World Economy

China is producing higher value goods — even as factories are shifting away from the mainland

Key Points
  • "We are actually seeing this movement from manufacturing in China to other locations, but also China then investing in technology," said Patrick Winter, Asia Pacific managing partner at Ernst and Young.
  • The reshuffling in global supply chains has been years in the making as costs in China rise due to the additional tariffs the U.S. has imposed on Chinese products.
  • Even though some of these factory activities are moving out of the mainland, China is moving up the value chain through its huge investments in technology, artificial intelligence, robotics and blockchain — in turn developing and producing higher valued goods, he said.
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Over 67% of Asia-Pacific business leaders are rethinking their supply chains: EY

Chinese companies are developing and producing more higher valued goods, even as companies are moving production out of the country due its trade war with the U.S. and the coronavirus pandemic, an expert said on Thursday.

"We are actually seeing this movement from manufacturing in China to other locations, but also China then investing in technology," said Patrick Winter, Asia Pacific managing partner at Ernst and Young.

"We are seeing a lot of manufacturing now moving into other locations — toys and cameras are going to Mexico; personal computers, we're seeing those go offshore from mainland into Taiwan. Other manufacturing (like) automotive manufacturing down into to Thailand, Vietnam, and India and so, we're seeing manufacturing move out of China," he said.

Even though some of these factory activities are moving out of the mainland, China is moving up the value chain through its huge investments in technology, artificial intelligence, robotics and blockchain — in turn developing and producing higher valued goods, Winter told CNBC's "Squawk Box." 

There are "a lot of investment into technology which would actually move China to a different spot within the supply chain," he added.

Even before the U.S. and China battled over trade for over a year, overhead costs of operating in China were rising due to increasing cost of wages. Additional American tariffs imposed on Chinese products only made it more expensive to operate.

The situation has exacerbated as large-scale lockdowns and movement restrictions from the coronavirus outbreak disrupt normal supply lines and further complicate logistics.

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A recent survey conducted by EY showed that over 67% of senior executives in the Asia Pacific were already thinking of diversifying their supply chain and the role that China would play in this new diversification, said Winter.

Diversifying the supply chain would mean increasing the range of suppliers a factory might choose to order from. Considerations include the additional costs involved, how quickly they should act, and how sustainable supplies from there would be.

"What we saw over a couple of decades is a centralization of supply chain and China played into that very heavily — low production cost, low labor cost," said Winter.

The new decentralized global supply chain will mean more connectivity among various centers via technology, he added.

The considerations for supply chain management will still center around cost, quality and delivery — but additional factors that businesses are considering now include resilience, responsiveness and flexibility, said Winter.