Global supply chain continues to shift away from China, but it remains the top sourcing location

American and European companies are gradually reducing their reliance on China, and its popularity as a sourcing market among Western buyers took a hit during the pandemic
As a regional alternative to China, Vietnam maintained its popularity during the turbulent 2020, and this year it was named as a top-three sourcing market by a quarter of respondents globally

Manufacturing

Cissy Zhou

Published: 6:30pm, 30 Apr 2021

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Although China has rebounded relatively strongly from the pandemic, having brought it under control much faster than the West, long-term diversification trends in the global supply chain are continuing to shift away from the world’s second-largest economy, according to a survey of more than 700 firms across the world in March.

In 2019, 96 per cent of US-based companies and 100 per cent of Europe-based companies listed China as one of their top-three sourcing countries, but those proportions respectively dropped to 77 and 80 per cent in the first quarter of this year, according to Qima, a provider of supply-chain-compliance solutions that conducted the survey.

Already shaken by the fallout of the US-China trade war, the popularity of China as a sourcing market among Western buyers took another hit in early 2020 following the initial coronavirus outbreaks and the resulting lockdowns.

But even as companies based in both the United States and Europe are reducing their reliance on the Chinese market, China still remains the top sourcing destination.

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For businesses located outside China, more than 85 per cent of respondents listed China as one of their top-three sourcing markets for promotional products, electronic items and toys.

“This suggests that, sourcing-diversification efforts notwithstanding, buyers continue to view China among their most important manufacturing partners and wish to maintain their business connections with Chinese suppliers,” the report said.

It went on to note that a major factor contributing to such decisions is China’s effective response to the pandemic, but other factors include “a long history of cooperation”, “a good track record in quality compared to local competition”, and “China’s progress in ethical compliance compared with other, less mature, sourcing regions”.

Traditionally viewed as a regional alternative to China, Vietnam maintained its popularity during the turbulent 2020, and as of early 2021 it was named as a top-three sourcing market by a quarter of respondents globally. Before the US-China trade war, a number of Chinese companies, especially in the textile and garment industry, had already relocated to Southeast Asian countries such as Vietnam, and more manufacturers from different industries have moved to Vietnam since the start of the trade war.

Meanwhile, India, which is traditionally viewed as a textile powerhouse and is now scrambling to handle a surge in coronavirus cases, was also said to be one of the leading sourcing partners for at least a third of respondents in multiple sectors, including promotional products, eyewear, jewellery, fashion accessories and footwear.

Vietnam is particularly popular with businesses based in the US, as the share of US-based respondents who considered Vietnam to be among their top-three sourcing regions has almost doubled in the past four years, reaching 43 per cent in early 2021.

And in Europe, 25 per cent of respondents listed Vietnam among their top-three sourcing countries in the first quarter, 15 percentage points lower than last year, but still higher than the 11 per cent in 2019. This came after a free-trade deal between the European Union and Vietnam went into effect on August 1.

Among all respondents who switched to suppliers in new geographic regions last year to navigate the pandemic disruptions and other risks, almost one-third named Vietnam among their top choices, and for US-based respondents, that figure was even higher at 40 per cent.

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And that trend looks poised to continue in 2021. Among respondents who intend to source new suppliers in the next 12 months, 38 per cent of US-based respondents and 28 per cent of those from Europe cited plans to shift some of their sourcing to Vietnam or buy more from existing suppliers there.

At the same time, businesses are not flocking back to China in droves. Only 6 per cent and 11 per cent of US- and EU-based brands said that they did “significantly more” China sourcing in 2020.

US buyers also appear to be more ambivalent about future China sourcing. While around one-third of them plan to buy as much from Chinese suppliers in 2021 as they did in 2020, almost as many reported plans to stop buying from China altogether.

Still, there is a discrepancy between the plans and actions. In the Qima survey, 73 per cent of the global respondents said they had plans to source new suppliers in 2020, but only 38 per cent of them were able to follow through on those plans. For US-based brands, 93 per cent of them announced geographical-diversification plans in early 2020, but only 49 per cent saw them come to fruition.