Global Supply Chains Won’t Be Leaving China Anytime Soon Despite COVID-19: Morgan Stanley

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A new report from Morgan Stanley says that global supply chains will be unable to leave China in the near-future despite a push from other nations to sharply reduce manufacturing dependence in the wake of the COVID-19 pandemic.

The COVID-19 pandemic has led to increasing calls from nations including the United States, Australia and Japan to reduce their dependence on Chinese manufacturing and supply chains, given the inability of many countries to procure adequate medical supplies during the health crisis.

In early April the Japanese government allocated around USD$2.2 billion in funding to shifting key supply chains away from China.

Keith Krach, under-secretary for economic growth, energy and the environment at the US State Department, also told Reuters in early May that the Trump administration was “turbocharging” an initiative to reduce dependence on Chinese supply chains.

According to analysts at Morgan Stanley these plans may prove hard to realise in the short-term given the heavy impacts of COVID-19 on other economies, in tandem with China’s brisk post-lockdown recovery.

Their report said companies outside of China will find themselves cash-deprived as a result of the coronavirus pandemic, which means that they will be unable to invest in efforts to shift or alter their existing supply chains.

In contrast China’s factories are ready to resume production following a heavy lockdown in February and March, giving overseas clients greater confidence in their reliability.

“Technology vendors are encouraged by the pace at which China’s production has ramped up post the COVID-19 shock, and this has reinforced their belief in locating the production of their high-volume products in China,” said Katy Huberty, head of equity research for North America Technology Hardware at Morgan Stanley, in a note from last week.

“This provides reassurance that China will remain a large base for manufacturing in these products.

“While there will be some diversification in the supply chain to economies like India, Vietnam, Mexico and Taiwan, companies are currently focused on cash preservation and costs, which will limit the scope of such diversification moves in the near term.”

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