2014 he allowed the Chinese to begin buying a property in Italy. His politics and policies soon led the Chinese to own 300 companies including banks, telecoms, fashion and represent 27% of the major Italian companies. In December 2019, the first coronavirus case had been imported by Italy from China in the Chinese neighborhoods of Lombardy. The people of Italy are learning a hard-hit lesson allowing the Chinese to foray into their businesses and taking over lives.
The French Finance Minister Bruno Le Maire on April 6, 2020, said on radio France Inter “We have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products” and “strengthen our sovereignty in strategic value chains” like cars, aerospace, and medicines.
Even Chief Security Officer Thomas Tschersich of Deutsche Telekom, Germany, said, “We need to be willing to invest in Europe to balance out the dependency on China”.
Slowly but surely more countries and companies in Europe are facing up to the economic reality.
While Japan said ‘pack up and get out of there’, US talked about ‘decoupling’ from China, and Europe spoke about ‘break dependence’ on China. Companies are now looking to source components outside of China and also increasing their vendors in more than one country for a single product keeping in mind materials safety, environmental rules, and labor practices. Will China survive the reverse effects of globalization and how it will benefit countries like India, Mexico, Vietnam, and Bangladesh, remains to be seen.