The coronavirus (COVID-19) recently added to reasons why many foreign investors began considering relocating parts of their China operations to get ahead of supply chain disruptions.
Southeast Asian (ASEAN) countries like Vietnam, Thailand, and Malaysia have been the main beneficiaries of this trend, owing to their low costs and growing manufacturing sectors. Companies such as Apple, Microsoft, and Google are among those who that have accelerated efforts to restructure production away from China towards ASEAN since the outbreak.
Yet, while supplementing China operations through a China+1 strategy is beneficial for many foreign investors, others may be better served staying in China and waiting out the outbreak.
Here, we look at three reasons why foreign investors should be more confident staying in China.
China was initially the hardest hit by the coronavirus, but it has since gotten new infections under control while other countries are struggling to contain the outbreak. China has kept its infections stable at just under 81,000, but global infections have soared in recent days to over 87,000 and counting.
Italy, in particular, has suffered from the coronavirus, with about 25,000 confirmed cases and over 1,800 deaths. While not to the same degree as Italy, other European countries have recorded sharp increases as well. About a week ago, France, Germany, and Spain each had around 1,000 confirmed infections, but now they have over 6,000 cases each.
Iran has also been hit particularly hard, with almost 15,000 cases – including several senior government officials. The US currently has about 4,000 cases, but infections are expected to soar in the coming weeks in the absence of widespread testing. Although Southeast Asia has had relatively little exposure, with Vietnam having just 56 cases, Indonesia 117, Thailand 147, and Malaysia 428, this could quickly change.
Given the rapid spread of the coronavirus, it may be a short-sighted strategy for China investors to relocate operations to another country.
Even if the virus does not end up spreading to the investor’s new destination, they may still have their operations interrupted by safety measures, such as bans on gatherings of large groups. Not only that, but the spread of the coronavirus is impacting the global economy as a whole, substantially disrupting investors’ internal plans and projections.
Now that the World Health Organization (WHO) has declared COVID-19 to be a pandemic, we have noticed how unprepared most governments have been once the virus began spreading to their respective country. According to Johns Hopkins University, coronavirus infections are growing faster globally than they were in China at the start of the outbreak, suggesting that other countries are not responding as effectively as China did.
The US, for example, has had an inconsistent response. US President Donald Trump initially downplayed the effects of the coronavirus, misleadingly comparing it to the common flu, and there is still inadequate testing available. On March 5, Mike Parson, the governor of Missouri, was ridiculed for boasting that “Nearly 17 people have been tested” in his state. Finally, after weeks of downplaying the coronavirus, Trump declared a national emergency on March 13.
Similarly, while European countries like Italy, France, and Germany eventually adopted strict measures to contain the coronavirus, the UK still has not closed schools and universities, cancelled public events, or instituted travel restrictions. Until a few days ago, the UK was acting based off a mitigation strategy that the Imperial College response team projected would lead to 250,000 deaths.
China, too, initially botched its response to the outbreak, allowing it to spread in its early stages. Afterwards, however, it established a robust process that some analysts suggest other countries should emulate.
According to the WHO, China “has rolled out perhaps the most ambitious, agile, and aggressive disease containment in history.” New cases in China have dropped from around 2,000-3,000 new cases per day – including a high of 14,108 new cases on February 12 – to well under 100 thanks to the use of quarantines and mass testing.
South Korea followed China’s strategy of instituting mass testing and has been successful in containing the virus. As of March 8, South Korea conducted 3,692 tests per million people, compared to 826 tests per million in Italy. South Korea has limited the amount of deaths to 75 people, while Italy is approaching 2,000.
Although China still carries some risk due to the sheer amount of cases in the country, the government has proven capable of managing the crisis effectively despite a slow start. At the least, China’s situation has gone from unpredictable emergency conditions to stable and well-managed, and the greatest threat of new infections now comes from abroad.
In contrast, many countries in South and Southeast Asia that are targets for China+1, such as India, Indonesia, and Vietnam, have lower government capacity and fewer resources at their disposal. As a result, they may struggle to contain or mitigate the impact of such an outbreak, thereby affecting production.
China’s success in managing the coronavirus has led to the partial reopening of businesses and gradual return to normalcy. The economy has likely passed through the most difficult stage of the coronavirus outbreak and is now on the upswing.
As businesses resume operations, they will benefit from a number of supportive policies from the government to blunt the virus’ economic impacts, such as financial support and extensions of tax deadlines. Once the virus is eradicated, the government will likely inject more wide-ranging stimulus to jumpstart the economy back to life.
According to Nomura, a Japanese finance company, 61.6 percent of the firms hardest hit by the coronavirus outbreak resumed operations as of March 8 while 74.1 percent had resumed overall.
The reopening of businesses has partly been made possible by the relaxation of travel restrictions, allowing migrant workers to return to their places of work. Because the outbreak coincided with Chinese New Year, millions of workers visiting home for the holiday were previously unable or unwilling to return.
Cities are also becoming more lively compared to the abandoned streets and stores at the height of the outbreak. Although metro passenger volumes are still approximately a quarter of regular volumes, they are almost 50 percent higher than a week earlier.
With the global spread of the coronavirus, the economic impacts are not isolated, but affecting the global economy. When businesses return to normal – as they are already beginning to do – the vast resources of the Chinese government puts it in a strong position to offer assistance to businesses and jolt the economy as a whole.
Many foreign investors have been forced to reach out to alternative suppliers and partners outside of China due to the coronavirus outbreak. While this was necessary for firms experiencing sudden supply chain disruptions, a more permanent relocation of operations may prove short-sighted.
The coronavirus continues to spread rapidly around the world, which will produce unpredictable effects both locally where it surfaces as well as on the global economy. At the same time, China has stabilized its domestic situation and is returning to normalcy, with substantial government support.
Moreover, most firms cannot afford to significantly downgrade China operations. International supply chains are deeply integrated with China, so there is only so much disruption that can be avoided. Further, China is a key end market for many firms, making it impossible for them to completely relocate.
That is not to say that a China+1 strategy amid the coronavirus should not be taken. For firms already considering a partial relocation of operations to enter new markets and cut costs, the current situation may simply offer an opportunity to execute such a thought-out plan.
The decision to restructure China operations, then, should not be in reaction to the immediate disruptions like the coronavirus, but reflective of the long-term direction of foreign investors’ Asia strategy.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.
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