China plus one
With this reliance, some markets are gearing up to pivot slightly away from China, but these sentiments have been around long before the coronavirus pandemic escalated.
“From our own surveys last year and even generally, there is an interest in getting away from a single factory that is actually putting things together and moving towards a model where there is customisation closer to the market that it's actually going to,” Krishnan said.
“There will still be essential subassemblies or subcomponents that will be made, but you'll be looking at a more distributed model of development. What we're hearing is actually that there's going to be a ‘plus one,’ which organisations were already starting to move to with regards to the US-China trade war.
“Some of the companies that I've spoken to were actually kicking themselves because they didn't do this fast enough.”
A major factor to move slightly away from China has been the rise of wages, especially on the east side of the country, Krishnan added.
“Supply chains, especially for labour intensive markets, tend to chase low cost labour markets,” she explained.
“In China, back in 2011, salaries started to increase, especially in the east side. As those salaries increase and workforces, which included the supply chains for IT equipment, started to move west as they chased that low cost labour market."
For the IT supply chain, Vietnam has been a significant player outside of China, which Krishnan notes has been a huge beneficiary of US-China trade tensions.
Automation, she continued, will also play a part in the future of supply chains and the pull slightly away from China to China plus one, as long as the locations getting involved in the supply chain have a strong STEM basis.
“Vietnam has developed a strong tech base, they've even started producing their own mobile phones. You're looking at Malaysia who had a lot of other technology capabilities before they went to China for the low cost labour market," Krishnan said.
“India has a strong technology capability — They still have some building to do, but we've seen the press on mobile phone and computer manufacturers looking over there.”
How quick can these plus ones be up and running in the supply chain? For Krishnan, it depends on their output.
“If it starts off with assembly, that that can reasonably happen in the 12 to 24 month period, provided you know that they have access to the labour force,” she said.
“For example, look at Malaysia. You had Seagate in Penang, and they moved out to China. That happened over a one to three month period where they moved quite quickly and started employing the workforce over there."
Across the region as a whole, Krishnan said there is a shortage of manufacturing and supply chain-related jobs.
“Unless we start turning to automation to solve those problems, which could bring it into the cheaper price point, it just means that we won't be employing people, we'll be using other forms of technology,” she said.
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