Chinese Supply Chain Considerations

[Douglas Buckland + 6,308]

As the Corona Virus continues to impinge on world trade, in a variety of ways, I would like to ask for opinions regarding the following:

As the Corona Virus is presently impacting trade, manufacturing and commodity prices, do you see a ‘reset’ with China regarding supply chain issues? That is, will other other countries or trading blocks restructure their supply chains so that they are not so dependent on Chinese supply and the bottleneck this creates when a virus such as the Corona Virus attacks?

[0R0 + 6,251]

That is pretty much set in stone already.

It is less about the coronavirus and more about the late response and quelching of information and the hysterically inefficient (but apparently effective)  quarantine. The CCP showed abysmal levels of incompetence. This has gotten clear decisions made to duplicate sole source Chinese production capacity for key chemicals, pharmaceutical precursors, metals, parts, electronic components and chips by those who were on a slow track due to rising costs and tariffs by the US. As well as subassembly and assembly work that has been a near monopoly for China for two decades. They are scouring the planet for countries willing to take on infrastructure commitments to make new plants and facilities possible. American companies are looking to Mexico and S. America as well as other SE Asian countries. Even the US. European companies are heading to Eastern Europe and particularly the Balkans to setup shop. 

https://www.forbes.com/sites/kenrapoza/2020/03/01/coronavirus-could-be-the-end-of-china-as-global-manufacturing-hub/#3ed4b7195298

https://www.barrons.com/articles/coronavirus-hit-chinas-economy-worse-than-expected-china-beige-book-51582902867 

Business interruption insurance is already an issue as quoted rates keep rising on policy renewals as the claims come in ever larger and more numerous.

China policies on quarantine have killed off some of the animal husbandry and egg and dairy production that was not affected by the bird flu  of just a couple of months ago and the swine fever. China is likely going to need to permanently import food, thus their labor rates have to rise even more than they have so far, which was due to incoming new workers being already a 40% smaller cohort than even the millennials. As a food and energy importer they need to watch their current account and currency exchange rate so would be hard pressed to devalue their currency as a means to lower their relative labor costs as it induces hardship in food prices. They also have a green rot infection in many grain crops. Farm land productivity, though rather high, is unproductive in labor terms and labor productivity of farming has been flat for most of this decade. So Chinese labor will remain consecutively less attractive to supply chains as this develops further. 

China as a growing middle class market target is dimming in prospects as Chinese consumption preferences remain highly slanted to savings and investment in housing. They face the geometry problem of coastal industrial metros everywhere, as there is no room to build in town and the surrounding area is already built up, however, that is where the jobs are and will remain. High speed rail is intended to relieve the problem so that people can commute to a greater distance from the key metro centers without a great time penalty. But it is still not quite working for the intermediate distances because of numerous stops, vs. express service between far flung cities' centers. The result is that housing remains prohibitively expensive in the industrial metros, while cheap spacious apartments stay unoccupied inland, where vacancy rates keep rising. The recent lightening of restrictions on shadow banking has resulted in Construction PMIs rebounding to very robust levels above 60 and remains the strongest sector in China during the quarantine at 41.3 vs. 33 for industry and 29 for services as of February. 

[Guillaume Albasini + 851]

We can already feel the impact on consumer electronics and EV's supply chains ...

 

Wuhan, the capital of Hubei, supplies nearly half of the world’s organic light-emitting diodes (OLEDs) and liquid crystal displays (LCDs). With production now halted, many TV, PC, and smartphone makers will encounter delays in acquiring display components. Facebook and Nintendo have already said that the outbreak will impact the production of Oculus Quest VR headsets and Switch consoles. Similarly, Asus has warned customers that its ROG II smartphones will be unavailable until further notice.

China is the global leader in lithium cell manufacturing, posing another problem for consumer electronics companies. The rapid spread of the contagion across the country has led to stringent domestic travel restrictions. This has caused labor shortages in Fujian province, China’s battery manufacturing hub. Industry experts are predicting a 10% drop in China’s total battery output in 2020. This could shrink global battery production by 7%, impacting the manufacture of popular devices like smartphones and tablets, which use lithium-ion cells. Leading battery manufacturer LG Chem has already announced that orders will be affected by the coronavirus outbreak.

https://www.verdict.co.uk/supply-chain/

[Rob Plant + 2,756]

Container ports such as Shanghai are massively affected by the virus.

https://www.reuters.com/article/us-china-health-shipping-idUSKBN2002K1

https://www.wsj.com/articles/chinas-shipping-nears-a-standstill-amid-coronavirus-disruption-11581699854

[Marcin2 + 725]

On 2/29/2020 at 3:40 AM, Douglas Buckland said:

As the Corona Virus continues to impinge on world trade, in a variety of ways, I would like to ask for opinions regarding the following:

As the Corona Virus is presently impacting trade, manufacturing and commodity prices, do you see a ‘reset’ with China regarding supply chain issues? That is, will other other countries or trading blocks restructure their supply chains so that they are not so dependent on Chinese supply and the bottleneck this creates when a virus such as the Corona Virus attacks?

Too early , much too early to tell.

Coronavirus affects supply chains for 45 days.

It takes 1-2 years to move basic and up to 5 years advanced manufacturing.

Like watching your toddler tries to catch big basketball for the first time and projecting about his NBA career.

Usual, typical adjustments I notice for at least 5 years, China gets richer, more advanced so textiles and footwear , furniture go to Vietnam, Bangladesh, India, Mexico.
Whether usual trend accelerated or more advanced supply chains move due to decoupling, de-globalization ? I think early 2021 we would have some picture and in early 2022 be more or less sure.

 

 

[El Nikko + 2,145]

On 2/29/2020 at 2:40 AM, Douglas Buckland said:

As the Corona Virus continues to impinge on world trade, in a variety of ways, I would like to ask for opinions regarding the following:

As the Corona Virus is presently impacting trade, manufacturing and commodity prices, do you see a ‘reset’ with China regarding supply chain issues? That is, will other other countries or trading blocks restructure their supply chains so that they are not so dependent on Chinese supply and the bottleneck this creates when a virus such as the Corona Virus attacks?

It's a golden opportunity for manufacturing to be moved back to the US and also to South America especially Mexico. There's a lot of obvious benefits including the fact it might help reduce immigration numbers coming across the Southern border.

My feeling is the virus is still being overblown somewhat, it's also a good opportunity for the US to do some serious economic damage to China and lets face it why wouldn't they?