Is the supply chain decoupling from China?

Since 2018, when then-US President Donald Trump launched a trade war with China, multinational corporations and foreign companies have been considering diversifying their supply chains to avoid dependence on the "world's factory" for the past 40 years. Furthermore, the Covid-19 pandemic, coupled with geopolitical upheavals worldwide, especially the Russia-Ukraine conflict, has exposed vulnerabilities in supply chains caused by over-reliance on a single location.

Workers are seen working on a car production line in Wuhan, China.

In recent years, corporations like Apple and Mazda have been determined to diversify their supply chains by seeking out other, lower-cost manufacturing hubs in Asia such as Vietnam and Bangladesh. However, things are not so simple because for the past four decades, China has been the primary manufacturing center for Western producers, and both sides have benefited significantly from this relationship.

China reduces imports.

According to Business Insider , although finished product manufacturing is shifting out of China, the supply chain is not yet completely detached from the country. Trade data shows that Chinese manufacturers are assembling fewer finished products domestically. Instead, they are shipping raw materials and intermediate products to Southeast Asia for assembly before export. This means the supply chain remains tied to China even as production shifts to other markets.

The supply chain is part of the ecosystem, and to support production in China, raw materials or intermediate components need to be sourced elsewhere. However, multinational corporations and companies are shifting production away from China, leading to a decline in exports from countries supplying intermediate products to China in Asia and elsewhere.

According to the report "Is Asia Gradually Detaching from China?" published on September 8th by economists at Nomura Holdings, the share of processed component exports from markets such as South Korea and Hong Kong to the Chinese market decreased by 2% in the 26 months from April 2021 to June 2023. China's purchases of raw materials and intermediate products from most Asian countries also decreased significantly during this period.

Employees at a factory producing handheld gaming devices for an American company in Guangdong, China.

Analysts believe this slowdown marks the largest decline in China's imports of raw materials and intermediate products in two decades, reflecting a shift in supply chains away from the country. According to Nomura's chief economist, Sonal Varma, the share of exports from India and Asia (excluding Japan) to China has decreased significantly over the past five years.

Furthermore, even Chinese companies are shifting their supply chains out of the country to avoid risk. In April 2023, the Financial Times quoted Lu Yucong, chairman of Guangdong Vanward New Electric, China's largest water heater manufacturer, as saying that American companies had specifically requested them to build factories overseas "to continue cooperation."

Exported to Southeast Asia for assembly.

Although much of Asia appears to be "decoupling" from China, trade between Southeast Asian countries and China is increasing, particularly among countries with close economic or political ties to China.

A report published by HSBC in September shows that since the beginning of 2023, China's exports to Southeast Asia have consistently exceeded those to the US and Europe, reaching nearly $600 billion per month. This shift is partly due to China's adjustment of its economic policies under the "Dual Circulation" economic strategy, which prioritizes promoting economic ties with countries in the region over other markets. This shift is also partly because products originating from China are being shipped to several Southeast Asian countries for assembly before being exported to end-consumer markets such as the US and Europe.

This is also the assessment made by researchers at the Carnegie Asia Program in April. Researchers Yukon Huang and Genevieve Slosberg found that although China's share of total US imports decreased from 22% to 17% between 2017 and 2022, Beijing is behind the supply of components and raw materials for other countries' exports to the US. This means: "China may be exporting less directly to the US, but they are indirectly exporting more."

Separation is not something that happens "overnight".

Analysts believe that China is likely to continue playing a major role in global supply chains. Despite expectations or fantasies of "decoupling" from China, the world's second-largest economy is likely to continue playing a significant role in global trade, even if indirectly.

Business Insider previously reported that, although Apple and all tech companies have taken steps in recent years to reduce their reliance on China, it is not easy. It is estimated that it would take Apple approximately eight years to move 10% of its production out of China.

Chinese workers are employed at a Foxconn factory, a leading supplier to Apple.

Speaking to Business Insider , Misha Govshteyn, CEO of Houston-based MacroFab, said that companies are shifting manufacturing processes to other countries in Asia and North America to diversify their supply chains, save costs, and mitigate risks. In this process, they are also requiring their suppliers to diversify their supply chains as well. However, he emphasized that "China will always be an important part of global trade."

Over the past four decades, China has built, improved, and perfected its supply chain, and ending the "Made in China" era is no easy task. Shifting the supply chains of corporations and companies from China to Asia, or some to the US, is not something that can be accomplished in a year or two, especially considering factors such as the cost of relocating factories, labor, equipment, opportunity costs, and the time required to rebuild the supply network.

Furthermore, China still holds major supply centers, possessing logistics services, human resources, specialization, and intellectual property protection far superior to Southeast Asian countries, India, and Mexico. Therefore, whether directly or indirectly, this country continues to play a crucial role in the global supply chain in particular and global trade in general.

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