Over the past two years, the fragility of global supply chains has been exposed. While there are many reasons for this, COVID-19 and Russia’s invasion of Ukraine, inadequate infrastructure, a lack of truck drivers in many markets, as well as freak occurrences such as the container ship that ran aground and blocked the Suez Canal, are some of are the main factors that are now forcing companies to re-evaluate their production and distribution networks. Legislation is an additional driver of change, especially as environmental regulations make it less viable for goods and components to be transported over longer distances, and new laws have, or will, come into force that will compel companies to carry out thorough due diligence, both up- and downstream.^[1]&[2]

As a result, China’s position at the centre of global supply chains looks set to be challenged. There will not be full decoupling, with companies leaving China altogether – the potential of the market is still too great to ignore. Instead, more nuanced strategies will emerge. [3]

Prior to the Omicron outbreaks that led to full or partial lockdowns in at least 45 Chinese cities, several European companies were considering further onshoring supply chains into China to better service the domestic market and isolate themselves from potential global shocks. However, onshoring is not without significant drawbacks: initial costs will be steep, and communication and data flows between headquarters and China operations will suffer for those that pursue this option. Furthermore, according to the Chamber’s Business Confidence Survey 2022, 31 per cent of European manufacturers import critical components into China for which they cannot source alternatives; meaningful onshoring for them is not possible.  

Several companies had begun or were exploring the possibility of creating separate supply chains, one to serve China and one for the rest of the world. However, this approach also carries considerable risk, for both business and China. Operating costs will increase while efficiency and economies of scale decrease, and China will become more isolated from the rest of the world. This of course has the potential knock-on effect of increasing misunderstandings between the EU and China, something that should be avoided at all costs with geopolitical tensions rising and negative sentiment towards China at an all-time high in many nations.

After the lockdowns, which paralysed supply chains, there has been a shift in priorities, from efficiency and economies of scale to reliability and resilience. Reshoring, ‘friend-shoring’ and ‘nearshoring’ are now increasingly being discussed in boardrooms, and operational mentality is changing from ‘just in time’ to ‘just in case’.^[4]&[5]This trend will likely continue, as European companies look to maintain a strong presence in this important market, while ensuring that they do not become over-reliant and have strong back-up options.

These are just some of the important topics that will be addressed in the European Chamber’s forthcoming Business in China Position Paper 2022/2023, our annual bible of recommendations. I look forward to presenting the report to you in September. Until then, I wish you all a relaxing and enjoyable summer.

[1] Blinken, Anthony J., Implementation of the Uyghur Forced Labor Prevention Act, United States Department of State, 21^st June 2022, viewed 13^th July 2022, <https://www.state.gov/implementation-of-the-uyghur-forced-labor-prevention-act/>

[2] New rules on corporate sustainability reporting: provisional political agreement between the Council and the European Parliament, European Council, Council of the European Union, 21^st June 2022, viewed 13^th July 2022, <https://www.consilium.europa.eu/en/press/press-releases/2022/06/21/new-rules-on-sustainability-disclosure-provisional-agreement-between-council-and-european-parliament/>

[3] Large majorities continue to hold unfavorable view of China, Pew Research Center, 27^th June 2022, viewed 12^th July 2022, <https://www.pewresearch.org/global/2022/06/29/negative-views-of-china-tied-to-critical-views-of-its-policies-on-human-rights/pg_2022-06-29_views-of-china_00-02/?utm_source=substack&utm_medium=email>

[4] These are all terms related to the reshaping of supply chains to fix weaknesses and increase economic resilience. Reshoring is the act of bringing manufacturing from a remote location to the company’s home country; nearshoring is the act of bringing manufacturing nearer to the point of use; and friendshoring is relocating manufacturing to a country considered a trusted partner to the company’s home country.

[5] Masters, Brooke, and Edgecliffe-Johnson, Andrew, Supply chains: companies shift from ‘just in time’ to ‘just in case’, Financial Times, 20^th December 2021, viewed 11^th July 2022, <https://www.ft.com/content/8a7cdc0d-99aa-4ef6-ba9a-fd1a1180dc82>