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The Surprising Effect of the COVID-19 Pandemic: De-globalization of the Supply Chain

July 11, 2022

 by David Collins III

cargo ship with containers of goods

The effects of COVID (the travel restrictions, lockdowns, global isolations, etc.) may have a surprising side effect: de-globalization of the supply chain.

For the past 20+ years, China has dominated the global manufacturing supply chain due to its seemingly endless low-wage population, lax regulations, and rapidly developing infrastructure. There were always naysayers and pitfalls, many significant, to business in China but those were discarded in favor of price advantages, drive for short-term profit maximization and the relative ease of finding suppliers that could produce nearly any product.

Why Is De-globalization of the Supply Chain Happening?

More and more companies are looking to “de-risk” their supply chain by moving products meant for their home markets out of China. According to a recent article in the Financial Times, a quarter of both American and European companies are considering moving current or future investments outside of China. Anecdotally, we have seen more clients coming to us with questions about moving from China to Vietnam and Taiwan, and increasingly, to Europe or North America.

How Does Lockdown Affect Your Business?

First, a little background on the current situation. Most people may broadly know that there are lockdowns and other supply chain disruptions in China but do not know the extent of the situation.

The Chinese central government is holding on to an unattainable zero COVID policy. Lockdowns have happened suddenly and can last for weeks at a time. Two weeks ago, the lockdown in Shanghai was finally lifted after over 2 months of full lockdown. A member of our staff was unable to leave home for that entire time. While this is an extreme example (most lockdowns aren’t nearly as long), these lockdowns can happen quickly and last an indeterminate amount of time.

The lockdowns are only half of the story. Directives trickle down from the central governments in China to the local governments. Lockdowns may end in one city, but residents are often barred from traveling to other locations. This situation has happened in our organization many times. Shanghai may have opened up but residents of Shanghai are barred from traveling to many locations. Even if the official policy allows travel, local businesses may decide to play it safe and not allow people from other provinces or even other cities in the same province.

The situation is unpredictable and will likely remain so for the foreseeable future. Informal reports state that the zero COVID policy is likely to continue for the next 5 years. Furthermore, it is unlikely that travel to or around China will be predictable for the foreseeable future. Foreigners can return from other countries and experience lengthened quarantine as travel conditions may change after arrival. Most of our clients have found that to be an unacceptable condition and have refrained from traveling.

 

What Should My Company Do?

Many companies are pursuing a “de-risk” strategy. They are opening new locations to meet more localized demand and keeping a presence in China. China’s economic clout will only increase, and companies want to be a part of it.

However, many see that continuing operations in one location creates an unacceptable risk. Companies choose to mitigate this risk in a number of ways. Some look for multiple suppliers in China to spread the risk to different locations and shore up production if needed. Others are moving to China’s neighbors such as Vietnam and Taiwan. There is also the option to move back to or near to the home country. Each of these approaches comes with its own risk and reward. Moving closer to the home market removes much of (though not all) the risks associated with production in Asia.

The best solution is to find the right fit for your company and not follow the crowd. Over the years, we have seen companies move from China to Cambodia chasing lower wages only to find that the infrastructure and workforce are not adequate for their needs. Some clients moved to China just before the pandemic and would have been better off staying in North America or Europe.

 

The Bottom Line

To find the right fit, we would recommend conducting a feasibility study either internally or using outside assistance. The study could compare what your primary concerns are with the options to mitigate the current situation.

Many companies are finding that “de-globalizing” production to smaller units closer to the market reduces risks and can be a lot simpler to handle. Our factory relocation guide gives an overview of what to consider. In particular, the first step, initial research, outlines the questions you should ask about your organization to conduct a good feasibility study.

 

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Topics: Supply Chain Management, Manufacturing Consulting, Manufacturing In China

David Collins III

David Collins III

David was a Senior Strategy Consultant for Deloitte, served in Iraq as a Special Operations Civil Affairs soldier, and as a Governance Advisor to the Afghan Government with the Department of State. At CMC, David advises clients on strategy and investments.

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