With COVID-19 seemingly on the decline, many countries are faced with a new challenge: Global Reopening.
China continues to set the gold standard with the virus under control with students re-entering school in early June. Face masks are no longer required unless in crowded public spaces such as public transportation. This week alone, we are seeing a significant reduction in mask usage in China.
However, countries in Europe, America, and Asia are all currently struggling to reopen. So what can they learn from China to aid them in this new challenge?
McKinsey & Company has recently released its latest update on global economic sentiment. Not surprisingly, the short term view is quite negative, but the long term outlook has improved since its last release of data. China currently leads the way in terms of positive outlook.
Relations between the US and China continue to deteriorate with the blame game accelerating.
Most expect this to continue well past election day and as such is continuing to drive a portion of the market to accelerate their decoupling activity.
COVID19 Updates in China
- Masks Are No Longer Required – Following early June’s decision to lift the mandatory outdoor mask requirement, significant portions of the population, particularly outside of Tier 1 cities, have chosen not to wear masks. This has raised some concerns of a potential second wave among the population but overall the situation is viewed as well in-hand with contact tracing being successful for all current active cases. However, despite several small scale outbreaks including in Beijing, the trend of reduced mask wearing remains in low risk areas.
- COVID Tracking –
- Utilizing big data for national security and health security in China is not new, and the ongoing use of “green codes” continues to allow individuals to travel around the country for business and leisure as necessary.
- On several recent trips, different provinces and counties were using various levels of control. Shanghai was only using green codes for hotel check-ins and hospital visits. Other cities are still requiring green codes for boarding and arrivals at train stations, in addition to hotel and hospital requirements.
- Surprisingly, the tracking is much less intrusive than many in the west believe, as the data is already readily available to the government and most people are happy to be able to quickly and accurately trace contamination exposure, resulting in quick containment where necessary.
- Schools Are Reopening – As of the week of June 1st school officially completed the reopening process with students grades three and under now joining their peers in grade three and above who returned to school on May 18th.
- China COVID – China continues to have two primary areas of concern in China’s Central and North Eastern Regions.
- Beijing is the latest region to have a significant outbreak. However, due to a quick and targeted district-level lockdown, as well as contact tracing, the outbreak is already under control. What’s most impressive is that only certain districts and neighborhoods were locked down, preventing a large lock down of Beijing as a whole.
- North East China continues to be an area of concern. Several months ago, an asymptomatic citizen returning from overseas started a significant outbreak. At this time, some areas are still on lockdown and not recommended to travel but things are improving daily.
- Wuhan, located in China’s central region and the epicenter of the outbreak. Last month several asymptomatic cases were discovered and within a 10 day period Beijing tested 10 million people finding a total of 357 asymptomatic cases. “Pool” testing was utilized to accelerate the process, where multiple samples were put together and tested at once. If a positive test is recorded, then they will go back and test each person individually. At present, there is no clear result on the outcome of the tests, but no lockdown has been put in place. Likely meaning the risk is not seen as an immediate concern.
- Five Ones Policy
- China has extended its Five Ones policy through October 2020.
- The Five Ones policy limits airlines to flying only one route into and out of China and limits the frequency to once per week.
- The policy is seen as a clear indicator of China’s concern over the state of COVID recovery outside of China as Five Ones is the major lever to limit inbound traffic.
- Airlines do have a path to increased flight frequency, but must meet specific zero positive test requirements in order to increase, and must increase gradually. Additionally, if more than five passengers test positive on a flight the route will be shut down for the next week. If 10 passengers test positive the route will be shut down for four weeks.
- Foreign Entry Ban Exemptions – Very few exemptions are being issued, and the current processes for granting exemptions to the foreign entry ban, which allows for those with work/residency permits and critical high level roles to return to China, is unlikely to be extended to non-resident visa holders, business travelers, and tourists until Q4 of 2020 or Q1 of 2021. At present, only individuals with work/residency permits are being granted exception and allowed entry
- Domestic Travel has recovered to 75% of pre-COVID levels by the end of June.
- Foreign Travel – Little additional information has been made available for country-specific travel arrangements that have started to be developed between China and other “low risk countries” beyond what has been set up for specific charter flights for expats from Korea, Japan, Germany, and the newly scheduled Amcham Shanghai flights. It is believed that the first business and tourist travelers allowed in will be between the Republic of Korea, Japan, and China.
- The Trade War is threatening to come back with a vengeance, despite the positive actions that took place last week: China rolled back several Phase 1 tariffs on US goods into China, and has increased its purchase of soybeans. The issue appears to be driven by domestic political concerns in both China and the US with Donald Trump leading the charge in the wake of COVID-19 finger pointing. Learn more about The Trade War here.
- IP Protection – China continued to strengthen IP protection in line with its agreements and for now the threat of another round is purely speculative.
- Trade Volume – Despite the rhetoric, the only thing that has successfully reduced US-bound China exports has been the impact of COVID, with February being the first month of significant trade reduction between the two countries.
