China's grip on global supply chains is slipping, but are there any alternatives?

China is the dominant player in the world of global supply chains. From medicine to electronics, clothing to furniture, the process begins in China. Or it did.

With tensions increasingly strained between the US and China and the increasing price of production since the pandemic, many manufacturers are now looking to alternatives when it comes to exporting goods.

Last week, FTSE 250 company IMI—an engineering enterprise—said it was moving its supply chain away from China because of worsening international relations, with clothing brands Marc OPolo, Mango and Dr. Martens cutting or signaling their intention to switch suppliers.

A study in late 2022 showed the percentage of global exports of consumer goods has fallen drastically since 2016: travel goods and handbags was down 13 percent, furniture down 11 percent, footwear down 7 percent, and clothing and accessories was down 4 percent. Vietnam, Bangladesh, and Malaysia have capitalized and are growing as China as shrinking.

ManMohan Sodhi is a Professor in Operations and Supply Chain Management at Bayes Business School (formerly Cass). He recently spoke to The Economists Money Talks podcast, along with former US diplomat Wendy Cutler, to discuss why this trend is happening and what it means in future.

Why are companies decoupling and diversifying from China? Reasons include the pandemic, lockdowns, a heightened risk of production being too concentrated on one country, increased geopolitical tensions, and manufacturing in China is getting more expensive as wages rise. Which is the predominant driver for other countries?

The geopolitical tussle between the US and China grabs a lot of headlines, including as to why companies are moving their supply chains away from China. The reality is more prosaic for these companies: cost, cost, and cost. Cost includes not just transportation but also holding extra inventory to cover the supply chain risks involved in longer supply chains and of non-sustainability as you are using more carbon when the supply chains are longer.

Even Chinese companies have already been outsourcing to other countries to offset their growing labor costs. The supply chain has got even longer as a result and it may well be a Chinese supplier shipping from Vietnam. If you go to John Lewis to buy a microwave, you may think it is from John Lewis, but it may be made by a Chinese company who shipped from their plant in Vietnam. The decision is always driven by cost. Sure, geopolitics adds more costs, but at the end of the day, companies care mainly about the total delivered cost, which includes transportation, labor, holding extra inventory to cover certain eventualities, and (non)sustainability.

What is the readiness of other countries to absorb manufacturing and become a greater part of the global supply chain?

When people think of supply chains, they think only that a supplier supplies through a port and a shipping company and then they get the goods—this is the material supply chain. There is also the knowledge and skills value chain that supports this. I need to have R&D, from this I take a product through engineering to bring it closer to a form that can be manufactured, and then I ensure that the product can be manufactured in volume. After that I design and put in place a production system for manufacturing this product.

Do these other Asian countries have the readiness and capability? No. But neither did China 30 years ago. Initially, these countries need to develop the material supply chain, and supporting that, the infrastructure like ports and roads. But in the long run, these countries also need to develop the knowledge and skills value chain with universities, manufacturing labs, designers, and people who can design production systems. The knowledge value chain is still being developed in China.

When you look at this region, there are countries with different capabilities, specialisms and skills. Where do you see a large amount of opportunity to develop outside China or to invest outside China?

Vietnam and India have got the most attention. Vietnam has been part of those China-based supply chains for quite some time, and India is becoming part of these erstwhile China-based supply chains in recent years. However, Bangladesh has been growing its economy steadily with a fairly low technical base, lots of political problems, and a high population density. However, their GDP has grown steadily for more than a decade, so they are doing something right. Despite lots of challenges and economic peril, the fact that any company can grow its revenues or assets smoothly—as Bangladesh has done—needs a second look for those who havent already looked at it.

Provided by City University London