Geopolitical tensions and supply disruptions are expected to accelerate the migration of manufacturing out of China, as concerns about the risk of production concentrated in one country increase, S&P Global Ratings said.
Although its economic expansion might be weaker than previous levels due to the accelerated relocation of manufacturing, China’s economic growth would still be stronger than that of most other economies, the ratings agency said.
“While absolute growth rates will moderate, we believe China’s economic performance will continue to be a key sovereign credit support,” S&P Global Ratings credit analyst Tan Kim Eng (陳錦榮) said in a statement on Thursday.
“Its growth performance is consistently above other economies of its income level. We estimate China’s average real GDP per capita growth over 2014 to 2023 to be close to 5 percent annually,” he said.
As the COVID-19 pandemic comes under control, some governments would introduce rules and laws that encourage the production of certain items within their borders, but China would retain its manufacturing prowess, given its competitiveness and its strong domestic demand, S&P said.
That should encourage foreign producers to continue to access the Chinese market, the ratings agency said.
“In the past few years, the manufacturers that had moved elsewhere owing to rising costs and US-China tensions have not materially slowed China’s real GDP growth,” Tan said.
China’s domestic demand is one reason foreign manufacturers might continue to produce in the country and help cushion its economy, S&P said.
However, the pandemic exposes the vulnerability of nations that are heavily reliant on China for global sourcing and production, it said.
This, along with US-China trade tensions and China’s increasing labor costs, would prompt more China-based multinational companies to reassess manufacturing risks, review their business plans and diversify supply chains in the coming years, DBS Bank Ltd (星展銀行) said.
The pace of production relocation from China would vary from sector to sector, DBS said in a report on Wednesday.
“COVID-19 will likely reinforce the existing trend for [multinational companies] to relocate the low value-added production from China to other emerging markets,” Singapore-based DBS economist Ma Tieying (馬鐵英) said in the report, referring to the textile and footwear sectors.
Ma said that this trend emerged a decade ago due to a rapidly aging population, wage cost increases and structural transitions in the Chinese economy.
US tariff hikes have only further squeezed the profit margin of low value-added producers, accelerating the relocation process, she said.
The pandemic would also trigger the relocation of sectors that produce “strategic” goods, such as personal protective equipment, medical equipment and pharmaceuticals, from China to end markets, as more countries would find it necessary to increase self-sufficiency and reduce their overreliance on foreign suppliers, DBS said.
The COVID-19 crisis is likely to provide another catalyst for China-based tech companies to diversify supply chains and relocate production to other emerging markets or some developed markets, but a complete relocation would be unlikely, Ma said.
China remains a competitive base for global technology companies, as its infrastructure, labor, and information and communications technology (ICT) adoption and innovation capability still outperform those of other emerging economies, she said.
Compared with developed markets, labor costs in China remain more affordable and it would take time for developed markets to widely adopt and implement industrial automation, she added.
More than 100,000 electronics manufacturing firms operating in China contribute as much as 30 percent of global ICT goods exports, which poses another problem for foreign tech companies seeking to completely move out of the country and establish another large-scale electronics cluster and ICT ecosystem any time soon, DBS said.
Multinational companies targeting China’s domestic market — in areas such as consumer goods, healthcare, e-commerce, mobile payments and industrial robots — would be least likely to exit the country given its large market scale and post COVID-19 growth opportunities, the bank said.
“Overall, we expect more [multinational companies] to adopt a ‘China+1’ strategy in the coming years, maintaining China as a primary production base while increasingly looking for alternative suppliers,” Ma said.
“India, Indonesia, Thailand and Vietnam appear to be the Asian economies best positioned to receive the manufacturing work transferred from China,” she added.
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