China Plus N Strategy: The Future of Manufacturing Diversification

At the International Business Summit, Benjamin Hung, President- International, Standard Chartered shared his insights into the South-South expansion of trade and the need for diversification beyond China. He discussed the transition from "just-in-time" to "just-in-case" approaches and trade digitalization through blockchain technology, which is crucial for efficiency improvement and financial inclusion. He also highlighted the role of Asia in sustainability investment and collaboration to address the key environmental concerns. Below are the key takeaways from his address.

During Trump 1.0, the administration introduced several tariffs. The first three tariff lists impacted a few sectors in China and impacted 4% to 5% of China’s exports. Although the tariffs were not applied across sectors, they did impact numerous sectors. In Trump 1.0, the RMB devaluation reduced some of the costs. Fast forward six years, China remains a core part of the export engine, and its trade surplus has expanded. But the focus is more on what companies, manufacturers, and exporters are doing now. Conferences with European, American, and Chinese stakeholders reflect a shared concern about minimizing potential future risks.

Diversification is the primary approach. Instead of relying on a just-in-time approach, firms are adopting a just-in-case approach. This shift is costly since just-in-case approaches are inflationary. Because nowhere in the world can they produce the quantity with quality at a cost level that they can in China. A “China plus one” strategy is not enough to compensate for the volume of China. Instead, a "China plus two" or even a "China plus N" approach is needed. Additional investment in manufacturing factories is needed, and these have to be sector-specific. This creates a tradeoff, forcing businesses to balance an efficient supply chain, delivering high quality at minimal costs. Higher inflation leads to increased interest rates, significantly impacting global currency dynamics.

The Rise of South-South Trade

Now the trade is detouring through the Global South before it hits the West which becomes a greater proportion of world trade being in South-South trade. Thirty years ago, South-South trade accounted for around 5% of world trade. Today it is 20% and it’s rising rapidly. In a South-South trade environment, the propensity or the willingness to use RMB has gone up. This differs from the North-North trade, which are dollar-dollar denominators. In contrast, the South-South trade has a lot more propensity to use because of the connectivity between China and the rest of the world. This does not indicate de-dollarization. The U.S. dollar is unlikely to be replaced but there will be an increasing process of diversification as a dollar plus one mode in the usage of currency in trade.

The Need for Trade Digitalization

Trade continues to be paper-based. There is a huge amount of digitization around the world in payments processing and credit card applications. But everything dealing with the trade is paper-based. Inefficiencies in the paper-based processes of trade prevent the realization of the possible benefits of digitization. The reduction of paperwork and streamlined operations can be quite effective in digital solutions for increasing efficiency. The key to effective digitization lies in establishing a connection between the largest buyers, whether in the U.S. or Europe, and the smallest SMEs. This process fosters financial inclusion. By leveraging digitization through blockchain, and deep-tier supply chain financing, even the smallest MSMEs can gain improved access to financing at lower costs.

Banks need to adopt digitization and use blockchain technology to change that whole notion. SMEs, especially in the global south and emerging markets, are often excluded from traditional financial systems. There is a huge trade finance gap that exists between the costs versus the supply. Digitization holds the potential to bridge this gap. Moreover, Made in Asia for the West" has been the dominant model for the past 30-40 years. However, this is beginning to change as Asia’s population continues to grow, from lower income brackets to the middle and higher ones. As one’s income increases, consumption increases exponentially, thus gradually shifting over to "Made in Asia for Asia."

Investment Hurdles in Sustainability

The battle for sustainability will have to be fought in Asia, as most production of goods and the largest carbon footprint can be traced to this region. This expertise is currently concentrated in Europe. As for Asia, it lacks comparable levels of specialized knowledge. Therefore, collaboration is essential to combat such issues. Investing in sustainability is expensive and more so there is a need for effective mobilization of funding from both public and private investors. Moreover, there is a tipping point of a few irreversible problems. Melting Greenland, destroying coral reefs, melting of all the permafrost and the release of carbon, and the dying of the Labrador currents are a few of the escalatory threats driving these changes. Once the tipping point hits, the effects will accelerate rapidly. Not addressing these challenges together and failing to handle effective solutions will lead to serious consequences for both present and future generations.