Flexibility and de-risking are going to be more important than scale and cheap labour in the post Covid world
The Coronavirus pandemic and China’s rising tensions with several countries are changing supply chains equations across the globe. No country now wants to put all or even most of its manufacturing eggs into the China basket any more. This has inevitably given rise to commentaries about which country is best poised to take China’s place as the next manufacturing hub. There is plenty of wishful thinking that India will be the inevitable choice as the China replacement.
However, the post Covid manufacturing is likely to see bigger changes than just one big manufacturing destination being replaced by another. The one lesson that Covid and the attendant lockdowns have taught global manufacturers is that the supply chain and manufacturing risks associated with concentrating your production facilities in just one or two countries that offer cheap labour costs and the right demographics to produce in bulk.
The post-Covid world is more likely to see a rise in distributed manufacturing and supply chains to reduce risks and increase flexibility and innovation. It has cost implications – but investment in technology could partially offset the cost advantages that cheap labour and enormous scale of a low cost manufacturing destination like China.
For global manufacturers, three different factors are at play when it comes to derisking their businesses after Covid. The first is the availability of other Asian options that are jostling to replace China in the global supply chain. The second is the rise of global protectionism. The third is supply chain worries that could look at a near-shoring movement and/or multiple destinations to reduce risks.
Take the first. A McKinsey study had estimated that Malaysia, Indonesia, Thailand and Vietnam are all aiming to become manufacturing destinations along with India. Each of them has its strengths and weaknesses. There are others such as Bangladesh, for example, which hopes to grab a big slice of the garments opportunity moving out of China. In Africa too, several countries are hoping to become a part of the global supply chain. Ethiopia is already well integrated in the global garments supply chain. Other African countries are trying to aspiring to be part of global manufacturing chains as well.
The second issue – global protectionism – has been rising for several years now, as elected leaders voted on the nationalist card have vowed to bring manufacturing back to their countries. President Donald Trump in the US has been the most vocal about the need to shift manufacturing back into the country and what he perceives to be the unfair trade relationship but there are plenty of others as well. The Coronavirus pandemic is only giving rise to the protectionism movement that had started earlier. The pandemic has already shrunk global trade and it may not bounce back fully in the medium term.
While no country can produce everything on their soil, it is more than likely that businesses will increase the proportion of manufacturing in their home countries to reduce supply chain risk. Apart from that, technology advances – especially robotics, factory automation and 3D printing – has made even some high labour cost developing countries such as the US competitive in some areas. Tesla, for example, built its first Giga factory in the US itself instead of looking at lower labour cost destinations. High technology products, in particular, may shift back to developed countries. In Europe, Germany is already a global manufacturing powerhouse and other western European nations could take tips from it to build their manufacturing competitiveness.
Supply chain worries may also cause big global manufacturers to increasingly look for near-shore alternatives. The Eastern European countries could emerge as formidable contenders in any such movement. Supply chain worries are probably going to be met by a combination of near-shore manufacturing and multiple, smaller and more flexible manufacturing facilities spread out in multiple geographies instead of the giant factories in China that were the norm in the past decade. Central and East European countries such as Hungary, Poland, Romania and the Czech Republic are already emerging as attractive destinations for manufacturing innovations in several sectors. Their governments too are offering tax incentives to attract more manufacturing business.
The Coronavirus pandemic is changing global manufacturing philosophies and the result could companies moving away from giant factories in low cost destinations to smaller, more flexible and higher technology factories spread across multiple geographies and designed to fulfil only specific markets. This would reduce the manufacturing opportunity for any one country to capitalise on and increase costs for manufacturers. But it would make up for this with increased flexibility that can better deal with global crises.