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Post-Pandemic, American Businesses Want To Leave China; Europeans Don’t

July 21, 2020

CPA's take: More evidence that waiting for our “allies” before we act to address the China issue is lazy thinking.

Thanks to the pandemic, American businesses have come to learn that sourcing nearly everything from China is a bad idea. The vast majority of them are looking to source elsewhere post-pandemic, while their European counterparts are rather “meh” on the subject.

[Kenneth Rapoza | July 20, 2020 | Forbes]

U.S. businesses are among the most likely to diversify sourcing, with 95% of U.S.-based respondents to a survey conducted this month by supply chain auditing firm QIMA saying they plan on changing out of their China-based suppliers due to the coronavirus, not to mention the worsening geopolitical tensions between Washington and Beijing.

On the other hand, only half EU businesses said there were out of there. Most of the Asian Pacific countries were staying put, but China is their backyard. Europe isn’t all that closer to China than the U.S., but Europe has proven once again that when push comes to shove, China is their guy.

Still, many U.S. importers told QIMA that they are finding it hard to make a clean break from China, as the country remains the only game in town for a number of items — be it electronics components or things as basic as surgical and dust masks now being worn around the world.

QIMA, which runs inspections of foreign factories, said that audit requests in the second quarter fell 12%, better than expected.

Some 87% of the U.S. respondents cited China as a top three supply chain nation for them, and a whopping 60% got more than half of their sourcing from China. Around 200 companies participated in the survey.

Companies said they are looking to de-risk from China, and are turning primarily to Vietnam. At least half of all U.S. respondents picked it.

Vietnam factory inspection demand rose 42% annualized in June, as good a gauge as any for the demand coming out of Vietnamese manufacturing facilities.

Many Chinese companies have been moving to Vietnam over the years, where labor and regulatory rules are weaker than in China. So while the country of origin may no longer be China, the business is owned by the Chinese. It is unclear by the report just how much of Vietnam’s new manufacturing is from China foreign direct investment.

Another 30% of respondents said they were going to Bangladesh or India.

U.S. brands in certain industries are continuing to rely heavily on China, especially for electrical and computer components. Much of Apple AAPL -0.6%product lines are made by Chinese workers at Foxconn factories.

Electronics inspections in China for American buyers recorded an uptick of 7.5% in May and 15% in June 2020.

QIMA data on inspection and audit demand in China shows that so far in 2020, China sourcing has followed a distinct W-shaped pattern of decline and recovery, report authors wrote in Q3 2020 Barometer.

After a 33% year-over-year drop in factory inspections in January-February 2020 due to lockdowns, China manufacturing showed signs of recovery in March, down 12% year-over-year, followed by another downturn in April of -22% as demand from Western buyers fell due to lockdowns here and in Europe.

With restrictions easing in Europe, demand for inspection and audits picked up from May onward (-5.5% y-o-y in May, +1% y-o-y in June).

European buyers have played an important part in China’s rebound, according to QIMA, with demand for inspections and audits spiking by 16% in May and 28% in June.

Throughout the first and second quarter, hospital protection equipment (PPE) helped mitigate some of the pandemic’s impact on multiple links in global supply chains, ranging from manufacturing to logistics to quality control inspection.

Furthermore, PPE also proved a much-needed life raft for the stitch-and-sew factories no longer taking clothing orders for Western retailers. Inspections and audits of apparel factories in China in the first half of the year were down 21%. A number of countries, led by China, but also including Vietnam, Bangladesh, Cambodia and Myanmar, ended up shifting their labor force to making PPE and face masks instead of polo shirts.

The number of firms that did this is reflected in the number of audits to inspect those factories that shifted gears to stay in business during the pandemic. Between January and May 2020, QIMA said that their inspection volumes on PPE items increased 30-fold and that over 1.2 billion face masks were inspected in the three months ending June 30, mostly all of it in China.

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