When Covid-19 shut down much of China through February, the crisis highlighted how dependent international companies truly are on Chinese manufacturing.
In short order, international firms making products from clothes to consumer electronics were paralyzed as work froze at Chinese factories assembling their goods or producing essential components. The reliance on China came into still greater relief once Covid-19 hit countries such as the US, which discovered they couldn’t produce enough medical masks and other equipment domestically because they’d outsourced the work long ago to China.
To make sure they aren’t caught in similar straits again, some nations have begun offering companies financial incentives to move manufacturing out of China and build more resilient supply chains. Less dependence on China would also have the added bonus for these countries of reducing China’s geopolitical leverage.
In India, the prime minister’s office is working on a plan that would provide benefits related to capital spending for makers of electronics and medical devices that shift production out of China. Some could return to India, but a more diverse manufacturing base is benefit enough. “A number of countries are now keen that their industry diversifies manufacturing,” an unnamed government official told India’s Economic Times. “There is going to be a shift.” The government has already reached out to more than 100 companies, and it’s looking at extending the offer to other sectors as well.
Japan set aside $2.2 billion earlier this month to help its companies relocate manufacturing from China. About $2 billion is for companies moving production to Japan, with the rest earmarked for companies moving it elsewhere. It followed Japanese prime minister Shinzo Abe’s call in March for more sophisticated production to move back to Japan and the manufacturing of other items to be diversified around Southeast Asia. Iris Ohyama, a maker of consumer goods, is set to become the first company to get the subsidy as it starts to produce medical masks, including the raw materials needed, in Japan.
The US hasn’t announced any similar plans, but Larry Kudlow, top economic adviser to US president Donald Trump, voiced his support for one in a recent television interview. “As far as policies to get the companies home, a lot of things we can do,” he said on Fox Business News. He proposed the US pay the full costs for companies moving plants, equipment, and intellectual property from China back to the US.
Breaking reliance on China won’t be easy since reorganizing supply chains is expensive and because China’s manufacturing infrastructure is unrivaled. But even before the pandemic, many multinationals were moving production as costs in China continued their rise and the US-China trade war complicated matters for those exporting from China to the US consumer market. The pandemic and government subsidies are just more incentive.
A large-scale shift by companies to return manufacturing home may be unlikely, however. Companies may bring back production of higher value-added products or items related to national health and security. But for other items they may find less-expensive options in Asia or countries near their major markets for cases where speed is critical. Globalized supply chains still look set to remain the paradigm, just perhaps more diversified than before.