China may have scrapped its “zero-COVID” policies, but questions about the country’s continuing role in supporting global supply chains remain.
Following mounting waves of public protest over the severity of China’s quarantines and lockdowns over the past three years, President Xi Jinping is clearly betting that the elimination of those controversial rules will lead to a return to normalcy — at least how he defines it. From the standpoint of global business, he has to be hoping that China won’t see further erosion of its status as the world’s leading source of cheap manufacturing.
Like every nation confronted by COVID-19, however, China is essentially running blind — struggling to cope with a crisis that has no precedent in modern times, according to Victor Meyer, chief operating officer of Supply Wisdom, a provider of third-party risk intelligence. When he was vice chair of the World Economic Forum’s council on catastrophic risk, Meyer recalls pandemic experts borrowing a term from the banking industry to describe the events of recent years: “This is not in our loss history.” In other words, “nobody’s worst-case scenarios said that was a possibility.”
Give such a high degree of uncertainty about the pandemic on a global scale, it’s no surprise that the future status of China’s manufacturing base remains cloudy, and continues to generate sharp disagreement among experts and business leaders. Meyer describes three current camps of thought: “long China,” regional diversification and anti-globalization.
“Long China” is akin to what Meyer calls a “What, me worry?” attitude, as evidenced by funds such as Blackrock, Inc. and Fidelity Investments continuing to maintain strong positions in the country. “In my own view, it’s a bit Panglossian,” he says, referencing the comically blind optimist of Voltaire’s satire Candide.
Regional diversification is the strategy of businesses “that think they can escape the sphere of influence of China” by moving to countries such as Malaysia, Vietnam and Singapore for at least a portion of their manufacturing. Meyer believes they’re deluded: “The idea that China is going to stop being a regional hegemon anytime soon is not founded in reality.”
Finally, there’s the “globalization is dead” school, consisting of business leaders who are reversing their long-held practice of offshoring in favor of bringing back manufacturing to the U.S.
The debate is more than academic. There’s a ticking clock, in the form of China’s threat to invade Taiwan and return it to the fold of the mainland. Anticipation of that event is expressed as the “Davidson Window,” named after former U.S. Indo-Pacific Command chief Philip Davidson, who said in 2021 that a Taiwan takeover could happen within the coming six years. More recently, the “window” has been adjusted to “inside of two years,” Meyer says. If that turns out to be the case, global businesses and their supply chains have very little time to decide how much to rely on China for their future production needs.
Meyer says Xi can only have two out of three core objectives: political stability, zero COVID or economic growth of greater than 5%. With the removal of total lockdown policies, “he has basically placed that bet.”
Whether China will have sufficient stocks of the mRNA vaccine on hand by that time is another question. With its high urban population density and aging population, the nation could see a mortality rate of a million people or more, Meyer says. The downside risks of abolishing zero-COVID, therefore, “are as material as the risks of keeping it.”
What’s more, Meyer doesn’t think that the change in China’s COVID policy will quell social dissent. He says crowd sentiment tends move with extreme unpredictability — “like flocks of birds,” quoting writer and researcher Renée Diresta — with recent protests marked by “some toxic emergent behaviors that we haven’t seen before. This is much more thoughtful protest. There seems to be a very material, intellectual component to it.” Under such a scenario, is this the time for global manufacturers to be doubling down on China, seeking some degree of backup, or abandoning the country altogether?
One segment of the diversification camp calls for relocating manufacturing to Mexico. But even that option doesn’t necessarily escape China’s global grip. “My own view is that anybody who thinks they can China-wash their supply chain, even in Mexico, is just moving from one sphere of Chinese influence into another,” Meyer says. “It’s basically the same beneficial owners.”
So what should global manufacturers be doing about China now? At the very least, says Meyer, they need to achieve total transparency around their sourcing and supply chains — a view that many lack. “They don’t know who’s providing what service or product, and where it’s going,” he adds. In some cases, that might mean “going all the way back to the general ledger: where is the money going, what is it paying for, where is the legal entity they’re delivering to, and who are their third parties?” Even the continued outsourcing of nominally “non-strategic” components entail huge risk to complex supply chains. Armed with such knowledge, companies will be in a far better position to take decisive action when events dictate it.
With the persistence of COVID-19, growing geopolitical tensions and China’s own uncertain future, catastrophic risks today are “cascading.” Says Meyer: “This has the potential to be quite disruptive — impacting a supply chain that’s already fragile.”
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