Winners in post Covid-19 world economy & rise of Globalisation 4.0

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March 4th, 2021

A look at changes in Global Value Chains in post Covid-19 economic landscape and birth of Globalisation 4.0. Which countries could be potential winners, and what could prevent them in doing so.


By Jaideep Singh Mann


By now you’ve probably heard the story about uncertainty and disruption of Global Supply Chains a thousand times because, well, it’s true. Every crisis (9/11,  2002 SARS, 2008 financial meltdown ) has challenged the status quo and established new world order. The Chinese word for crises “weiji” (危机) represents a danger as well as opportunity. While earlier global crises flattened the world through the advent of Globalisation, will this be the case again? If yes, who could be the winners?


The heterogeneous world society always had Geo-political, Financial, and Environmental stresses. While every time globalisation breathed a new life into battered post crisis world economies, it has also become increasingly easier to transfer those stresses throughout the “wired world”. Covid-19 has resulted in the most brutal global economic collapse since the Great Depression, exacerbated by a near 60% oil price slump.


FDI into China has also been to the south. China reported 24.4% fewer new foreign trade entity registration in China during the first quarter of 2020 compared to the last year. Meanwhile, 12,000 existing foreign trade enterprises closed down. Major industries have suffered at the hands of COVID-19, with nuclear reactors, electrical machinery and equipment, plastics, and organic chemicals among the worst affected.  


China: monthly value of exports from April 2017 to April 2020 (in billion U.S. dollars)

China: monthly value of exports from April 2017 to April 2020 (in billion U.S. dollars)



When most economists were predicting a fall of 15% (April’20) in Chinese exports, many were surprised when the exports rose 3.5% from a year ago.


While the debate will go on about the origins of this pandemic and what could have been done right, many are writing off the world’s factory China. But one needs to be very careful in predicting that China is finished. During the 2002 SARS disruption (which also had the same origins as Covid 19) China’s share in global GDP was 4%, in 2019 it contributed about 20% to the world GDP. This tells us something.



Circa early 2000s, “Cost” was the main driver for reshuffling of global supply chains as they headed for becoming “leaner” and manufacturing started shifting where labor was cheap.


Globalisation manifests itself in the form of Global Value Chains (GVCs) connecting manufacturers across multiple countries. The ultimate goal that GVCs serve for manufacturers is increasing efficiency by way of sourcing the best possible inputs at the lowest cost. China emerged as the single largest source of these highly specialised intermediate goods for businesses across the world.


“What people thought was a global supply chain was a Chinese supply chain.”

-Anand Mahindra


By 2017, average Chinese manufacturing wages had become as high as those in some parts of Europe, and it was clear that the logic of “cost” needed serious review. Also, disruptions like SARS or the Tohoku earthquake in Japan, revealed that disturbance in production by one country could render the entire chain compromised. COVID-19 has once again put this risk at the forefront for global businesses as it is clear how essential China remains as a provider of inputs to the factories elsewhere in Asia and around the world.



Recently, an important buzzword in supply chain management has been “Resilience”. A resilient supply chain detects early signs of a disruption to which it responds by switching over supply from alternative sources. Resilience, however, is a tradeoff with efficiency. Covid pandemic has exposed how companies’ quest for more efficient supply chains have resulted in very brittle supply chains in terms of resilience. And then there is another dimension, “Risk” brough to the fore by the recent US–China trade war. Increased tariffs and the threat of disruption in  Chinese supply chains has prompted businesses to diversify the sources of manufacturing inputs.


Resilience, however, is a tradeoff with efficiency. Covid pandemic has exposed how companies’ quest for more efficient supply chains have resulted in very brittle supply chains in terms of resilience.


While Covid-19 has accelerated the debate around such diversification, it is not a new phenomenon in itself. This crisis may speed up a trend that was already in place. In recent years, rising production costs coupled with increased tariffs, have seen businesses steadily move their supply base out of China in favour of more competitive and less risky markets.


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Businesses have adopted the wise approach to spread their risks, instead of putting all their eggs in the lowest cost basket. Going ahead, companies are expected to further diversify their supply chains in order to increase global supply chains’ resilience while minimising risks and costs.


The trend of supply chain diversification and “decoupling” from China can be seen more clearly through the Kearney US Reshoring Index (USRI)The Reshoring Index compares US domestic manufacturing gross output to the level of manufacturing imports from 14 traditional Asian low-cost countries (LCCs): China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka, and Cambodia.


The Kearney USRI tracked that in 2019 US manufacturing contributed a significantly larger share as compared to the 14 Asian low-cost countries (LCCs), with a steep decline in manufacturing imports from China.


