Homeshoring or reshoring is the question BCOs face as risks rise between China and the West
 Looking to the New Year, one recognises that geopolitical tensions between China and the West remain high and threaten to become larger still.
Talk is of decoupling the West from China to avoid being caught in the middle of any unpleasantness that may erupt in the months ahead.
It is just this inclination that is being questioned in an article by Peter Tirschwell in New York's Journal of Commerce. It is all the more tempting given the fact that hostility to China is about the only thing that unites right and the left in a deeply divided western world.
Some trace the antipathy towards China back a decade when President Xi Jinping came to power, when the Chinese Communist Party ceased being the moribund organisation it was gradually becoming, but was infused with renewed vigour and authority it had not had in years.
That in turn, produced a new Chinese challenging military posture, the seizure of the South China Sea, the setting up of air bases naval stations and establishing port facilities in the western Pacific.
The opening up of China guided by the laissez-faire spirit of Deng Xiaoping - "it is glorious to be rich" - had now been eclipsed by the more severe Maoist spirit of yesteryear, which bespoke of a puritanism born of a nationalism, reminiscent of a racial pride of earlier times.
As this new aggressive spirit took hold and manifested itself with threats against Taiwan and the seizure of Hong Kong, obliterating its defacto independence supposedly guaranteed until 2047 in the Joint Declaration. When these were combined with ever tightening measures of citizen surveillance through Social Credit, facial recognition plus mass incarceration of Muslims for re-education and de-programming, many long-time friends of Deng's China were heading for the exits.
But is such a move to be regretted when it is too late. Mr Tirschwell tells a tale of a seller of artificial Christmas trees, sourcing 93 per cent of its product from China in 2019, but as of 2023 sources only 58 per cent from China and 41 per cent from Cambodia.
A forwarder told Mr Tirschwel:"They do not see a further shift away from China as they also cited capacity and supply chain efficiencies from China were still far superior than those in Cambodia.”
But it wasn't just the typical beneficial cargo owner making such moves. Much grander movers and shakers were exiting too.
Norway’s US$1.4 trillion sovereign wealth fund has started winding down its office in Shanghai as Singapore takes over as its Asian hub. The fund was closing its office due to “operational considerations,” said Norges Bank Investment Management.
Goldman Sachs and Morgan Stanley have also scaled back ambitious expansion plans in China as the deteriorating geopolitical climate become colder. Goldman Sachs revised projections on its five-year plan and has let go more than a 10th of its workforce on the mainland after doubling headcount to over 600.
The Ontario Teachers’ Pension Plan announced earlier this year it was shutting an Asia equity investment team in Hong Kong, cutting five jobs, while Moody’s shut its China risk management operations, laying off 100 staff. Moody’s Analytics closed its offices in Beijing, Shanghai and Shenzhen following discussions about operating efficiency and profitability.
In his article, Mr Tirschwell is quick to cut to the bottom line: "Moving production out of China is costly, even to the point of leading some to reconsider it."
That is why, he says, that some executives with long experience in Asia logistics believe that if factors such as risk mitigation were to recede as an urgent supply chain priority China could, at least in the short term, recapture lost manufacturing given the well-established efficiency and quality of its overall system.
Said one senior Asia-based forwarding executive: “The short-term rush out of China has in some cases been too rushed and infrastructure/cost and capabilities were not ready to absorb the business from China and thus if there were immediate changes in China; some of that would likely come back as an interim step."
But he does point out that two to three years more of de-bugging the new countries will make that reversal much less likely. In this, he reflected what was generally held to be a long-term trend.
There is a great gulf fixed between the likes of a massive asset manager or a teachers pension fund and an importer of artificial Christmas trees. What is advisable for one is inadvisable for the other.
It might be a good thing to get some of Christmas tree production done in Cambodia, perhaps shop around from factory to factory in the region and de-glitch faulty supply chains and shift production from China in quantities as conditions warrant. But just because China is going through a nasty turn, does not change the fact that what it does it does very well and it deploys efficient supply chains.
But for asset managers who deals not in millions but trillions their investment cycle is much longer term and must expect return over many years, then China today is not as promising as it once was. Nor is it expected to be promising tomorrow. There is already a cold war afoot with the West, which looks like it will only get frostier as time goes on.
A study prepared for the annual US Federal Reserve Jackson Hole Symposium found that moving production out of China brought new additional costs.
Said the study: “Decreases in product-level import shares from China are associated with rising unit values for imports from Vietnam and Mexico, which likely reflects rising costs of production in these locations. This ongoing reallocation of global supply chain activity comes attached with costs that need to be monitored and assessed more rigorously.”
This may well be true, but it is a downside of an enduring trend that will be endured.
|
