How COVID-19 impacts decision to relocate capacity out of China
UBS Evidence Lab: input from key decision makers on potential supply shifts
Our colleagues in China and Asia have written extensively about the prospect of companies shifting capacity out of China, using UBS Evidence Lab's CFO surveys. Indeed, 44% of respondents in the North Asia CFO survey said COVID-19 impacts increased intentions to move production out of China, with greater propensity to close capacity than just downsize. We further the work, leveraging the responses from senior executives at 450 US firms in the UBS Evidence Lab CFO survey from earlier this year to help understand the potential for supply chain shifts from the perspective of US firms.
How much capacity could shift?
Of the US firms surveyed, 34% produce in China. Of those, 76% have moved or are planning to move capacity out of China, with 1/3 planning to move in the near future. That compares to 85% and 60% of North Asian firms and Chinese manufacturers, respectively, moving production out. For those planning a shift, US firms surveyed would move 46% of their China production. This is higher than the 30% of export capacity moving for Chinese manufacturers, and over 1/3 moving for N. Asian firms. All 3 surveys point to 20-30% of capacity moving, which on $2.5tr of Chinese exports would imply $500-750bn. That is considerable potential and there could be sizeable rebalance as China's share of world exports has jumped 10pp since the early 2000s to ~14%, much higher than the US, Germany and Japan. However, we see the shift as predominantly driven by future capital flows elsewhere as profitable capacity in China gets utilized and Chinese companies face many obstacles to move production.
Which sectors and size of firms are more inclined to move production?
Of those US firms producing in China, 92% of Healthcare firms have/are moving capacity out and 89% of Consumer Staples companies are shifting. Firms in Tech (80%) and Cons Disc (76%) are also moving supply out at a high proportion, compared to Industrials (69%) and Materials (57%). Responses in the China and North Asia surveys also generally corroborate these relative sector takeaways. Surprisingly, more US small and mid-sized firms are moving production (78%), vs large firms with over $2bn in sales (63%), though large firms are planning to shift more of their capacity.
Which countries would benefit from reallocation of supply?
The US was a target for relocating capacity for 82% of US firms shifting production. Canada was 2nd at 38% with Japan and Mexico at 29% and 23%, respectively. Many Asian countries were mentioned but US firms were more open to relocating to Africa (15%), Middle East (14%) and Eastern Europe/Russia (34%) than China/N. Asia firms. The North Asia survey showed firms' desire to relocate back to home markets in Japan, Taiwan and Korea. Outside of that, Vietnam was the most desired destination with Thailand overtaking India for the second spot. Combining the responses across the 3 UBS Evidence Lab surveys, Japan stands out as the biggest potential winner of relocating production, followed by Vietnam, the US, Korea and Taiwan.
What types of investment spending could benefit?
US firms were asked what categories of investment spend would see the largest relative increase from reallocating investment out of China. IT spend that was infrastructure related was mentioned the most followed by manufacturing capacity for existing and new products. Data analytics, equipment upgrades and automation/digitization spend would benefit, but had a little more than half the response rate as IT+capacity spend.