The relocation of the supply base from China to other Asian LCCs has been going on for some time now, and gained momentum in 2018-19 by the US-China trade spat. Resultantly, a new Asian trade balance is taking birth. The new world order may be here to stay for longer than anticipated owing to Trump’s recent trade policies conjugated with the Covid 19 rhetoric drummed up around China in light of upcoming presidential elections in the US.



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During 2018-19, US imports from China declined by 17% ($90 billion). During the same period, US imports from other Asian LCC markets went up by $31 billion and imports from Mexico rose by $13 billion.


The damaging effect of Covid 19 on Chinese supply chains is inevitable, with major global economies openly luring businesses to shift their manufacturing out of China. The European bloc is seeking to reduce its trade dependencies on China. And, Japan has announced a $2.2bn package to support companies looking to relocate away from China.



Although in the long run supply chain diversification is inevitable, China is expected to remain the main manufacturing centre in the near term. Coronavirus is having global repercussions, even if it originated in China, and would be less of a factor in pivot away from the Asian economic giant.


There is no denying the fact that China is way ahead of the global curve when it comes to rebooting the economy following the Covid 19 lockdowns. Moreover, one also has to address the challenges in relocation of manufacturing to another country. Logically, the exodus from China might not be as extensive as anticipated.


Another factor complicating any potential relocation is related to parts and raw materials, with many countries still reliant on China for all kinds of components needed for production. Taking such factors into consideration, many businesses looking at relocation will have to assess any costs associated with establishing new supply chains for components, or delays in production brought on by disruptions in China.


According to a March’20 survey by the PwC and American Chamber of Commerce in China (AmCham China) more than 70% of companies admitted that they had no plans in the short term to relocate production and supply chains outside of China due to COVID-19.


The companies are most likely to adopt a more practical strategy to maintain a strong presence in China, and at the same time diversify their supply base in other LCCs. This is being referred to as the “China + 1” strategy.


The companies are most likely to adopt a more practical strategy to maintain a strong presence in China, and at the same time diversify their supply base in other LCCs. This is being referred to as the “China + 1” strategy. It will not only give businesses sufficient time to explore countries with capacity in terms of skilled labor, infrastructure and raw materials, but also allow them to leverage on the huge domestic market in China.


There is, however, at least one sector where the future could be starkly different than others; “Pharmaceuticals and Medical Supplies”. China, along with India, plays a crucial role in the world’s pharmaceutical supply chain. China produces between almost 90% of the global supply of active ingredients for antibiotics, and Indian companies lead the production of generic medicines. The coronavirus pandemic has exposed the over reliance of businesses and governments on China for vital drugs and medical equipment, a scenario which they would most certainly like to avoid in future. 



As businesses and governments seek sustainable alternatives to China, several emerging ASEAN countries with developed infrastructure and/or low manufacturing cost stand to benefit.


FDI inflow into ASEAN countries in 2018-19 points towards Vietnam as the key winner. India, Cambodia, Bangladesh, and to a lesser extent, Philippines, Myanmar and Indonesia, Pakistan and Ethiopia are also seen as contenders. Vietnam is perhaps the best positioned simply because it shares the same shipping routes to the Western world as China.


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Vietnam’s response to coronavirus has been steller, perhaps the best among developing economies. Government’s swift actions have ensured fewer than 40 active cases (as on 1st June’20) and is yet to register a single Covid-19-related death. Vietnam has not only been able to arrest the damage from pandemic at an early stage but it is forecasted to be one of the fastest-growing economies in Southeast Asia during 2020. The government’s $10.8 billion credit support package announced in March’20 will help the cause.


Of the $31 billion in US imports that shifted from China to other Asian LCC countries, almost half (46 %) was absorbed by Vietnam, which exported an additional $14 billion worth of manufactured goods to the US in 2019 vs. 2018 – KEARNEY


Over the last decade, the country has heavily invested in industrial infrastructure, and has experienced an increase in textiles and apparel manufacturing, among other industries. This, in addition to the fact that the labour costs are around 50% less than China has seen global businesses, such as Apple flocking to the country with plans to set-up alternative production bases.



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Cambodia has seen rapid GDP growth (~7%) over the last decade. Like Vietnam, Cambodia has duty-free access to American markets. The country is also one of the top benefactors from the US-China trade war. In the latest annual figures available, Cambodia recorded $5.88 billion in trade with the United States with a trade deficit of $4.85 billion.

