Global supply chain crisis under the epidemic, why they ushered in the "best year"

Under the new crown pneumonia epidemic, the global supply chain pressed the pause button, but many multinational companies have ushered in the "best year in history" in China.

"Whether it is in terms of market growth or global share, China's contribution is increasing significantly, making the company's performance exceed the same period last year and exceed expectations." The feelings of Zhouping Ai, President of Heraeus Greater China, are not unique. Tang Xiaodong, president of Kach Group's Greater China region, told CBN that in 2020 and 2021, Kach Group's business in the Chinese market grew by more than 35%.

From the outbreak of the epidemic to the global spread, to the gradual recovery of the economy, and the consequent challenges of soaring shipping fees, rising raw material prices, and shortage of material supplies, the virus has undergone several rounds of mutation in the past two years, and global companies are also looking for ways to survive and become stronger in the twists and turns.

Respond to supply chain crises

"It was the Spring Festival, and even though it was still on holiday, we immediately took measures to bring in goods from abroad as soon as possible. For the sake of speed, some of the imports at that time were still used by air. Recalling the scene of the initial outbreak of the epidemic, Zhang Weiwei, director of Supply Chain of Kach China, told CbN that Kach initially made up for the market gap caused by the shutdown of Chinese factories by increasing imports. Due to the proper prevention of the epidemic in China, the Kach China factory officially started construction in March 2020 and increased production, quickly catching up with the progress.

For enterprises with a global layout, the impact cycle of China's supply chain pressing the pause button under the epidemic is short, until the epidemic spreads globally, and the entire supply chain is affected and transmitted layer by layer, which is the real test.

Fortunately, most of the raw materials produced in China have been localized, and the flexibility and resilience of the industrial chain have also made the Chinese factories that first controlled the epidemic a "savior" for the global market.

"More than 85% of the raw materials in our Chinese factories are purchased in China, and a small number of them still rely on imports, and the imported parts that are in short supply are supplemented by emergency air transport and railways on the one hand; on the other hand, through the domestic research and development centers, we are looking for local replacements for individual parts that are in short supply or have too long delivery times." Zhang Weiwei said that Kach has nearly 20 factories around the world, and the localization of Chinese factories is the highest, because the group has set up production, research and development and sales centers in China at the same time, so it is also the most flexible, allowing them to respond in a timely manner in the crisis.

Chai Xiaozhou, president of Honeywell Safety and Productivity Solutions Group China, also told CBN that during the epidemic, almost every company has encountered a shortage of raw materials, "because we have strong local research and development capabilities, we can redesign products and replace manufacturers with local chips or raw materials that have problems in the supply chain to ensure that customers do not stop."

With the rapid resumption of work and production of Chinese factories and strong support for the global market, Kach China has increased localized production under the epidemic and contributed a larger proportion of the global supply chain. Zhang Weiwei said that some of the products that increased demand under the epidemic were originally produced abroad, but now they are also produced in China, opening more production lines.

As a German deep cleaning expert, Kach's factories are more distributed in Europe, but the trend of production capacity and investment layout, as well as more headquarters resources tilting towards China, is becoming more and more obvious under the epidemic.

Tang Xiaodong said that in 2020, the group's business in the Chinese market achieved a 40% year-on-year growth. They have set up a sales and manufacturing "dual headquarters" in China, increased their capital by 150 million yuan in 2020, invested in a new production base for fully automatic car wash equipment, and then considered setting up a research and development headquarters in China.

Localization strategy upgrade of foreign enterprises in China

Tang Xiaodong is the first Chinese face in the position of President of Kach Group Greater China. In recent years, the greater China or Chinese leaders of multinational technology manufacturing companies such as Schneider Electric and Heraeus have changed their faces to China, which is seen as a signal for foreign companies to increase China's localization. At last year's 4th China International Import Expo (hereinafter referred to as the "CIIE"), the localization strategy of foreign enterprises in China also became one of the most obvious features.

Ai Zhouping told CBN at the fourth CIIE that China is one of the most important and important markets for Heraeus, and revenue from the Chinese market accounts for one-third of the group's global revenue. Under the epidemic, the lack of cores has intensified due to the obstruction of global supply chains, while Heraeus Electronics has ushered in the "best year in history" in China.

