Why “China-Plus-One” strategy remains superior in post-Covid era

December 17, 2020 09:03
Even if China apparently has lost its appeal of low-cost, loosely-controlled manufacturing, China still enjoys many excellent infrastructural, economic and financial advantages that ASEAN countries could never replicate. Photo: Reuters

China, well-known as the “world factory”, has accounted for 35% of the manufacturing output worldwide, in accordance with a recent McKinsey report. Over the years, China has been the go-to destination for labour-intensive, semi-skilled manufacturing, with superior strengths like abundant land supplies, lax industrial regulations and the unmatched connectivity linking the 1.4 billion domestic market with the rest of the world. In 2020, the burst of the COVID-19 pandemic has brought a massive upheaval to global economies, giving rise to nation-wide shutdowns of factories in China and subsequent global supply chain dysfunctions. In view of the inauspicious start of 2020, China demonstrated its resilience and agility, working tirelessly to bring the COVID-19 cases and deaths to a very low level. As the economy had quickly recovered from the coronavirus plunge, China’s manufacturing activities continued to extend its strong growth and achieved a faster-than-expected rise of industrial outputs.

Nonetheless, the escalating trade tensions and the COVID-19 pandemic are a wake- up call for multinational corporates to realise the importance of building resilience and raising efficiency. To diversify the risks of possible production disruptions, it makes the most sense for them to relocate or reshore part of their production lines. Even without the trade disputes nor the COVID-19 pandemic, corporates would have made gradual supply chain shifts to lower-cost regions, in light of the “comparative advantage” strategies. As China is moving up the value chain, many industries find China no longer the cheapest or most cost-effective place to manufacture. Hence, the increase in costs, especially tariffs, coupled with the exigent value of diversifying supply networks have become main accelerants to moving manufacturing businesses out of China.

The “China-Plus-One” strategy is about multinational corporates adding new production facilities in other developing Asian countries to complement existing operations. Even if China apparently has lost its appeal of low-cost, loosely-controlled manufacturing, China still enjoys many excellent infrastructural, economic and financial advantages that ASEAN countries could never replicate. Besides, as many corporates suffer from considerable detriments as a result of the COVID-19 pandemic, they are less likely to uproot their heavily- invested manufacturing infrastructure. With this respect, “China-Plus-One” is a fail-safe for corporates to vary supply chain risks, and gain access to new revenue streams and resources while tapping into domestic market opportunities.

“China-Plus-One” will gain further momentum if regional trade blocs develop. Home to over 650 million people, the 10-member ASEAN bloc was China’s top trading partner in the first half of 2020, surpassing major players like the US and the European Union. This has mirrored the immense market potential of ASEAN economies. As China and 14 other countries signed the Regional Comprehensive Economic Partnership (RCEP) in November 2020, forming the world’s largest trade pact, China’s upside synergies with ASEAN countries will be further unleashed. Upon imposition, RCEP enables restriction-free sourcing by putting China in the same category as other members of the trade agreement. Such streamlining

helps solidify China’s role as a potential counterweight to trade tensions and the COVID-19 pandemic. The deal is expected to scale up the market size of Asia-Pacific, thereby forging more opportunities for corporates to produce and sell within the region. The latest announcement of Economic and Trade Co-operation Zones (ETCZs) in the Policy Address, where Thailand, Malaysia, Cambodia and Indonesia are selected as pilot bases for electronics, toys and electrical appliances industries, stands to incentivise corporates interested in the ASEAN countries to fast-track their supply chain expansions.

Meanwhile, several Southeast Asian countries have already rolled out initiatives to attract investment into labour-intensive manufacturing. Thailand announced policies to build the country as an electric vehicle hub in five years; Malaysia built up 4.3 gigawatts of solar- cell-module capacity; Growth of smartphone manufacturing operations in Vietnam is ever- expanding. Many ASEAN countries are now transforming into comprehensive manufacturing hubs alternative to China.

The appeal of setting up manufacturing bases in ASEAN countries is further proven by a recent survey conducted by Federation of Hong Kong Industries (FHKI) in November 2020. The survey, with 230+ respondents, revealed that 22.4% of them have manufacturing facilities outside China, of which 90% are in ASEAN countries including Malaysia, Thailand, Vietnam and Myanmar.

Of full commitment to supporting industries and businesses in Hong Kong, FHKI signed MoUs with the Office of the Board of Investment of the Kingdom of Thailand, Eastern Economic Corridor Office of Thailand (EECO), Federation of Thai Industries and AMATA Corporation PCL respectively to boost mutual co-operation from information exchange, investment promotion to factory setups and business matchings. FHKI will continue liaising with regional game players in Southeast Asia to take legacy industries in Hong Kong to an accelerated “China-Plus-One” path.

China, as the world’s leading manufacturing basecamp, has remained invincible in the post-pandemic world. The official manufacturing Purchasing Managers’ Index (PMI) for November came in at 52.1, based on the data revealed by the National Bureau of Statistics. That is the highest reading in more than 3 years, and PMI readings above 50 illuminate expansions. In November 2020, China’s exports recorded a year-on-year rise of 21.1%, the greatest record-high monthly export haul in the nation’s history. These empirical data are testaments to China’s robust manufacturing capabilities and its irreplaceable ecosystem. Moving forward, industries shall capitalise on the opportunities brought by dual circulations and emerging ASEAN markets to weather the pandemic storm. Instead of quitting from China, diversifying supply networks shall be the most preferred strategy for corporates to stay competitive.

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Chairman, Federation of Hong Kong Industries