Global investors have reasons to be concerned about Cambodia’s economic reliance on China. Although Cambodia’s economy is very open to foreign investment, however bulk of that investment has been coming from China. There are several other reasons that may keep manufacturers away: the country’s small market size, corruption, a limited supply of skilled labor, inadequate infrastructure (including high energy costs), and lack of transparency in government approval processes.



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One would argue that Bangladesh has more competitive advantages than its competitors such as Cambodia and Vietnam. For example, setting up factories in Cambodia is more challenging owing to strong labour unions. Moreover, Bangladesh has about 10 times the population of Cambodia at 160 million, ensuring less risks related to the labour supply. This, combined with cheap labour as compared to Vietnam gives Bangladesh competitive edge over its eastern neighbours. Compare the minimum wage in Bangladesh at $95 per month, which is almost half the $180 per month mark in Cambodia and Vietnam.


Caution for companies would, however, be crumbling infrastructure, weak rule of law, and a poor business environment. Many observers are also concerned that Bangladesh’s excessive and reckless borrowing from China may put the country in a longer-term debt trap, like other countries.



Diversification of Global Value Chains should have been invigorating for the largest economy in Southeast Asia. Yet compared to its SEA neighbours, Indonesia remains relatively unattractive to foreign investors. According to OECD, Indonesia ranks 2nd on FDI restrictiveness Index, with Philippines being the first.


Due to restrictions on FDI, as well as weak infrastructure and higher labour costs, Indonesia was largely bypassed by 33 Chinese-listed companies looking for alternative business locations in 2019.


According to The World Bank, Indonesia’s prospect of attracting FDI is marred by a highly complex regulatory landscape. It points to the sheer number of ministerial and regional regulations, and the many inconsistencies they cause.


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The Jokowi government has resolved to do away with the regulatory obesity with the new Omnibus Law which aims to revoke or revise over 1200 articles in 79 laws deemed problematic for investors. The bill addresses policy areas from licensing to special economic zones hoping to turn the country into a coveted destination for foreign investors.


But given the inherent complexity in the regulatory framework, these recent efforts are unlikely to address the problems that have caused Indonesia to miss out on global investment opportunities arising from the “China Decoupling” trend, unless the government is committed to rather more dramatic and fast improvements. Perhaps this optimism has propelled CEOworld to rank Indonesia 4th in the list of top countries to invest post Covid 19.



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In April’20 Facebook announced its largest single investment of $5.7 billion in Jio Platforms controlled by the ambitious Reliance Industries. This is a huge bet on the largest democracy in the world, and a testimony to the improvements India has made to its FDI landscape. Companies like Apple and Amazon are also expanding their manufacturing bases in India.


In a bid to attract manufacturers fleeing China, the Indian government is developing a land pool of 462,000 ha (twice the size of Luxembourg) earmarked for 10 sectors – electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles.


In spite of various challenges, India boasts of some unique advantages for both market-seeking and resource-seeking foreign investors. According to a UNDP report, India will have a working age population of 1.14 billion, with rising urbanisation and a populating middle-class by 2025, creating a huge domestic market. India’s jump from 77th to 63rd rank in World Bank’s Ease of Doing Business Index also bolsters its position on the global investment market.


According to a UNDP report, India will have a working age population of 1.14 billion, with rising urbanisation and a populating middle-class by 2025.


However, India’s manufacturing sector (16% of India’s GDP) faces a plethora of bottlenecks. Tax and tariff policies, labour regulations, logistics, land acquisition issues, and discrimination in the export market are a few of them.


The window of opportunity is narrow and the future of India will greatly depend on the choices it makes during the ongoing pandemic. Successful economies have used crises to build and design a new vision of their State. For this, India needs to smoothen its policy process for long-term sustenance ensuring that the FDI tide doesn’t get shifted towards Bangladesh, Malaysia, Vietnam or Thailand.



Economic devastation due to the coronavirus pandemic would prompt MNCs to make their supply chain more resilient by boosting inventories, enlisting alternative suppliers, most likely closer to home. There will also be increased deployment of information technology to keep a better tab on suppliers and customers.


For US centric businesses, Mexico (already the largest trade partner of the US)  stands out as a logical option. Japanese car company Mazda has already shifted some of its production from China to Mexico. European industrial businesses could utilise Morocco, Tunisia and Egypt as competitive manufacturing bases.


Next one year is going to be Wild !  One who is most Adaptive is going to survive, not the Smartest or the Strongest. It is pretty evident that post Covid 19, we are going to witness the emergence of “Globalisation 4.0”.  In conclusion Globalisation has never got a boost like this, and the world is only going to get flatter.


This article was originally published on 2 June 2020 on LinkedIn


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