Many heads of multinational companies in China have felt this sentiment: it is not necessary for the global headquarters to continuously increase investment in the Chinese market.

From import to local production, to local design, local research and development, is a clear plan for more and more foreign-funded enterprises to lay out in China. This also means that foreign companies value not only the huge Chinese market, but also the strength of China's R&D and manufacturing in the global supply chain.

"We will further enrich our 'localization' product portfolio in the next 1 to 3 years, covering all business areas and the entire production line including high-end products." This also means that these star products we display on the Expo platform originate from China just around the corner! At the Fourth CIIE China-Singapore Cooperation Service Trade Innovation Forum, Li Tao, vice president of Philips Greater China, said that they are in close communication with the headquarters, with the global headquarters of some businesses located in China, while integrating global and local resources, and laying out three centers of products, systems and software in China to improve local innovation capabilities.

Shu Jueting, spokesperson of the Ministry of Commerce, said at a regular press conference of the Ministry of Commerce on November 18 last year that it is expected that the absorption of foreign investment in 2021 will achieve double-digit growth and can achieve the goal of stabilizing foreign investment throughout the year. While growing against the trend, China's foreign investment also shows the characteristics of foreign investment that first fell and then rose throughout the year, gradually stabilized, continuously optimized the industry structure, maintained stability in the main sources of investment, and provided obvious support in key regions.

Among them, the rapid growth of foreign capital in China's high-tech industry has become a major highlight. From January to October last year, the actual use of foreign capital in China's service industry was 752.52 billion yuan, an increase of 20.3% year-on-year; the actual use of foreign capital in high-tech industries increased by 23.7% year-on-year.

Along with the localization and upgrading of foreign enterprises, the rapid rise of Chinese private enterprises.

"Thanks to the company's strategy, we have actually defeated the foreign companies that compete together in recent years, and now we are facing greater pressure from domestic competitors, who have low costs and fast responses." Zhang Weiwei said.

While meeting the competition, the development of Chinese technology enterprises has also allowed foreign giants that have long played a leading role to have more support for localization and innovation, and also give them greater motivation to build platforms and build ecosystems to accommodate more small and medium-sized enterprises.

"No single company has all the technology and solutions, including us." Pang Xingjian, senior vice president of Schneider Electric and head of industrial automation business in China, said that to build an innovation system, it is necessary to emphasize openness and transparency, so that more localized enterprises can join it without worrying about losing advantages and sovereignty, and get the help of rapid growth on the platform, thereby promoting the integrity of industrial giants in the overall solution.

What businesses have learned

The pressure caused by the epidemic, including raw material price increases, long supply cycles, and continuous soaring freight rates, has made enterprises pay more and more attention to localization, and there is a significant change, which is that the concept of lean management has been subverted.

KPMG's "2022 Macroeconomic Ten Trends Outlook" report released in December last year proposed that with the deepening of economic globalization, multinational companies continue to strengthen lean management of supply chains to achieve cost reduction and efficiency, improve timeliness. For example, the selection of a relatively small number of suppliers reduces procurement costs and improves management efficiency through scale effects; transfers production to countries with lower labor costs; and reduces inventory through efficient logistics and transportation. This supply chain model improves the efficiency and profitability of enterprises, but once the supply chain of key links cannot be supplied as scheduled due to external shocks such as natural disasters, epidemics, and social factors, the entire supply chain will face the risk of interruption. The outbreak is a good example.

The report said that in the context of the spread of the epidemic, the obstruction of supply chains and geopolitical changes, companies are also reflecting on the shortcomings of the current supply chain model. While focusing on low cost and low inventory, enterprises have also begun to pay attention to the safety and stability of the supply chain, improve the resilience and anti-risk ability of the entire supply chain, and emphasize emergency preparedness before unknown risks occur.

Zhang Weiwei said that under the epidemic, "having goods is king", they have also begun to reconsider the balance between inventory management and cost, "moderate inventory is needed".

For Chinese foreign trade manufacturing enterprises, "spot" and "rapid response "rapid response" have also become their advantages in attracting global business. In the window period of foreign trade, enterprises attach equal importance to domestic sales and foreign trade under the "double cycle" pattern, and walk on two legs online and offline, which is also an accelerating trend under the epidemic.