Can Companies Really Exit China?
The coronavirus pandemic has turned out to be a public relations disaster for China. Many people are of the opinion that China has deliberately unleashed this virus on the world in order to gain superiority. There are others who are of the opinion that China has been hiding its true numbers so that the world does not realize the true nature of the problem and how China is responsible for the same.
However, millions of people around the world are suffering because of the coronavirus, which is being branded as the Chinese Virus by American President Donald Trump. The anger in the general population is quite high. This is the reason that governments all over the world are being propelled into action.
For instance, Japan has been an important trading partner for China. China is the largest exporter of goods for Japan. However, the coronavirus crisis has impacted the Japanese economy. As a result, when President Abe offered a trillion-dollar bailout package, he earmarked close to $2.5 billion for Japanese companies who want to exit China. Out of this, roughly $2.25 billion is for Japanese companies who want to relocate to Japan, and $250 million is for Japanese companies who want to relocate anywhere out of China! American is also said to be considering similar measures. There are many countries across the world who have economic distancing on their cards, especially after news reports surfaced that China has been profiteering by selling medical equipment at high prices to countries like Italy.
Many American companies have been willing to move their supply chains out of China ever since the trade war broke out. Some of them had already started taking measures and hence were not impacted as much. On the other hand, other companies that had not started taking any measures have seen their production being impacted.
The reality remains that China is still the most dominant manufacturing country in the world. This is because the country offers certain advantages to manufacturers. Hence, moving production out of China will not be an easy task.
Right now, multinational companies are thinking of a few alternative sites where they would want to move their production. However, that is not going to be an easy task. Lets have a closer look at the proposed alternatives.
Vietnam: A lot of American companies are looking at moving their production to Vietnam. Although Vietnam is still developing, the country has made good progress in terms of manufacturing infrastructure. However, experts who have conducted feasibility analysis believe that Vietnam is at least ten to fifteen years behind China. It is a relatively small country. Hence, there is a limitation to the amount of manufacturing it can do. Also, the country has a population of 100 million. By western standards, it is a sizeable population. However, it is less than one-tenth of the size of China. Hence, finding skilled workers could also be a challenge.
India: When it comes to emerging economies, India is the only country that can give a challenge to China. It has the population as well as the resources required to replace China. However, the problem is that the present infrastructure in India is not good. It would be expensive to manufacture there because of the shortage of labor, raw materials, and other essential inputs. Also, the country is known for its complex regulations, something which multinational companies want to avoid. Despite all these issues, the fact of the matter remains that if production has to move out of China, a lot of it will move into India.
Eastern Europe: East European countries such as Bulgaria and Romania also provide viable alternatives to China. This is because these countries are also quite poor. As a result, the labor here is quite cheap as well. Hence, if multinational companies were to move their production to Eastern Europe, they would still have a low cost of production. Even if the production cost does increase a little, the companies would be able to offset them with the reduced cost of transportation as well as a more streamlined supply chain.
Moving the production to Eastern Europe would give multinational companies a public relations boost. This is because consumers will be more comfortable buying products from companies that manufacture in Europe and provide employment to locals. This will be particularly beneficial given the fact that coronavirus is likely to cause a recession, and these companies will be viewed as entities helping the people of Europe to return to prosperity.
United States: Many American multinationals are focusing on automating their supply chain and moving the production back to the United States. Labor costs are the main reason behind outsourcing. If the work done by laborers can be done by machines, production can be brought back to the United States. Once again, this will help in positive public relations, and also the United States is willing to give generous tax incentives for production to be moved out of China and into the United States.
The fact of the matter is that all the alternatives to China are still in the nascent stage. Companies might find it uneconomical to move production out of China. However, given the coronavirus crisis, companies are more likely to focus on continuity and business stability as opposed to short term cost-effectiveness.
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