PwC, AmCham China predict companies will pursue a 'China+1' strategy after COVID-19
Date: Tuesday, April 21, 2020
Source: Supply Chain Dive
- Despite the trade war and COVID-19 outbreak, "our China-based data suggests that the majority of our members will not be packing up and leaving China anytime soon," Alan Beebe, president of AmCham China, said in an April 17 press release concerning the organization's joint survey of 25 U.S. companies conducted with PwC March 6-13.
- Diversifying away from China or expanding manufacturing operations in the U.S. is an option, given the current climate, but companies have to weigh costs, time and understand it is a "largely irreversible process," Beebe said. Despite ongoing financial and operational challenges in their supply chains, very few companies the two organizations surveyed said they were preparing to shift operations or sourcing as part of their China strategy.
- Sixty-eight percent of companies said they expect China operations to recover from coronavirus-related disruptions within three months, and all respondents believed a return to normal would be complete within 12 months.
Supply chain experts from Boston Consulting Group to McKinsey have pointed to supply chains that diversified during the trade war as being better prepared to handle coronavirus-related disruptions. However, the survey results found 84% of respondents had no plans to move production or operations to another region of China or outside the country due to COVID-19 and 74% said they had no plans to shift sourcing.
"It is worth emphasizing that China appears ahead of the global curve when it comes to restarting the economy following months of lockdown, and many of the reasons why companies are in China in the first place still hold true today," Beebe said. "As a result, we expect to see companies adopting a 'China + 1' strategy as a way to diversify supply chain risks while tapping into China market opportunities."
China+1 refers to China remaining the main source for a company while it diversifies based on benefits to specific operations but doesn't move the whole supply chain.
While the state of U.S. manufacturing has declined since the joint survey was conducted, respondents said it was either too soon to tell (52%) whether the pandemic would shift their long-term China strategy, or that it has not changed their approach at all (40%).
For now, moving goods through and out of China is the respondents' foremost concern according to the survey, followed by suppliers operating at limited capacity and insufficient labor availability.
The Institute for Supply Management found supplier lead times have increased by 222% in China and 200% in the U.S. due to the ongoing effects of the coronavirus outbreak, according to a survey of 559 primarily U.S.-based companies conducted March 17-30.
This can affect operations at U.S. factories that are waiting on critical parts and is also a challenge for firms that need to export components from the U.S. to China for final assembly as airfreight rates have skyrocketed and maritime carriers blank Asia Pacific sailings.
These factors have all come to a head as the economy slides into what the International Monetary Fund is calling "The Great Lockdown," the most significant downturn since the Great Depression, due to the unprecedented "magnitude and speed of collapse in activity" that has resulted from the pandemic, according to a recent IMF blog post.
As a result, regardless of whether businesses diversified away from, or stayed the course in China, as global supply chains slow down alongside the economy, ISM expects the worst is yet to come in April and May until China, Europe, and the U.S. begin to fully rebound.