Time for a conscious decoupling with China? This expert says no

Since the beginning of the coronavirus epidemic, media commentators have been trying out ideas around ‘China-decoupling’, or unhooking a portion of a nation’s economy from the Chinese powerhouse.

Some companies, such as rubber glove and condom maker Ansell (ASX:ANN), have already moved out of China and into countries like Vietnam, saying manufacturing there has become too expensive as the country has developed economically.

But others, like a number of small caps aiming directly at the Chinese market, are fully enmeshed, or trying to become enmeshed with that economy.

China is an integral part of almost all sectors of Western economies, from agricultural trade to minerals and electronics. Australia, a major exporter of finished pharmaceutical products, still imports most of its medicines and most of the world’s generic pharmaceuticals are made in China and India.

But Wood Mackenzie vice chair Gavin Thompson says decoupling supply chains that begin, and sometimes also end, in China is not reasonable, particularly now the “black swan event” of COVID-19 is finally spreading around the world apace.

“The closure of many Chinese plants is raising concerns around rising shortages and supply chain disruption, but as the virus spreads outside China, this would have been unavoidable had supply chains been more geographically distributed,” he wrote in a note.

“I’m not denying global confidence in China has been shaken and both government and industry will now have to work hard to retain supply chain dominance. But where else would it go?”

Mass consumer jewellery retailer Lovisa (ASX:LOV) is one company that has been hit by closures of China-based manufacturers.

Yet Thompson says few if any countries could replicate the speed, efficiency and costs of China, which companies like Lovisa depend on for mass market products they can sell at low prices.

Even during a crisis China can still maintain some supply chains when it needs to: the country built a new hospital in Hubei province in 10 days, and Wood Mackenzie estimates face mask production within China will rise by 30 per cent this year.

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