- PPE, Price Gouging, and Bad Actors – The situation has settled a bit with bad actors exiting the market as scrutiny has increased, and companies adopting better, selection and oversight processes and more reliable supply partners. Significant opportunity in the PPE industry is expected to continue for up to two years based on the latest estimates. However, the reputational damage that China has absorbed in the US and Europe will take years to walk back.
- Logistics Complications.
- Airfreight – Capacity and availability continues to be tight. The reduction in air links have resulted in significant reduction in airfreight availability. For now, freight prices seem to have stabilized as more options and capacity comes on line.
- Sea Freight has also started to recover with improved availability due to capacity being restored to key routes.
- Global Economic Outlook
- McKinsey & Company has recently released its latest update on global economic sentiment. Not surprisingly, the short-term view is quite negative but the long-term outlook has improved since its last release of data.
- The improvement in economic outlook has come primarily from the greater China region, but the general outlook in the US has increased as reopening continues on a state-by-state basis.
- Potential second waves are taken into account in the data, but should a significant second wave occur in the US, Europe and China. The outlook could deteriorate fast.
- The largest threat to global economic recovery is viewed as weakening demand in the US and EU as an ongoing result of the economic impact of COVID19.
- China Market Outlook
- For the first time, China has not set a specific target for economic growth for the current year. This is an indicator that while the economy is recovering, it is a real possibility that a net contraction in GDP will occur in China during 2020.
- The government is focused on maintaining stability in its six points (employment, the financial sector, foreign trade, foreign investment, domestic investment, and expectations) and six areas (job security & basic living needs, operations of market entities, food & energy security, stable industrial & supply chains, and the normal functioning of primary level governments)
- The announcement of a roughly 6% increase in China’s military spending is also seen as a sign that focus is on areas other than economic growth at present. Many have criticized the increase while others point to the fact that the total spend for the US is roughly 25% of their annual spend.
- “Nesting” products continue to outperform as people spend more time at home and look for things to keep them busy. It is expected that even as lockdowns are lifted, these products will continue to outperform due the general uncertainty of the macro environment and our home environments, being one of the few things viewed as controllable.
- Up significantly – Household appliances and white goods, screens (computer, pad, TV), exercise and weight training, health goods, health foods, health tech, interior design, and home improvement, crafts and projects, educational products, toys, pet products, indoor sports (pingpong, billiards)
- Slight boost – Beauty products, luxury foods/comfort foods (chocolate), FMCG (note initially off has bounced back significantly as lockdowns are eased with China as a major example with most FMCG up 30% YOY in April/May).
- Raw material prices are not falling at the same rate as gasoline. Various plastic and other petrochemical products pricing is not falling at the same rate as gasoline. This is primarily due to import limits which were placed prior to COVID, and price setting measures by the central government controlling the price of oil inside of China. It is expected that raw material pricing will ease some in the coming months. Do not expect it to match oil.
- Automotive is up significantly, for three consecutive months through June, as consumers shun mass transport in favor of the family “Bubble” that is the automobile. Related accessories are also up significantly.
- Infrastructure and construction-related products are also up significantly as public works and construction are being used as key triggers for stimulating the economy. Construction equipment, construction materials, and other related categories are outperforming at present.
- Diversification / Uncoupling – Prior to COVID many businesses were actively looking to uncouple with China by dual sourcing, duplicating, or re-sourcing out of China. We are seeing different industries, and markets respond to the uncertainty of COVID with different strategies. Much of this activity has been put on hold due to COVID19 cash flow issues, COVID driven changes in priority, and general uncertainty; However, startups, new product launches, and the less affected are doubling down and accelerating their uncoupling. We are seeing it as about 60% hitting pause, 20% moving forward as planned, and 20% accelerating.
- Customers hit pause – Customers who have been negatively affected by COVID who are forced to cut costs and or reduce their workforce are generally choosing to hit pause. Often, cash flow constraints are the main factor. Most in this position are merely hitting pause and sticking with their existing supply chain where possible. Some choosing to hit pause have not been negatively affected, but generally have conservative risk adverse management. For many their existing supply chain, which is most likely in China, remains the most viable option.
- Customers Accelerate Projects – generally these customers fall into two categories:
- Customers who take advantage of COVID19 opportunities have generally chosen to move forward with their diversification strategies
- Customers with new product launches that are not able to be handled by their existing supply base and the cost basis for uncoupling/diversification would be on par with launching the product within their existing supply chain. In other cases, it is a strategic imperative (startups, etc.) that the new product be launched.
- New Projects Proceed at Pace – In many cases, but not all, these are businesses that are already into the development process, and or have not been significantly negatively affected by the uncertainty of COVID19.
Making Data-Driven Decisions
Now that you have this information, what should you do with it?
It’s extremely important to make data driven decisions based on the current realities. Now that you know the impact of COVID and global reopening, you must find ways to deal with the impediments that the current environment has given us.
Whether you have current operations in China or Southeast Asia, want to diversify your current operations, or need overall help from the experts, CMD is here to help. We are on the ground throughout Asia, and free to to move around and support our customers with needs in the region. If you need advice and support, reach out so we can have a conversation.
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