China is often referred to as the "world's factory," given its huge manufacturing and export base. However, whether the country can maintain that status going forward is now being thrown into question after the unexpected shutdown during the Covid-19 outbreak caused havoc and severe disruption to the global supply chain network.
The disruption came so abruptly at such an unprecedented scale that it affected most industries, but especially medical supplies, pharmaceuticals, electronics, and consumer goods (we have seen what happened with toilet paper!), with long delays and bottlenecks in order fulfillment and shipping. In the meantime, all around the world, countries are feeling vulnerable without manufacturing of critical supplies onshore.
Lessons learnt during the outbreak in China
Relationships, communication and control are all key to overcoming the challenges brought by the supply chain disruptions. Having a good relationship with key suppliers makes a huge difference at such critical times in that priority is given to you over others, and you are able to reach a mutual understanding more quickly.
Corporate relationships are no different to the ones individuals have - where you have many acquaintances but only a few close friends. Maintaining a close long-term relationship is important to ensure a secure and stable supply. And the best test of any relationship is longevity. For example, one of the companies I worked with previously is one of the UK’s largest personal care retailers and they are now still dealing with the same suppliers I found for them 16 years ago! So you can imagine the importance of loyalty at a time when suppliers can choose which customers they are going to serve first.
It is vital to have timely communication, both through your local team and also from HQ to show the urgency during a crisis. You need to be in control of the situation. Seeking compensation from the supplier for not being able to deliver, getting the work in progress on the factory floor into finished goods, hoovering up as many supplies as possible and rushing them into air and water. During February and March, there was only a short window of less than one month between China’s resumed production and the UK-China travel ban. Being able to act swiftly and make quick decisions with a control of the process was critical for a client to ensure UK stores had enough products on the way for the shop shelves.
China plus One – but which one?
For some multi-nationals, the supply chain will never be the same again. They may have started the diversification before the pandemic and this will only accelerate it. Current suppliers will be rationalised and new supply chains duplicated in other countries. They will bring some sourcing back to Europe, but South-East Asian countries like Vietnam, Indonesia, Malaysia, Bangladesh and Thailand, all want a piece of China’s pie.
From my discussions with some of the Chinese manufacturing sector experts in our partner network, their argument is that decision makers should keep in mind the strengths and resilience of the established supply chain in China - which suggests that multi-nationals are not able to find the same level of combined excellence in manufacturing design, product development, sophisticated production process and management skillset anywhere else in the world.
Another partners of ours, who helped foreign businesses to set up manufacturing in Vietnam, has argued that Vietnam is limited in terms of their technical skills, and many of their raw materials are also dependent on China, especially for electronics and light industry goods. For example, China has over 80% of the world’s production and supply of rare earth making it not feasible to move the supply chain elsewhere.
My own research also shows that Vietnam’s cost advantages over China’s are not as high as commonly thought. The production level workers are paid about 2000 to 3000 RMB a month, nearly 50 to 70% of those in T3 cities in China, but local management skills are scarce, with most occupied by expatriates.
Productivity is another important factor. Chinese businesses manufacturing in Vietnam report that productivity is noticeably lower than China due to the experience and skills. However, a UK client finds Malaysia more expensive but more efficient than China and, together with Indonesia, which has a population of about 200m, the region is a good alternative to China manufacturing with regard to skilled production.
As a result of Covid-19, the need to optimise the global supply chain is more urgent than ever. But for those businesses that consider China a critical part of their supply chain, the big question is not whether the change should happen now, but how. What factors should companies be considering when working out a new supply chain strategy and how should companies go about implementing it in the so-called “China plus One” model?
To help businesses have a better understanding of these impending challenges and prepare for the strategic changes ahead, Crayfish.io is holding an online discussion on 16th June, where we will be considering these important and timely topics with a panel of academic and industry experts in sustainable manufacturing systems, technology and business management, strategic change, mobile, semiconductor, transportation and digital healthcare industries, from both the UK and China. Find out more and sign up here>>>
Ting Zhang is the CEO & Founder of Crayfish.io, the go-to platform dedicated to enabling better engagement with China powered by technology. With an online service marketplace as well as an extensive network of Chinese experts, Crayfish.io provides a range of services to facilitate cross-border collaborations. The Crayfish.io Accelerator is the UK’s first fully funded initiative to get tech startups China-ready. www.crayfish.io
Ting is also a Co-Vice Chair of the UK China Tech Forum.