In the past, supply chains were designed to keep costs low. In the post-pandemic era, supply chains are being reworked to reduce the risks of future disruptions. The international community is committed to moving supply chains from China to: India and Vietnam.
China is the world’s largest exporter of goods and faces the twin challenges of overcoming vulnerability to the pandemic and ensuring the trade war with the US doesn’t increase the vulnerability of supply chains.
There is an opportunity for low- and middle-income countries to partner with developed countries to move supply chains away from China.
China has the largest share of the world’s labor-intensive exports. It is estimated that China’s share of exports grew from 13.9 percent in 2000 to 26.9 percent in 2018. China’s economic development between 2000 and 2018 was also accompanied by higher living standards.
Production wages in China’s three largest export provinces have risen by 11 to 14 percent per year over the past two decades.
The pandemic was a wake-up call for companies that relied solely on Chinese suppliers. Supplier diversification is one way to increase resilience, meaning at least some production lines will have to relocate permanently. But the practicalities of moving supply chains out of China are complex.
According to a recent Q2 Barometer report from QIMA, Vietnam and India emerged as alternative sourcing locations. Vietnamese reforms allow foreigners to own both real estate and majority stakes in Vietnamese companies. Consistent economic growth has made Vietnam attractive for foreign investment.
QIMA global sourcing survey shows that 43 percent of US-based respondents described Vietnam in their top three sourcing regions as of early 2021 and about a third of buyers worldwide.
The QIMA report also shows that the demand for sourcing from India is increasing, but it remains a challenge that the latest wave of Covid-19 cases could slow sourcing from the country. India as a sourcing market is equally valued for promotional products, footwear and eyewear, jewelry and accessories. For now, however, this “rebound” seems dependent on how effectively India manages its ongoing fight against Covid-19.
The Indian government recently allowed up to 100 percent FDI in contract manufacturing, with an emphasis on increasing the share of manufacturing investment in total FDI. In addition, an expenditure of approximately US$1.85 billion is planned for infrastructure development in key ports in the country. The Indian government has further allowed up to 100 percent FDI on projects related to ports and is offering a 10-year tax exemption for the construction and maintenance of ports and ports in an effort to boost investment.
The opportunities for India and Vietnam are obvious, but so are the challenges. India has the experience of being part of the US supply chain hub because of its IT sector. Shifts in the supply chain need to be moved to multiple countries. The US plans to establish an ‘Economic Prosperity Network’ with friendly countries, which will work towards comparable standards for everything from digital, energy, infrastructure and so on.