“In foreign eyes, mask wearing appears to be a unique and curious practice particular to Japan. It is an emblem of public-spiritedness and discipline.” So said a sociological study published by the University of Kent in 2012.

In 2020, however, the face mask has become emblematic of the global anxiety generated by the coronavirus pandemic, and it can be seen in almost every country affected by the virus. The face mask has also revealed the world’s over-reliance on China, where around 80% of mask production occurs, including those produced in Dalian, Liaoning Province and Suzhou by Japanese company Iris Ohyama.

“We are reviewing our supply chain’s dependency on China,” the consumer goods manufacturer said in April 2020, as it revealed plans to shift production back to Japan. Once operational in June 2020, the company expects to produce 150 million masks a month in its new facility in Miyagi. The move would make Iris Ohyama the first Japanese company to heed prime minister Shinzo Abe’s call to move production back home, and would see it receive subsidies for shifting production out of China.

Supply chains strained

When the coronavirus outbreak caused China’s economy to shut down abruptly for an extended period between late January and April 2020, the effects were felt by global manufacturers across sectors. For example, when China’s Hubei province first went into lockdown on January 23, executives from carmakers across the world, including Fiat Chrysler, Hyundai, and Nissan, were all forced to announce the temporary closure of factories due to a shortage of supplies.

“People are concerned about their lack of resilience in the supply chain, and now they are beginning to think about which actions to take,” says Gordon Orr, former chairman of McKinsey Asia. “It is likely that companies will try to reduce the number of cross-border steps in their supply chain, and there will undoubtedly be some movement of business out of China, which fits under the larger theme of US-China decoupling.”

The prospect of rising US tariffs on China-manufactured products is an additional risk for companies operating in China. So far, the US has imposed tariffs on around $550bn-worth of Chinese products in a trade-war that stretched over 20 months, including 25% tariffs on communications equipment, servers, and other electronics.

Although the two countries reached a commercial truce in January with the phase one deal, their relations have deteriorated again amid rising anger over Beijing’s handling of the coronavirus pandemic. US president Donald Trump has since taken aggressive economic measures against China, including threatening to “terminate” the January trade deal, which could lead to a new flare-up of tariffs. 

“The political risk of tariff barriers, export restrictions, investment screening and nearshoring pressures is potentially a greater threat than underlying logistical disruptions,” says Sean Doherty, head of international trade and investment at the World Economic Forum. “The possibility of pre-Covid tariffs going up adds to costs in China and is another logic to pull operations elsewhere,” he says.

China + 1

The manufacturing exodus from China is nothing new, as companies have sought lower labour costs and direct access to new markets when adopting a “China plus one” production model.

“Companies have been shifting to south-east Asia for the same business reasons for which they initially found China attractive: namely, cheap labour, rent utility costs and regulatory flexibility,” says Kyle Freeman, partner at Dezan Shira & Associates.

This tilt towards south-east Asia increased during the height of the US-China trade dispute. Whereas China accounted for 66% of all US-bound manufacturing goods sourced from Asia in the third quarter of 2018, this was down to 56% in the fourth quarter of 2019, according to the China diversification Index (CDI) issued by US consultancy firm Kearney.

Governments in Asia are now also implementing policies to attract companies to relocate projects in value-added sectors.

Courting companies 

As part of its emergency economic package, for example, Japan’s government has earmarked $2.4bn to help domestic companies bring manufacturing back from China.

In a meeting of the Council of Investments of the Future on March 5, Mr Abe stated: “Due to the coronavirus, fewer products are coming from China to Japan, we will try to relocate high added value items to Japan, and for everything else, we should diversify to countries like those in the Association of Southeast Asian Nations.”

Malaysia, meanwhile, has established a panel to fast-track investments for US and Chinese businesses looking to move operations out of China. Its 2020 budget also includes incentives of around $240m over five years for investments of at least $1bn, targeting companies in high-end technology and manufacturing.

India has also provided key incentives to help position itself as a manufacturing hub and enter the global supply chain, as companies look for alternative markets. Under the $5.5bn production linked initiative announced on April 20, the government will pay manufacturers an incentive of 4% to 6% of incremental sales of electronics goods manufactured in India. 

“The new investment model for manufacturing is smaller footprint facilities, near market, lots of automation, high skilled workers,” says John Evans, managing director and co-founder at Tractus Asia. “India has the technical labour force and engineering skills availability to leapfrog China and Japan will be successful in attracting re-investment because their companies already have a global presence and are typically at the cutting edge of technologies,” he says.

Major movers 

Indeed, multinational tech companies have started shifting operations too. In October 2019, Samsung closed its last factory in China, shifting operations from Huizhou city to India and Vietnam, while in April 2020, Apple was reportedly considering plans to shift 20% of its manufacturing out of China to India. Quanta Computer, has invested around $500m to boost production in Taoyuan, northern Taiwan, for server parts for its US suppliers – which include Apple, Facebook and Google.

While wearing a face mask is an emblem of Japan’s “public-spiritedness and discipline”, until a few months ago it did not matter where those face masks came from; today it does. Several months into an unprecedented global crisis, face masks have become a sign of the global fight against the Covid-19 pandemic, with one side effect being the accompanying push towards reshoring and nearshoring of supply chains.