Q-Series: Reshoring the supply chain: where, what and how much?

We tore down an electric fan and 'tore it back up' in different countries to look at manufacturing competitiveness and assess how much of China's manufacturing is vulnerable to relocation, and to where. With China's gross exports 3% of world GDP, this issue is of global significance. Our controversial conclusion is that widescale supply chain relocation is overhyped. Unsurprisingly, Vietnam and India come out as low cost winners. The big surprise in our fan analysis was that the production cost in China was only 5% higher than in India, despite wages nearly 3x as high. The principal reason? China's embedded advantages in its vast economies-of-scale supply chain.

This cost advantage won't be eroded easily and helps anchor manufacturing even in the face of higher wages or tariffs. Our work on tariffs/customs rules also shows the difficulty of just moving the 'last mile' of production, underpinning the importance of a competitive domestic supply chain. Our analysis suggests that the bulk of manufacturing in China looks likely to stay, in line with Tao Wang's previous work around export employment sensitivities and UBS Evidence Lab survey data.

That said, some sectors are more vulnerable than others to relocation to low cost locations. Our detailed analysis of input/output tables and export competitiveness, suggests that around 30% of China's gross exports are in industries that don't have strong competitive onshore supply chain advantages – mainly in electronics assembly industries. Patching on employment and fixed asset data from bottom-up sources suggest that the employment opportunity for low cost countries looking to attract these industries might be 6-10m jobs, and around US$70bn of capital investment.