How Competitive is China’s Production Location Still?

Logistical bottlenecks and sourcing issues resulting from the pandemic have given a boost to the idea of nearshoring and diversification. Companies are now openly considering the possibility of shifting production and sourcing out of China. A survey published in June by the EU Chamber of Commerce in China found that nearly a quarter of European companies in China are contemplating leaving the country due to the risk of COVID lockdowns. US firms share this sentiment as well. Does this mean that a real shift in sourcing strategy is underway, or is it just talk?

(Munich) To determine whether a genuine change is imminent, we compared the total TEU capacity of ships calling at Chinese ports with the TEU capacity of neighboring Southeast Asian countries, Vietnam and Thailand. The TEU capacity of ships is defined as the cumulative TEU transport capacity of vessels operated by shipping companies that call at various ports around the world.

TEU Ship Capacity as an Indicator of Trade Volume

The total TEU capacity shipped from China saw a drastic decline at the end of 2021 and in the early months of 2022 due to various headwinds. These include increased blank sailings by container lines aiming to improve schedule reliability, which had been affected by the backlog of ships on the US West Coast at the end of 2021. Additionally, issues with the return of empty containers, widespread zero-COVID lockdowns, and the Chinese New Year week, during which many workers returned to their hometowns, played a role.

Lockdowns Lead to Temporary Decline in Ship TEU Volumes in China Traffic

In the first half of 2022, lockdowns occurred in key production and logistics centers such as Shanghai and Shenzhen, leading to a decrease in the number of TEUs processed on the Chinese mainland. This resulted in a significant portion of orders being delayed or not fulfilled at all, jeopardizing operations in downstream areas – some companies halted production for weeks.

Meanwhile, the situation has eased, and the total TEU capacity has risen as quickly as it fell. However, the ongoing energy crisis in China has throttled production in the country and will lead to fewer TEUs being processed. While COVID-related lockdowns are not solely responsible for companies wanting to shift their sourcing out of the country, it is quite possible that multiple such adversities combined will ultimately force businesses to focus on other locations.

According to data from project44, Thailand’s TEU volume is declining in relation to the shift of TEU capacities from China to its Southeast Asian neighbors. There is also no significant increase in TEU capacities at Vietnamese ports, indicating that there is not yet a major shift of production to Southeast Asia.

Outlook

The Purchasing Manager’s Index (PMI) is a good indicator of the short-term future of the manufacturing sector. The Chinese Caixin PMI fell in August, missing market forecasts, and recorded 49.50 – down from 50.40 in July.

This is primarily due to the concerning conditions of the energy crisis, as China suffers from a historic drought that has severely impacted its hydroelectric power generation capacity. As a result, power outages frequently occurred in production centers, leading to a noticeable decline in production output. The industry is additionally affected by the Golden Week holidays in the first week of October.

While companies will attempt in the short term to diversify their sourcing to avoid issues such as the loss of foreign labor and production disruptions, there are few signs that firms are relocating entire production lines out of China. Replicating the Chinese production infrastructure and the reliability of the sourcing process would involve enormous costs. Compared to a complete relocation of business operations to a new market and establishing a presence there, missing profit targets and accepting losses still seems to be an acceptable scenario.

Indeed, a small portion of companies will abandon Chinese production, but this will only be a fraction of the total trade being pulled out of China. Nevertheless, firms should at least consider the idea of nearshoring critical components and diversification, as these measures can help improve a company’s carbon footprint and increase stability.

Photo: © Project44