China’s Gift to the Rest of the World

The trade battle between the US and China has taken some interesting twists and turns. Front and center in the conversation are the economic issues each country has been up against. Financial institutions are cautious when it comes to the public market, with fluctuations happening every time there is news of trade talks. Concerns of a US recession and overall slow GDP growth loom, and several economic reports out of China suggest their economy has slowed, and GDP is continued to be forecast downward through 2020.

With all that is happening, there is a long term observation that I find quite interesting related to the supply chain. The trade tension is shifting manufacturing out of China due to the tariffs in the US. The US market is so important to many companies that their priority has become getting manufacturing out of China and into other countries. This is what I’m calling China’s gift to the rest of the world.

The Supply Chain Shift
I have close contacts at several OEMs and speak with folks in the tech component supply chain frequently. The sense of urgency of shifting the supply chain out of China has accelerated the last year and is a primary focus at the moment. With the pressure China is putting on Taiwan, ODMs based there are also looking to move.

I have read three different private studies and reports on what is happening here, and the latest report shows accelerated timelines to move core manufacturing out of China. According to the study, which includes interviews with many of the main tech manufactures and supply chain players, 63% have already moved at least some of their production volume out of China. 57% said they are still planning to move even more production out of China and into other regions. How much manufacturing can be moved out of China is a big question for many. At the moment, the sweet spot seems to be between 30-40% of their production is moving or planning to be moved to another region.

The biggest benefactor has been Vietnam, but a fascinating emerging benefactor is India. See this chart from a CFO survey of ODM and supply chain companies.

Vietnam and India rank atop the list. Interestingly, the US in the YoY data from this survey declined in the number of respondents saying the US was a candidate with only 10% of respondents considering moving to the US, which is down from over 30% the same survey a year prior.

This question was on the planned move, again noting many have already made some manufacturing moves out of China. Looking at the data on countries manufacturing companies have already made investments, Vietnam, India, and Malaysia rank atop the list, in that order. In terms of the countries, other than China, the same CFOs said they currently have production moved to, atop the list was Vietnam, Korea, India, Malaysia, and Japan in that order.

It seems momentum is favoring these countries and Vietnam and India in particular. While it won’t surprise too many that countries in SE Asia are on this list, the most interesting one for me is India.

India’s Potential To Benefit from China’s Shift
Since the early 2000s, I had studied China from a few different lenses. Having been there and spoken at tech conferences and supplier-customer events, the culture and hard-working, determined nature of their people fascinating me from the moment I got there. China’s work ethic was vastly different than many other European countries I’ve visited, and that stood out. China’s people’s work ethic is a core reason they have become what they are as a manufacturing hub and will be a core reason for whatever else China evolves into in the future.

China’s sheer scale was another competitive factor. With well over a billion people in a growing class of consumers entering the financial conversation, and being highly ambitious, China’s scale of driven people was a large part of their success. The first time I was in China, one of the executives we were working with who lived there remarked: “I’ve never seen a more capitalistic people that are unfortunately held back by communism.”

I make the two points above because India shares a lot of the same dynamics that China does. India has a huge population and a growing economic class of customers entering the financial conversation and driven by ambition. While I’ve never been to India, I have close contacts there who help me stay informed on the economic and consumer trends. Years ago, I wrote about how an uprise in successful Indian CEOs, like Satya Nadella, was helping to inspire and motivate Indian culture. Having followed the Indian market for many years as well, and watching their ambition play out and grow, I’m beginning to think India has many opportunities to compete in the way China did on a global scale but in a very different way.

Ultimately, this acceleration is not just manufacturing, but also the opportunity for India has come because of the trade war. The surveys I mentioned from supply chain CFOs have been going on for years, and prior to the US trade war with China, there was little sense of urgency to move anything out of China. Now that is happening at a rapid rate, and what I’m not sure the Chinese government understands is that once the dust settles, the manufacturing that was moved out of China is not going back.

India has been trying to get more local manufacturing for years as well, making it hard for importing tech companies by placing tariffs on goods with a percentage of the hardware not made in India. Apple, of all tech companies, has likely been hit the hardest given the already steep cost of their hardware. Yet, we are just now seeing the fruit of Apple’s labor moving manufacturing to India with photos of locally made in India iPhone XRs.

Obviously, Apple wants to be more relevant in India, and local manufacturing, as well as continued investment in the Indian economy, is essential for Apple’s long term strategic play.

Lastly, the recently elevated narrative of China, communism, and their censorship stance will only continue to fuel more global businesses to be more diverse and have core operations, including manufacturing, outside of China. Essentially, while China’s tactics are designed to lower their dependency on companies and technologies outside of China, these efforts are also causing the rest of the world to lower their dependency on China.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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