In early 2020, businesses got a wake-up call. They weren’t just concerned about the growing health crisis emerging around the world caused by the Covid-19 pandemic, there was also the realization that their reliance on global trade and open borders was to be put on hold.
While the atmosphere in the third quarter of 2020 has somewhat stabilized in certain areas with people adjusting to this “new normal”, the early-year panic has made businesses rethink their overall global supply chain set-up. In particular, business have re-examined the strategic role of China-based production facilities, which play such an important part in the supply chains of many companies.
China accounted for between 20% and 25% of the advanced economies’ total imports in 2019, according to data compiled by Moody’s Investors Service. However, amid ongoing trade tensions between the United States and China and the steadily rising cost of wages in the world’s second-largest economy, businesses over the past several years have looked for greener pastures elsewhere. Before the pandemic, multinational companies like Apple Hasbro and GoPro had already indicated that they intend to or had moved to diversify their supply chains away from China.
The Covid-19 pandemic, a recent Moody’s research note suggests, will further accelerate these supply chain shifts to areas less affected by geopolitical tensions and closer to home markets.
The mixture of localization and further diversification from single-source suppliers will headline this new era of trade, with companies becoming more attuned to their logistics set-ups.
"Ensuring supply security by enhancing the strength of supply chains will become the overarching objective of governments and companies, overtaking cost and efficiency considerations," says Michael Taylor, Moody’s managing director and chief credit officer for Asia-Pacific. "The Asian countries that stand to benefit from diversification are those with sound economic fundamentals, reliable infrastructure, sufficient human capital stock, and low geopolitical and supply security risk."
In fact, countries like Cambodia, Indonesia, India and Vietnam stand to gain from this diversification push by businesses. Vietnam’s manufacturing prospects for instance got a shot in the arm earlier this month when the country’s free trade agreement with the European Union came into effect.
The question now is whether those frequently mentioned countries could provide the infrastructure needed to support the high requirements of multinational manufacturers accustomed to operating in China.