Is the West relying too heavily on Chinese supply chains?

China’s zero-Covid pol­i­cy has been cre­at­ing seri­ous knock-on effects for glob­al sup­ply chains and trade since the first lock­downs in 2020. The virus-con­tain­ment restric­tions in Chi­na have been among the harsh­est in the world and it did not take long for the effects to be felt beyond its bor­ders. Chaot­ic, obstruct­ed glob­al trade caused by the pan­dem­ic exposed the heavy inter­na­tion­al reliance on Chi­nese-made prod­ucts, mate­ri­als and com­po­nents, and the sup­ply chains that orig­i­nate from Chi­nese ports.

After two chal­leng­ing years for logis­tics and trade, Chi­nese pres­i­dent Xi Jin­ping told state broad­cast­er CCTV in mid-March that the coun­try would con­tin­ue to stick with its “dynam­ic zero” pol­i­cy in response to the lat­est out­break of the omi­cron vari­ant. The pol­i­cy includes gov­ern­ment-built quar­an­tine facil­i­ties for peo­ple who test pos­i­tive, wide­spread PCR test­ing in affect­ed geo­graph­i­cal areas and tar­get­ed lock­downs. 

At the time, the north-east­ern indus­tri­al province of Jilin was most heav­i­ly affect­ed, along with cas­es report­ed in provinces and cities along China’s east coast and inland. Researchers at China’s Lanzhou Uni­ver­si­ty told the media they were con­fi­dent this lat­est out­break will be under con­trol by ear­ly April. 

Since then, how­ev­er, fur­ther restric­tions have been intro­duced by the gov­ern­ment. Mass test­ing has been ramped up in Bei­jing, along with the clo­sure of restau­rants and enter­tain­ment venues. In Shang­hai, res­i­dents have been for­bid­den from leav­ing their homes, food deliv­er­ies have been banned and infect­ed patients have been quar­an­tined.

Arnold Ma, founder and CEO of Qumin, a dig­i­tal agency that con­nects Chi­na and Europe, cau­tions that these out­breaks sug­gest that “the country’s bat­tle against the virus is far from the end”.

But what do these lat­est pock­ets of Covid mean for world trade and sup­ply chains, have there been improve­ments in the way busi­ness with Chi­na is being done, and have lessons been learned about the over­re­liance on Chi­na?   

Lau­rence Del­li­cott, direc­tor of sup­pli­er man­age­ment and sup­ply chain ser­vices at logis­tics tech­nol­o­gy firm MySup­ply by Avnet Sil­i­ca, says there are “def­i­nite signs that Chi­na is emerg­ing from the pan­dem­ic, par­tic­u­lar­ly because of a suc­cess­ful vac­ci­na­tion pro­gramme”.

“Eco­nom­ic growth is con­tin­u­ing [but] we’re still see­ing city lock­downs with a zero-Covid pol­i­cy being seen as too aggres­sive by some,” he says. 

How­ev­er, Del­li­cott says the trade and sup­ply chain prob­lems are not just Covid-relat­ed: “Trade dis­putes between the US and Chi­na were hap­pen­ing long before the cur­rent vari­ants … Gen­er­al­ly, costs have con­tin­ued to rise across the board, with many man­u­fac­tur­ers strug­gling to keep up with the scale of demand … in Chi­na and else­where.”

Kevin Gaskell, busi­ness growth expert and author of Inspired Lead­er­ship: How you can achieve extra­or­di­nary results in busi­ness, says that dur­ing the pan­dem­ic, China’s logis­tics “sim­ply froze” because ships, trucks, planes and con­tain­ers were locked down or not avail­able in the right place at the right time.

“Mod­ern inven­to­ry man­age­ment works on the basis of effi­cient sup­ply chains min­imis­ing required stock hold­ing,” Gaskell explains. “When sup­ply lines were dis­rupt­ed, buffer stocks were quick­ly con­sumed and, due to logis­ti­cal blocks and man­u­fac­tur­ing lock­down in Chi­na, replen­ish­ment was dif­fi­cult, if not impos­si­ble, for an extend­ed peri­od.”

Del­li­cott says that busi­ness­es are “seri­ous­ly review­ing putting all of their eggs in one bas­ket and spread­ing their man­u­fac­tur­ing more than they usu­al­ly would, in case of anoth­er inter­na­tion­al cri­sis.”

