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Multinational companies are fundamentally transforming their approaches to global manufacturing and supply chains, shifting toward strategies such as nearshoring, friendshoring, reshoring, and adopting “China-plus” tactics. This evolution is driven mainly by increased geopolitical uncertainties, significant changes in economic regimes, and the need to address vulnerabilities exposed by disruptions such as the Covid-19 pandemic. China, the world’s largest manufacturing hub, is at the heart of these shifts. Therefore, understanding China’s role in the global supply chain is crucial for investors.
According to the Reshoring Institute, a US non-profit, China’s historical supply-chain advantage may no longer be based solely on labour cost but on its manufacturing ecosystem. The Whitepaper shows that China – once known for cheap labour – is now in the mid-range of labour costs, and countries like India and Mexico are at the lower end.
MSCI argues that China now has a strong foothold in tech- and resource-driven manufacturing as recent government spending has been concentrated in these areas. This would make it difficult for companies in these industries to move supply chains out of China in the short term.
“Through 2021, China had installed more industrial robots than the rest of the world combined. This infrastructure and talent pool have supported efficient and cost-effective production processes, an important factor in the competitiveness and leadership of China’s manufacturing hub,” says Wei Xu, Executive Director of MSCI Research.
Also AllianceBernstein notes that diversifying supply chains away from China is not always easy. “Global manufacturers have often found that Chinese companies with essential products for complex production processes are not easily replaced,” says John Lin,
Chinese companies adapting to changes in supply chains
However, Chinese companies have quickly adapted to a new reality, Lin points out. “Many are rerouting a large portion of their shipments and/or moving production sites to other countries. Indeed, our research indicates that Chinese companies comprise about half of Apple’s suppliers in Vietnam,” Lin highlights.
One question arises: “Which markets are the biggest winners?”. Research by the Economist Intelligence Corporate Network (EICN) suggests that China’s regional neighbours will benefit over the following years.
“We believe certain markets in South-East Asia have already emerged as ‘winners’ in attracting foreign direct investment (FDI), particularly in the context of worsening US-China ties. Moreover, our long‑held view has been that countries like Vietnam, Malaysia, and Thailand will reap the biggest benefits of these trends,” explains Robert Xiao, Director of EICN in Beijing.
AllianceBernstein’s Lin also names Mexico, besides Vietnam, as a big beneficiary of changes to supply chains. “But that doesn’t mean China has been removed from the picture,” opines Lin. “In fact, Chinese exports to Vietnam have jumped by 72% since 2018, while US imports from Vietnam have risen by a similar proportion. Chinese exports to Mexico have surged by 155% over the same five-year period. Even as Mexico and Vietnam enjoy GDP benefits from new sources of trade, Chinese companies are still embedded in the relocated supply chains.”
Lin argues that these complex trade patterns matter not only for companies but also for investors. “Despite the pressures, we believe selective equity investors can find resilient companies in China, with business models that remain integral to global trade and create solid cash flows to support long-term return potential,” Lin concludes.
