SMEs join sourcing shift away from China as Covid policy dents confidence

Source: The Loadstar
Date: 25th July 2022

The production shift from China to Southeast Asia is accelerating – now “even SMEs” are searching for alternative supply chains in the face of China’s restrictive Covid policies.

According to Hong Kong-based digital wholesale marketplace Peeba, while the world is likely to see record Covid cases this winter, this is unlikely to lead to more supply chain disruption, except in China, where business disruption is “driving companies to alternative markets.”

Peeba supply chain director said: “While global supply chains are beginning to resume normal operations post-pandemic, we’re seeing an accelerating divergence between China’s supply chain and the rest of the world’s.

“For example, Japan saw record Covid cases last week, yet that did not lead to a change in its preventative policies, which is good for predictable supply chain operations and general business confidence.

“Meanwhile, China continues to clamp down hard when new cases spring up, leading to uncertainty and business disruption that damages the supply chain.”

Indeed, Shanghai has announced yet another round of mass testing, and roughly 20% of the country, across 41 cities, are currently under some form of lockdown, according to an analysis by Nomura. Most of the cases are in the northern province of Gansu and the southern region of Guangxi.

China’s continuing zero-Covid policy was creating an “acceleration of companies shifting production from China to Southeast Asia, where pandemic policies are looser and more predictable.”

This trend was already well underway among bigger brands, but now we’re seeing even SMEs shifting production, and growing numbers.

Apparel is one of the larger industries making this move, as materials and equipment suppliers are already set up for servicing manufacturers in Southeast Asia.

So now we’re seeing that, although cases are rising once again in the US, EU, and across Asia, case numbers are no longer directly correlating to governments’ preventative actions. Last year this was a concern for businesses, but for Q3 and Q4 this year, we do not expect the same disruptions, except in China.

This extends not only to border controls but also internal limits on workers’ ability to produce goods on the factory floor.

China’s exports keep increasing, however, surging 18% last month to give the country a record trade surplus. And, according to the Chinese government, as the country switches focus to high-end production, manufacturing moving out is “controllable, limited and in line with the law of economics”.

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