Many busi­ness­es are con­sid­er­ing alter­na­tives to using Chi­na as a one-stop man­u­fac­tur­ing shop, with reports of a deltacron vari­ant poten­tial­ly speed­ing up this deci­sion, Del­li­cott says. 

For man­u­fac­tur­ers, the pan­dem­ic has high­light­ed the impor­tance of hav­ing man­u­fac­tur­ing hubs out­side Chi­na or main­tain­ing a pres­ence in Chi­na, while plan­ning with neigh­bour­ing coun­tries. 

“Some com­pa­nies have been play­ing on the so-called Chi­na Plus One strat­e­gy, which means they have expand­ed their oper­a­tions to sur­round­ing coun­tries such as Viet­nam and India as a way to reduce their reliance on Chi­na as a pro­duc­tion base,” Ma says. “The strat­e­gy allows com­pa­nies to have their pres­ence in Chi­na so that they won’t miss out on oppor­tu­ni­ties offered by the lucra­tive mar­ket.” 

The Chi­na Plus One strat­e­gy offers busi­ness­es flex­i­bil­i­ty with­out aban­don­ing oppor­tu­ni­ties in Chi­na, as Ma explains: “Oper­a­tions in neigh­bour­ing coun­tries can func­tion as a back­up, in a sit­u­a­tion like a pan­dem­ic, when restric­tions in those regions might not be as tough as that in Chi­na.”

How­ev­er, in some mar­kets, gov­ern­ments have stepped in to make it eas­i­er for busi­ness­es to man­u­fac­ture at or close to home. In the US, the gov­ern­ment has invest­ed $52bn (£38bn) in the semi­con­duc­tor sec­tor under the CHIPS for Amer­i­ca Act. Mean­while, in India, the gov­ern­ment has approved a $19bn (£15bn) pro­pos­al to incen­tivise glob­al com­pa­nies to move fac­to­ries to the coun­try, includ­ing man­u­fac­tur­ers in the auto­mo­tive, elec­tron­ics, phar­ma­ceu­ti­cal and tex­tiles sec­tors.

In Chi­na itself, the eco­nom­ic impact of pan­dem­ic-relat­ed pres­sures on man­u­fac­tur­ing and sup­ply chains has improved the sophis­ti­ca­tion of logis­tics in the coun­try, accord­ing to a report by McK­in­sey. This includes greater use of automa­tion tech­nol­o­gy for digi­tised, high­ly vis­i­ble sup­ply chains, and expan­sion of air freight in response to ship­ping delays. 

Gaskell says that the chal­lenges with man­u­fac­tur­ing and logis­tics are not spe­cif­ic to Chi­na because most inter­ac­tions with inter­na­tion­al sup­pli­ers were affect­ed by pan­dem­ic lock­downs. How­ev­er, he adds that many in the UK and Europe are now recon­sid­er­ing the price ben­e­fits of sourc­ing from Chi­na.

“In my com­pa­nies, we are active­ly review­ing alter­na­tive local sup­pli­ers,” Gaskell says. “The tran­si­tion will not be sim­ple or quick, but alter­na­tive sources need to be con­sid­ered as the pan­dem­ic has high­light­ed the exis­ten­tial prob­lem of rely­ing on long-dis­tance sup­ply chains.”

The per­fect storm of China’s strict zero-Covid pol­i­cy and increas­ing reliance on Chi­na for cheap man­u­fac­tur­ing and smooth sup­ply chains has cre­at­ed two years of seri­ous dis­rup­tion. But Kay­la McE­wan, a strate­gic ana­lyst at TecEx, a cus­toms com­pli­ance spe­cial­ist, cau­tions against com­pla­cen­cy. Oth­er fac­tors are at play – many of these have not only con­tributed to the prob­lems dur­ing the pan­dem­ic but could become ongo­ing or re-emerg­ing con­cerns.

McE­wan says that for the UK and Europe, Brex­it is the first issue that comes to mind because of the “trade bar­ri­ers and oth­er com­plex­i­ties” cre­at­ed since the 2016 vote to leave the EU. More broad­ly, she cites “oth­er adverse fac­tors”, such as labour short­ages, glob­al sup­ply issues and pan­ic-buy­ing, as caus­es of world­wide logis­tics and man­u­fac­tur­ing headaches. The over­rid­ing les­son goes beyond over-reliance on Chi­na – agile busi­ness­es will be bet­ter equipped to over­come future dis­rup­tions if they imple­ment strate­gies that spread the risk and the respon­si­bil­i­ties.