Understanding China’s Turmoil through Supply Chain

Near-shoring contributes to the decline on China’s market. In the article published by David Simchi-Levi in Harvard Business Review, he pointed out that the currency devaluation and slowdown of China’s economy is brought about by the acceleration of “near-shoring” or the practice of producing closer to the customer.

The evidence of Simchi- Levi are the following:

The MIT Forum launched an online survey in 2012 to understand what U.S. manufacturers were doing about bringing production back to the United States and what factors were driving their decision process. One-hundred fifty-six U.S. manufacturing companies, defined as firms that have their headquarters in the United States, responded. The resulting report, U.S. Re-shoring: A Turning Point, indicated some shift in manufacturing footprint. While 33.6% of respondents stated that they were “considering” bringing manufacturing back to the United States, 15.3% of U.S. companies responded that they were “definitively” planning to do so. The results of the 2014 survey — to which 89 U.S.-based companies and 33 non-U.S.-based companies responded — were very similar.

The more recent AlixPartners survey of manufacturing and distribution companies serving North America and Western Europe suggests that this process is accelerating: Thirty-two percent of the companies surveyed reported that they have already near-shored or are in the process of doing so to meet end-market demand. Of the company leaders surveyed, 48% said near-shoring activities are likely within the next one to three years.

Another indication that near-shoring is accelerating is the Purchasing Managers’ Index (PMI). This index, which is compiled monthly, shows changes in manufacturing activity. A value of 50.0 means no change, while a value above it means an increase in activity and below it a decrease in activity. China’s PMI was 49.7 in August and 50 in July, reflecting a real decline in activity. In comparison, the U.S. PMI was 51.1 in August and 52.7 in July, reflecting a decrease in growth but not a decline in activity, and Europe’s PMI slipped slightly to 52.2 in August from 52.3 in July. Altogether, these figures suggest that the decline in manufacturing activity in China is related to both a softening of local market demand and the impact of near-shoring.

Source: www.hbr.org

Moreover, the article written by Simchi-Levi pointed out that bringing manufacturing to the United Stated does not necessarily imply more jobs in the US nor does it imply that China is changing its position as the number one manufacturing hub. Instead, the situation suggests that the world is in the middle of a transformation with companies moving from a global manufacturing strategy, where China is for China, United States is for Americans, Eastern Europe is for European markets.

We agree with the interpretation of Simchi-Levi that near-shoring contributed to the decline of China’s market. However, near-shoring will not create a drastic impact in the manufacturing position of China. There are still companies that would benefit if they choose China as their manufacturing base. It would be costly for some industries to transfer their production to near-shores.

The problem in China may accelerate the trend to near-shoring, but its impact will vary by specific industry and company. As what Simchi-Levi discussed in his article on Harvard Business Review, high tech industries (e.g., the manufacture of laptop computers and mobile phones) recreating the infrastructure in China somewhere else would be expensive and difficult to do. In contrast, it will be easier for footwear and apparel companies to move to lower-cost locations. Manufacturers of heavy products such as appliances or cars that are heavily influenced by shipment costs may find it pays to move production closer to market demand.
The bottom line: Companies need to evaluate on an ongoing basis whether the trade-offs for their particular industry have shifted enough to justify a change in their sourcing strategies.