(Yicai Global) May 11 -- In the wake of the coronavirus pandemic there has been talk of global companies shifting production away from China. In fact that was happening before the outbreak but particular to certain sectors such as apparel, according to a senior executive at Alvarez & Marsal Asia.

“The trend where factories move out of China actually has been happening ways before the Covid-19,” How Jit Lim, managing director of the management consultancy’s Shanghai office, said in an interview with Yicai Global May 8.

“My belief is that this is more a sector-specific dynamic,” Lim said, rather than a general phenomenon.

As China’s economy has developed and wages have grown, companies in some sectors such as apparel have moved production to countries, including Bangladesh and Indonesia etc, with lower labor costs.

But moving supply chains out of China can also increase risks and difficulties for businesses, he added.

“China is still a very attractive market to continue to invest for many factors, and still has unparalleled supply chain solutions to a lot of industries,” Lim said. 

Excerpts from the interview are below.

Yicai Global: What impact has the pandemic had on the manufacturing sector?

How Jit Lim: Covid-19 has brought some destruction to the supply chain. In this period, a lot of manufacturing businesses will have to evaluate business fundamentals and seek their own transformation to stay relevant.

YG: China’s first-quarter gross domestic product figures show that the secondary industry fell 9.6 percent from a year earlier. Why was manufacturing hit the most compared with primary industry and the service sector?

Lim: The manufacturing sector as well as the service sector are impacted because of the labor issue. That’s quite a bit of supply chain destruction and stronger constraint during February and March as well.

So China has recovered quite well. In general, from the end of March and early April, I think most of these sectors have recovered nicely. Labor have returned back to the city to work. Logistics capacity has resumed. And then as a result factories are able to produce again and materials are flowing again. Moving into Q2, if you look at the China PMI, we actually saw a recovery in terms of the productivity around factories in China by quickly going into March and then slight drop in April as order book decrease with the rest of the world now went through shutdown.

YG: Some global firms have announced or are considering plans to move production out of China after the pandemic. What do you think about that?

Lim: I don't have a crystal ball so I think this deal is too early to really tell because of a lot of factors. But we need to evaluate what is the fundamental around people shifting out or wanting to shift out production from China. My belief is that this is more a sector-specific dynamic.

First, Covid-19 is a pandemic, which can happen anywhere, either in China or elsewhere. What shifting out from China brings to stabilize or diversify the supply chain would also bring risks, and also increases complexity for business.

I also want to say that the trend where factories move out of China actually has been happening ways before Covid-19. For example, business that depends on labor arbitrage, or sectors like the downstream of apparel depending on wage differentiation to serve their customers. Those businesses have already shipped out of China, moving to Bangladesh, Indonesia etc. But that is due to economic transition in the country and China’s level of income.

The second factor is the Chinese government has been more selective in terms of what type of business they want moving forward with the economy. For example, they have been discouraging industry that had heavy pollution. So those businesses probably have more strong fundamentals to look for what they need elsewhere. The individual particular sector is doing that.

Besides, China is still a very attractive market to continue to invest for many factors. China still has unparalleled supply chain solutions to a lot of industries, so basically you can find anything you need to produce the goods that you need to sell to clients in China.

I can't say that for sure if you would be able to find the same kind of supply chain solutions in other countries. Although they might have cheaper labor, you might need to import quite a bit of stuff to do what you need to do. Labor efficiency and work force maturity are still better in China compared to many other developing countries. So that's a factor that businesses are actually constantly evaluating. Yes, my labor, which is cheaper elsewhere, but I can get more efficiency. It is easier to manage if I have my factory here.

And the third point is China is still a huge market. Producing and sell in the same market is still a key strategy for many businesses to pick up market share. If you want to stay relevant and you want to have the right solution and the right price point in China to take market share, a lot of people still have to produce in China. So that continues to be a very important pull factor for businesses.

Countries like Japan or the United States suggesting firms producing medical products back. These are sector specific that these countries feels the supplies of particular goods are critical that should be closely controlled. We will have to evaluate this from a policy influence perspective wanting to get sector specific goods closer to the home market.

YG: What opportunities will this pandemic bring for some specific manufacturing segments?

Lim: I think the coming government policy will indicate where opportunity may reside, especially in China. A lot of countries including China have been looking at stimulus packages to help fight the Covid-19 and bring the economy back to life. The Chinese government has continued to modernize its infrastructure, and sectors that support the modernization of infrastructure will continue to see investment.