Foxconn recently made headlines for announcing it would move some iPhone assembly from China to India, in response to Apple’s decision to diversify production in part due to related restrictions. to COVID-19 in Shanghai. Samsung moved its personal computer production from China to Vietnam in 2020, ostensibly to cut costs. And many other multinational companies have made similar decisions, choosing to outsource all or part of their manufacturing to their home or another country.

Clearly the math has changed for companies when it comes to locating their production base in China. Other markets in Asia are gaining in competitiveness and countries are offering broad incentives to transfer sensitive technologies home. But does this mean that the “Chinese factory” risks losing its role as the world’s leading manufacturer? As change is underway, we do not believe China’s leadership is in jeopardy and see investment opportunities throughout the value chain.

Pandemic restrictions fuel relocation

Strict mobility restrictions imposed by China in Shanghai since late March, along with a series of closures in other cities, particularly in the surrounding Yangtze River Delta region, have strained supply chains. And in the absence of a clear exit plan for the dynamic zero COVID strategy, mini-lockdowns could therefore continue in the event of new epidemics. This means that further disruptions to production operations are possible.

All of this comes as regional competitors – Vietnam, Malaysia and India to name a few – return to pre-COVID life. Based on a survey from the EU Chamber of Commerce in China released in early May, nearly 25% of surveyed companies plan to move their current or future operations out of China due to the strict zero COVID policy, more than double the number in a January survey and the highest proportion in a decade.

In addition to lockdown restrictions, other factors are fueling the trend. The need to diversify manufacturing began in earnest with the trade dispute between the United States and China, as it exposed the downside of depending on one economy. Additionally, by lowering tariffs, the Regional Comprehensive Economic Partnership (RCEP) Agreement benefits companies whose supply chains are spread among the various member countries of the region. RCEP therefore encourages companies to adopt a “China+1” strategy.

Thus, if China’s zero-COVID strategy and induced lockdowns persist, interest in supply chain diversification outside of China may increase.

China still has key competitive advantages

Even with mobility curbs, we don’t expect China’s supply chain dominance to end anytime soon. The country not only has a huge and growing consumer market, but also offers the best combination of advanced manufacturing infrastructure, efficient logistics, and high-quality skilled workers.

Companies with some infrastructure outside of China are mostly reallocating and rebalancing their operations, but not completely relocating. For example, while labor-intensive industries like footwear have shifted over the past decade to Southeast Asian countries, China has remained the largest footwear manufacturing country. in the world in 2021. When it comes to the middle part of the production chain and intermediate goods, China is irreplaceable with its complete and large-scale manufacturing chain.

Investing in China’s Supply Chain Upgrade

As the Chinese government increases its investment in key technology segments throughout the supply chain, we see investment opportunities in several areas.

Growing demand for electric vehicles and projected shortages of batteries and materials are expected to drive continued investment growth in this industry, benefiting Chinese automakers. Beijing’s target for robotic installations in factories – 20% annual growth through 2025 – should provide strong support for its automation industry, which includes both hardware and software players. And the rise of 5G, AI, drones and blockchain is expected to bolster demand for these technologies in the long run.

Further ahead, we see opportunities in long-term investment themes (LTIs) such as “Automation and Robotics”, “Emerging Markets Infrastructure”, “Energy Efficiency”, “Safety and Security”, “Waste Management and Recycling”. waste” and “Clean air recycling”. and carbon reduction. To learn more about how to invest in long-term growth, click here.

The content is a product of the Chief Investment Office (CIO).

Main contributors: Eva Lee, Yifan Hu, Carl Berrisford, Summer Xia

See the full report – Is Factory China in danger?, May 31, 2022.