‘De-Sinicization’ and Manufacturing in China

SMITH BRAIN TRUST – China is said to be confronting an economic challenge as a trend toward “de-sinicization,” or the removal or elimination of Chinese culture, takes hold in the world supply chain. “Companies around the world are expected to alter their supply chains to be less dependent on China in the wake of the COVID-19 crisis," according to a recent report in The Diplomat.

Kislaya Prasad, a research professor at the University of Maryland’s Robert H. Smith School of Business and academic director of the Maryland Smith Center for Global Business, offers insights on what that means for the world and for its second-largest economy.

Q: How is de-sinicization currently impacting China’s economy?

Prasad: In the early phase of the pandemic, when the impact was localized in China, a number of people in U.S. policy circles made the claim that the newly exposed risks of dependence on China strengthened the case for decoupling of supply chains and reshoring of manufacturing. Even at that point, it was unclear that this was a tenable claim. The cost advantages that offshoring to China provides are just too great, and the costs of bringing manufacturing back to the United States or moving it to third countries – even assuming such capability exists – are too high.

Interestingly, as the pandemic unfolded, the hotspots of the pandemic shifted, and disruptions in China became smaller than in other places. China turns out to be a reliable supplier of goods.

Since we are not immune from pandemics and other natural disruptions, reshoring becomes the ultimate case of ‘putting all your eggs in one basket.’ I think the pandemic reveals the importance of having resilient supply chains, to have well thought out contingency plans for what to do in the event of disruptions in one part of the world. This may involve building some domestic capacity as insurance but is not a justification for ‘de-sinicization.’

For China, I believe the greater threat is the de-sinicization of the tech world and the fracturing of the internet. U.S. actions against Huawei and ZTE, and threatened action against TikTok are steps in this direction. This is potentially easier to accomplish because costs imposed on U.S. consumers would not be as high. Additionally, the norms about control of information and government access to user information are so different that the divide may be too great.

For both supply chains and the internet, I believe we are better served by a world that does not fracture into distinct camps. I think there is room for accommodation from both directions to forestall such a possibility.

Q: Ultimately, what are the key, current challenges facing China's manufacturing industry?

Prasad: When it comes to manufacturing, China is unique in the range of things that are built there. Almost anything you need to build something can be found there.

Everyone is aware of the cost advantages, but the quality is also remarkable. It has a skilled labor force. There is innovation, and constant improvements in quality, and China has done relatively well moving up the value chain. This push must continue. If it does, then even given some building of resilience of supply chains, China will continue its preeminent role in global manufacturing.

I believe the challenges are some of the same that societies elsewhere face – how to reap the advantages of robotics, AI, et cetera, while still creating enough employment as a society, and of having growth that is inclusive, reaching all sectors of society and all regions of China.