Amid the Sino-US trade war, a lot of firms are thinking about moving the supply chain out of China, mainly to Southeast Asia and Eastern Europe. In the face of high tariffs from the US for China-made products and retaliatory tariffs from the EU in relations to Chinese products being flooded in the European market, those importing from China are now scrambling to find alternative supply chain.
The questions now are: Can the world replace China’s supply chain?
The answer is: no,from our perspective as a business consultancy firm.
Political Performance based on infrastructure
Over the last 20 years, China has leaped onto the world stage as the second-largest economy in the world, commanded by a centrally controlled economy by the government which focus on infrastructure investment and which the private sector contributes to more than 80% in tax revenue and export. Together, the country has re-invested funds into physically visible facilities, to whom most government officials rely on them for a political performance. For example, as a governor of a municipal city, he/she is evaluated based on performance such as the city’s investment in infrastructure, the number of funds being poured into the city by investors and more recently the implementation of electric vehicles in the public transport sector.
As a result, the country has developed impeccable world-class infrastructure such as ports, airports, highways, roads, hospitals that most countries in the world cannot compete with.
Transformation of the manufacturing sector into high tech
The government, on one hand, has sought investment from high-end companies investing in more high-tech industries rather than the traditional industry. Not only are the investors attracted by China’s domestic market, but also it is a well-known supply chain in which infrastructure plays a big role in the process. For instance, as an investor being pitched to invest in a place, you are looking at a number of factors, including material, labor cost, transport, workforce, taxation and so on. If the place’s port facility does not allow you to ship your goods out in time to your clients, you are likely to end up breaching the terms and conditions of an agreement which ultimately results in losses of money. From that perspective, labor cost is the least important, while transport matters the most.
Subsidy for exports
On the other hand, the Chinese government, in order to boost exports, has never stopped subsidizing its firm to produce for foreign markets. A factory run by a Chinese citizen in China is eligible for a tax rebate in the form of cash if they export goods overseas. This has worked well for the Chinese economy, using export for generating cash while investing a large sum of it into its infrastructure.
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