It’s hard to have an effective conversation about supply chains without addressing China. Many are questioning China's future role in global supply chains but the truth is no company, industry or country can divorce itself entirely from China.
China’s growth will see it reach about 75 per cent of US GDP by next year. Some predict it will surpass the US GDP by 2030. With an economy of that size and scale, it's impossible for a business to say it would delist itself from China entirely.
What business can do to address uncertainty is invest in diversification. The market has already seen the beginnings of a move towards a ‘China+1’ strategy, which reduces exposure but recognises China will continue to play a role in supply, and certainly in terms of consumption.
As this diversification occurs, countries in the ASEAN region (in particular Vietnam, Thailand, Indonesia) may benefit as investment out of the US, Europe and Japan looks to shift.
It is inevitable there will be a short-term cost to this transition. The technology required alone will require increased investment. The wearer of this cost is likely to be the consumer.
How quickly the transition occurs will determine the ultimate outcome. If companies move locations, build new plants and establish a presence in different countries - even if the long-term goal is to lower costs - the short-term impact will be expensive.
This may inevitably dampen demand, which will accentuate many of the economic challenges presented by the pandemic.
Farhan Faruqui is Group Executive International at ANZ
This article is an edited version of comments delivered by Faruqui to a Bloomberg virtual event in October