Bottlenecks from China’s manufacturing hitting countries beyond Asia

• Beyond the human tragedy of the coronavirus, the epidemic has exposed the downsides of depending too heavily on China to power global manufacturing. In fact, not only has China reached 19% of market share in global exports in 2018 from 8% in 2003, it has also moved up the value chain by exporting more intermediate goods (32% of gross exports from 24% in 2003), although the bulk of exports are still final goods. Since the 23 January, manufacturing production has come to a stop in Hubei province and has suffered severe disruptions in many other parts of China. While activities are recovering, multinationals are realizing the consequences of depending on a single country, namely China’s manufacturing goods.
• In our previous note (See: China’s larger role in export of intermediate goods makes corona virus an even bigger risk to global value chain), we looked at the costs of this dependency for Asia. We found that, globally, the electronic, machinery and textile sectors are most exposed to disruptions in China’s manufacturing, with North Asian firms being very vulnerable due to their extensive investment in China. In this note, we analyze bottlenecks in global supply chain by analyzing sources of bottlenecks.
• We found key differences in global bottlenecks: the European Union (EU) dependency is primarily on consumer goods, as it is more regionally integrated on value chain, and this is especially true for France. For South Korea and Japan and to a lesser extent the US, the dependency is high for intermediates, especially electronics and machinery.
• At a granular level, we see that France’s supply chain bottlenecks with China are higher than those of other EU member states on average. At the sectoral level, France’s largest dependency is on baby carriages and toys, light fixtures and fittings, telecommunication equipment’s, auto-processing data, sound recorders, and parts of machines and household equipment. Japan’s concentration risks is the highest amongst the economies studied, although South Korea is not too far behind. Thus, Japanese and Korean firms are the most impacted through the supply chain in the short-term.
• That means the trend of South Korean and Japanese firms diversifying from their China concentration risks will likely continue. The EU, too, will need to consider this as there are clearly too many eggs in the Chinese basket, although more skewed towards consumer goods. With France exposure much greater than EU 27 average, we expect this urgency to be greatest for those firms in most exposed sectors.

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