COVID-19 recently added reasons why many foreign investors began considering relocating parts of their China operations to get ahead of supply chain disruptions. Should foreign investors stay with China during the COVID-19 outbreak?
Southeast Asian (ASEAN) countries like Vietnam, Thailand and Malaysia have been the main beneficiaries of businesses relocating from China due to COVID-19, owing to their low costs and growing manufacturing sectors. Companies such as Apple, Microsoft and Google are among those who 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. We look at three reasons why foreign investors should be more confident staying in China.
1. COVID-19 has gone global in unpredictable ways:
China was initially the hardest hit by COVID-19, 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 83,500, but global infections have soared.
Italy, in particular, has suffered from COVID-19, with about 165,115 confirmed cases and over 21,645 deaths. While not to the same degree as Italy, other European countries have recorded sharp increases as well. France, Germany and Spain each had around 1,000 confirmed infections in early March, but now they average at an estimated 150,000 cases each.
Iran has also been hit particularly hard, with about 76,389 cases—including several senior government officials. The U.S. currently has about 639,644 cases. Although Southeast Asia has had relatively little exposure, with Vietnam having just 268 cases, Indonesia 5,136, Thailand 2,672 and Malaysia 5,072.
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 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.
2. How China stabilized COVID-19’s spread:
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, COVID-19 infections are growing fasterglobally than they were in China at the start of the outbreak, suggesting that other countries are not responding as effectively as China did.
The U.S., for example, has had an inconsistent response. U.S. President Donald Trump initially downplayed the effects of COVID-19, misleadingly comparing it to the common flu. Finally, after weeks of downplaying the coronavirus, Trump declared a national emergency on March 13.
While European countries like Italy, France, and Germany eventually adopted strict measures to contain the coronavirus, the U.K. was also slow in its response. 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 quarantine and mass testing.
South Korea followed China’s strategy of instituting mass testing and was 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.
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 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
3. Government assistance and responsiveness to business distress:
China’s success in managing COVID-19 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 COVID-19 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.
With the global spread of the coronavirus, the economic impacts are not isolated, but affecting the global economy. When businesses return to normal, the vast resources of the Chinese government put it in a strong position to offer assistance to businesses and jolt the economy as a whole.
Taking a long-term outlook:
Many foreign investors have been forced to reach out to alternative suppliers and partners outside of China due to the COVID-19 outbreak. While this was necessary for firms experiencing sudden supply chain disruptions, a more permanent relocation of operations may prove short-sighted.
COVID-19 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.
The numbers in this article are from April 16.