No evidence of major supply chain shift from China

Allianz Trade, the German insurance group’s credit insurance arm, says that despite much talk recently of a decoupling of supply chains from China for political and economic reasons, there is no evidence of a major shift yet.

Perhaps surprisingly given recent news on US-China trade tensions and Taiwan, the group’s latest survey of over 3,000 global companies from China, France, Germany, Italy, Poland, Spain, the UK and the US found that more than a third of respondents plan to increase their footprint in China, while only 11% plan to decrease it.

On the other hand, Chinese companies that are considering relocating sites or changing suppliers mostly favour staying within the same region, it said.

However, the credit insurer said there are signs of diversification.

Around a quarter of German, French and US firms see their footprint in China representing a smaller share of their global supply-chain investments going forward, preferring Asia Pacific (especially ASEAN countries) and Western Europe.

Forty-eight percent of US exporters that took part in the survey and that have production sites or suppliers in China would consider countries in Asia Pacific or Latin America to diversify their supply chains, it said.

“Relocating within the same region and nearshoring seem to be the preferred trend. Only 5% of respondents expect reshoring trends to reverse in the coming two years, while more than 26% expect it to accelerate,” said Allianz Trade.

Allianz said that basically the shorter the supply chain, the more short-sighted companies are when it comes to geopolitical risks.

“Despite rising geopolitical issues at the global level, companies tend to remain short-sighted and focused on their own regions. Concerns broaden to global topics only when supply-chain exposure intensifies. When it comes to geopolitical factors posing an immediate risk to their supply chains, respondents are mostly concerned with events affecting their respective regions,” it said.

For example, exporters in Europe are most worried about the conflict between Russia and Ukraine, while those in the UK cite the upcoming general election as the main geopolitical factor posing an immediate risk to their supply chain, noted the insurer.

US exporters are most concerned with the upcoming presidential election in their country. Meanwhile, respondents in China are most worried about the intensification of the US-China trade war, it added.

Allianz Trade said that companies with long supply chains and at least half of production carried out abroad are most worried about the intensification of the US-China trade war.

For Chinese exporters with offshore production sites in North America, the main geopolitical factor that poses an immediate risk to the supply chain remains the US-China trade war, while for Chinese corporates with offshore sites in Africa, instability in the Middle East was top of mind, it said.

The credit insurer said that European companies are clearly less worried than US firms about US-Chinese tensions over Taiwan.

Its survey found that 39% of companies in Germany and Spain, and 33% in France, expect to increase their footprint in China, compared with 27% in the US.

“That said, a trend of diversification rather than decoupling seems a little more apparent. Around a quarter of German, French and US firms expect their footprint in China to represent a smaller share of their global supply investments going forward. In the meantime, some German companies are also doubling down on their relationship with China, with 35% expecting their footprint in China to increase relative to other markets,” said the insurer.

“In terms of sectors, companies in automotive, chemicals, construction, metals and textiles said that they plan to increase their footprint in China relative to other markets, while those in sectors such as electricity and retail plan to increase their footprint in other markets relative to China,” it added.

China remains the world’s critical supplier, from which a full decoupling seems difficult, if not impossible, said Allianz Trade.

“Despite rising geopolitical concerns and an increasing number of companies saying they intend to relocate from or diversify away from China, there is probably a limit to what extent this can happen. China remains the world’s critical supplier, often accounting for more than 50% of imports of a particular product, and holding a global market share higher than 50% for the product,” it said.

The insurer said that the intensity of importers’ dependency on China varies, with the US being among the most exposed. China is a critical supplier for around 45% of total US imports. The share is 29% for the UK, 28% for Spain, 27% for France, 22% for Germany, 13% for Poland and 11% for Italy.

Asia Pacific and Western Europe are the preferred destinations as alternatives to China, based on this survey.

“Among companies that indicated they plan to increase their footprint in other markets, relative to China, the highest share indicated Asia Pacific as their preferred region (37%) if they were to relocate away from China, followed by Western Europe (17%). Within Asia Pacific, ASEAN captures more than a third of choices, while Japan, India, Taiwan, South Korea and Australia roughly share the rest equally,” said Allianz Trade.