Shifting landscapes: how geopolitics is remapping production

For many enterprises, increasing trade barriers and deglobalisation are complicating the business environment. What began as a trend to move production facilities away from the manufacturing powerhouse of China on cost grounds was turbo charged by the covid pandemic and a rise in geopolitical tensions. The resulting approach of diversifying production, known as the China Plus One strategy, demands relocation that is making business more difficult and costly for many entrepreneurs. Some profit from the disruption. But what holds true across the board is that a restructuring of global supply chains is underway, and showing no sign of letting up.

The stringent controls adopted by China during the covid pandemic revealed the risks of a globalised supply-chain system focused on low costs that depended heavily on Asian (especially Chinese) manufacturers. Businesses had already started moving some production away from China prior to the pandemic, largely on cost grounds, with Vietnam and Bangladesh proving popular alternative locations in low-tech activities such as some production assembly and the textiles sector. This trend was broadened and accelerated by the imposition in 2018 of tariffs and other trade barriers on China, with the aim of pressing it to change trade practices. Heightened geopolitical tensions between the US and China have increased even further the incentives for firms to reduce their dependence on China and to distribute production across multiple suppliers and regions.

By diversifying their supply-chain networks so that they are less China focused, multinational corporations (MNCs) hope to build resilience and to hedge against future shocks. Some MNCs now require their suppliers to relocate production outside China. Hence, what began as a natural, cost-driven economic trend is now more politically driven. This leaves suppliers in an awkward position: the MNCs they supply are increasingly demanding they relocate, but doing so is expensive.

Annual growth of US total trade with its major trading partners

India is becoming a popular production location for MNCs, especially in the consumer electronics sector. For suppliers, however, some aspects of doing business in India – bureaucratic hurdles, complicated compliance and tax systems, and logistical challenges – can prove burdensome. Regardless, the upshot of the increasingly politically driven pressures on business is a growing trend toward supply-chain regionalisation — a process that involves reorganising manufacturing into smaller, more localised blocks.

The ASEAN (Association of Southeast Asian Nations) countriesare a major beneficiary. Another relocation destination is Mexico, which offers tariff-free access to the US. By moving production closer to their home market, US corporates may lower shipping costs and better supervise production quality. At the same time, China’s vast and growing consumer market will likely encourage businesses to maintain or even to grow their presence there. As a result, China will likely remain a top global manufacturing powerhouse, with some of the more labour-intensive industries being replaced by higher value-added sectors.