SHORTENING SUPPLY CHAINS MAY LEAVE CHINA OUT OF GLOBAL TRADE

COVID-19 is reshaping trade all over the world, accelerating the trend towards shortening supply chains. For many multinational companies this means cutting production in China and moving closer to home.

By Aurel Constantin

The trade war between China and the United States will continue regardless of the outcome of the US election in November 2020

China’s share of global trade in some industries exceeds 50 percent. For example, its share by volume in telecommunications equipment was 59 percent in 2018, according to research by the Economist Intelligence Unit. China’s role in global supply chains has grown since it was accepted in the World Trade Organisation in 2001. Many multinationals rushed to take advantage of the trading opportunities that China offered in terms of manufacturing and also as a market for sales.

But the trend is changing. It started with the USA-China trade war and the rising wages in China, which led some companies to relocating their supply chain to other parts of Asia. The textile sector was among the first to look for cheaper labour force in other countries, which made the Asian supply chain more diverse. According to the research, this is just the prelude to what is due to happen in other regions as global companies look to build resilience into their supply chains. And the COVID-19 crisis is just one more push for these companies to shift to regionalised supply chains. But multinationals’ problems are not caused only by the limited supply chains. The COVID-19 crisis has pushed down demand as well. The Economist Intelligence Unit expects the global economy to see a steeper decline in output than the one that followed the global financial crisis of 2007-2008, implying that demand for a range of goods and services will be significantly curtailed in 2020. “Companies will therefore be faced with the simultaneous challenge of both supply and demand disruptions,” the report reads.

DIGITALIZATION OF BUSINESS MODELS As the COVID-19 crisis developed, companies saw their offline stores closing around the world, just like restaurants did. As a result, they have expanded their delivery options in order to reach more customers. This highlights the importance of e-commerce and the need of an online presence. As the consumer habits that emerged in 2020 are likely to endure, companies will have to continue to develop their online platforms.

Digitalization is increasing in the production process too, as companies will be making efforts to reduce their reliance on paperwork and create more data-driven supply chains. But this move will have its own challenges as different systems operate in each country and border controls are heavily reliant on paperwork. And persuading suppliers to provide their data will raise privacy and competition issues, especially during a trade war.

Regardless of how they’ve been affected by COVID-19, companies that plan strategically for the new normal will be the ones to emerge after the crisis. Developing an online presence opens new opportunities for many companies as they are able to reach customers who were otherwise unattainable. And companies in the manufacturing and consumer goods sectors will be able to join regional supply chains. This will be relevant for small and medium enterprises. Pricing models will also need to be developed strategically. The regionalisation of supply chains and the build-up of strategic inventories will push up the final price of goods and lessen competitiveness. But a more regionalised supply chain will also give companies the opportunity to focus on local tastes with a greater capacity for product differentiation. In the medium term, this may give companies the ability to reach higher price points for their products, potentially offsetting the increased production costs from regionalising supply chains and holding larger inventories.

The trade war between China and the United States will continue regardless of the outcome of the US election in November 2020. Multinationals will have to change their business models in order to remain competitive on the global market, and regionalised supply chains will be part of these new models.