Is China's Slow Down Due To The Supply Chain?

Having changing supply chain habits been the catalyst of China's slowdown?


China’s economic growth in 2015 was 6.9%, the lowest it’s been for 25 years. If a European country achieved this sort of number, there would be ticker tape parades, fireworks on every street corner, and whoever was in government at the time could, quite reasonably, expect to remain so until the end of time. When its China, however, the markets panic, and economists clamber over one another to deliver the autopsy.

The long-term reasons for China’s weaker growth are pretty simple - excess investment and the slow rot of old industries. One factor appears to have been largely ignored though - the global trend that’s arisen over the last several years in supply chains towards ‘nearshoring’.

Nearshoring, in short, is the practice of bringing production closer to the end-user. In a recent AlixPartners survey of manufacturing and distribution companies serving North America and Western Europe, 32% of companies surveyed said they have already near-shored or are in the process of doing so to meet end-market demand, while 48% said near-shoring activities are likely within the next one to three years.

Another sign of nearshoring increasing is the Purchasing Managers’ Index (PMI), a monthly index showing changes in manufacturing activity. A value of 50.0 means no change, anything above means activity has increased while anything below shows it has decreased. China’s fell 49.7 in summer of last year, indicating a fall in real terms in activity. The US’s PMI, meanwhile, went as high as 52.7, and Europe’s to 52.3. This trend does not seem to have stopped this year. Exports also fell by 1.8pc in April, compared with the same month in 2015. All of this seems to imply that manufacturing is moving away from the nation.

It appears that China has been a victim of its own success. Labor costs in China have gone up by nearly 20% a year, compared to just 3% in the US and 5% in Mexico, and it makes sense for foreign countries to return home if costs become too great to simply manufacturer nearer the customer base. However, it is likely that nearshoring, rather than being detrimental in the long term to the Chinese economy, is simply part of its transition to a service-led economy, with the services share of GDP rising 2.4 percentage points to 50.5% in 2015. For manufacturers in the country, it is not all bad either. Supply chain in the country is among the best in the world. A recent survey by PwC3 found that 38% of multi-national companies operating in China rated Chinese companies as more innovative than themselves in supply chain, and having fewer ties to heavily capitalized assets and automated solutions should hold Chinese manufacturers in good stead to deal with increased demand in the country from its own expanding middle classes. 

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