What the Fall of the World Factory Means for Global Supply Chains

Companies such as Apple, Dell, Microsoft and Nike are planning to move production out of China. Photo: Roy Liu/Bloomberg

China has long enjoyed its role as the world's factory, but its dominance may be coming to an end.

Amid rising price pressures and a more hostile stance President Xi Jinping's approach to the West, CEOs are increasingly looking to shorten their supply chains.

An American Chamber of Commerce survey in August found that 40% of U.S. companies are already redirecting investments destined for China to other countries are or are planning to do so.

However, it is not only the United States that is leaving China.

Huge companies such as Apple, Dell, Microsoft and Nike have already announced plans to move production to Mexico, Vietnam, India and Thailand.

But these are not the only countries that will benefit from companies being 'onshore' their supply chains, as this trend is also bringing manufacturing back to Europe.

Room for growth

Industrial real estate companies in the Central East Europe (CEE), which covers the Czech Republic, Slovakia, Romania, Hungary, Poland, Serbia and Bulgaria, is booming.

In the first six months of this year, developers brought 3.8 million square meters into the territory. meters of industrial space. CEE, according to Cushman & Property Consultants in Wakefield

Year-on-year supply in the region is up 16%, with a further 5 million square meters of industrial and warehouse space already under construction.

Earlier in this CTP, Europe's largest industrial developer, announced plans to invest €300m (£260m) in its warehouse portfolio in Poland. In 2023 alone, the company will increase its area by 600,000 square meters. meters, that is, it will increase more than three times.

The company also opened an office in Hong Kong in August to sell warehouse space to businesses looking to diversify their supply chains. from China.

Taiwanese electronics manufacturer Inventec has leased 52,000 square meters of production space in the Czech Republic “to reduce risks in the global supply chain.”

Chinese companies are also investing in expanding their supply chains – particularly for electric vehicles – in Europe. Photo: Daniel Berehulak/Getty Images

CTP CEO Remon Vos leads his firm's expansion and frequently travels the world in his personal vehicle. jet aircraft, called OK-VOS.

“Western companies are saying: let's move production as close to home as possible,” says Tomasz Dvorak, senior economist at Oxford Economics. “But this is still just scratching the surface. In two or three years this will really take off. It can be transformative. Across the region, we are probably talking about millions of jobs.»

«We are now hiring people to represent us in Taiwan and mainland China,» says Bert Hesselink, CTP's account director. , who just returned from a trip to both countries. “The mood is expansionist. Many companies are making decisions about where they will make their next product. Global supply chains are essentially cutting into local supply chains.”

0210 More cash flows into Eastern Europe

Other European property companies such as Mountpark and WDP are also expanding their activities in Central and Eastern Europe.

“These developers have a significant amount of land between them and will be able to implement large-scale projects,» says Brewer.

According to Hesselink, the greatest demand is from companies producing electronics and electric vehicles (EV).

Hungary is already the second largest producer of electric vehicle batteries in Europe.

Audi has expanded its Hungarian electric vehicle production line. while Samsung's battery division is setting up a new manufacturing facility there. Last year, Volvo announced a €1.2 billion investment in a new electric vehicle plant in Kosice, Slovakia. In February, the company also announced plans to hire more than 500 people at a new electric vehicle software development center in Krakow by mid-decade.

So-called «nearshoring» doesn't necessarily mean moving out of countries where it already has factories, but it certainly influences new investment decisions, says Brewer.

However, this does not only apply to Western companies. Chinese companies selling goods to the European market also want to be closer.

“Chinese companies are investing heavily in expanding their electric vehicle supply chains in Europe,” says Hesselink, adding that Chinese battery maker CATL is building a $7.6 billion production plant in Hungary, and car makers Nio and BYD are also exploring opportunities in Central and Eastern Europe.

Companies want to reduce risk in their supply chains, Hesselink says, not only because of the growing political risks associated with operating in China, but also because shock events such as the blockage of the Suez Canal by the container ship Evergreen in 2021 will increase global trade by $400 million per hour for six days.

Clean supply chains

CEE countries have great transport advantages. For example, goods produced in Ilow, located near the German border with Poland, can be delivered to 21 million customers within a five-hour drive. This is important both from a cost and logistics perspective and in terms of corporate sustainability goals.

“Decarbonization of supply chains is becoming increasingly important,” says Hesselink.

Manufacturers are here. goods may not need to be transported far at all, he adds, as consumer demand in Eastern Europe is set to grow rapidly in the coming years.

China is getting more expensive

At the same time, China is pushing itself out of the market on prices.

“The dynamics that led to the further removal of many industries, especially in the Far East, were primarily costs. Now the difference is closing,” says Brewer.

Industrial wages in China have risen by at least 480% between 2005 and 2021. In the EU, growth was only 48% over the same period.

In some CEE countries, wages are actually lower than in China. In 2021, the average hourly industrial wage in Serbia and Bulgaria was 5.6 and 5 euros per hour respectively, while the average equivalent in China was 6.1 euros.

“There's also the inevitable factor of geopolitics,” Brewer says, “which is driving very big changes” in sectors like semiconductors and electric vehicles.

0210 Industrial Wages 2021

Regarding competition from Southeast Asian countries, Dvorak says it's Eastern Europe. is far ahead in terms of “intellectual property rights and a stable business environment.”

Dvořák also adds that each country offers a range of cash grants and tax incentives to manufacturers and investors.

>Hungary has one of the lowest corporate tax rates in the EU at 9% and offers partial tax relief for 13 years after investment.

The Czech Republic also offers corporate income tax relief for up to 10 years, because cash grants of up to €12,000 for each job created.

All this is contributing to a boom in interest in Eastern Europe.

“It's business-friendly and cost-effective. «, says Hesselink.