Coronavirus forces Europe to confront China dependency

Coronavirus forces Europe to confront China dependency

Disruption across sector amplifies calls in Europe and beyond to grow less reliant on China.

By LAURENS CERULUS 3/6/20, 2:57 PM CET Updated 3/9/20, 3:39 PM CET

https://www.politico.eu/article/coronavirus-emboldens-europes-supply-chain-security-hawks/

The global outbreak of coronavirus is prompting Europe to concede that the time to break dependence on China has come.

Chinese manufacturers and suppliers have shut down factories and offices in an effort to contain the spread of the disease formally known as COVID-19, wreaking havoc on industries including the technology sector and pharmaceutical sector, which have intricate supply chains in the key global hub.

Already, the coronavirus has caused exports from China to plummet: Exports fell by 17.2 percent in January-February compared with a year ago, according to data updated over the weekend by Chinese authorities.

Even as the rate of infection inside China has fallen and shipping from the country's coast is creeping back, the disruption is prompting top European officials to call for a reckoning with the Continent's dependency on China.

"There will be a 'before' and an 'after' the coronavirus [outbreak] in global economics," French Finance Minister Bruno Le Maire told radio station France Inter on Monday. "We have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products" and "strengthen our sovereignty in strategic value chains" like cars, aerospace and medicines.

Eurozone finance ministers warned about a "potentially significant impact" on economic growth from the outbreak

Last week, eurozone finance ministers warned about a "potentially significant impact" on economic growth from the outbreak, citing the disruption of supply chains as an important factor.

In the tech sector, the shutdowns have pummelled the market values of some of the world's biggest tech companies, as Apple, Microsoft and Google all grapple with disruption and seek to move at least some of their production out of China, to countries like Vietnam and Thailand. Apple warned its investors last month that worldwide iPhone supply would be "temporarily constrained."

"Unfortunately, there will be broad, global economic effects stemming from this epidemic," said Jason Oxman, president of the Information Technology Industry Council (ITI), a lobby group that represents most of Silicon Valley's largest firms. "While other countries in the region have manufacturing capacity, nothing matches China’s scale or sophistication."

Germany's digital association Bitkom underscored dire consequence for tech firms, estimating in a survey that one in four companies out of 80 surveyed had stopped receiving orders from China, while many also faced issues with suppliers in other countries.

In the midst of an already heated debate in Europe and across the West about over-reliance on Chinese tech equipment, the mounting supply chain problems are fueling arguments for greater independence from Beijing's manufacturing might.

While the prospect of "decoupling" — or the untangling of deeply intertwined supply chain relationships that bind the West to China — seems premature, the virus is prompting a reappraisal of reliance on a single country.

"There is an overdependence on China, and we need an answer to that," Chief Security Officer of Deutsche Telekom Thomas Tschersich told POLITICO. "We need to be willing to invest in Europe to balance out the dependency on China. But we also need Chinese suppliers for balance."

Supply chain security an 'untrained muscle'

The reappraisal comes after more than a year of intense debate about the security risks associated with using Chinese-made equipment in Europe's 5G telecoms networks.

While large EU countries including France, Germany and the United Kingdom have stopped short of banning 5G equipment made by Huawei, European security officials have jointly called on the telecoms industry to limit its dependency on Huawei, which built up a large market share in Europe in the rollout of 3G and 4G.

But even Huawei's competitors, Sweden's Ericsson and Finland's Nokia, are reliant on suppliers in China, including via joint ventures and large-scale manufacturing sites.

As coronavirus disrupts global supply chains, technology players both in Europe and in China have started to take decisions that point to an increased interest in diversifying and decentralizing their supply chain.

Ericsson last year announced it would boost manufacturing in Poland to serve the European market and announced a new factory in the U.S.

Europe's reassessment of supply chains also conflicts with its own open-market ideology, which has dominated the bloc's trade and competition policies for decades.

Nokia has plants in Finland, Brazil and China.

Huawei last week suggested it is diversifying its supply chain too, when it announced it wants to invest €200 million to build a manufacturing site in France — a far-reaching effort to move a part of its supply chain to the Continent as it seeks to alleviate concerns that its gear poses security risks.

European officials are now starting to look beyond Huawei, to the complex global supply chains that feed EU consumers and critical industries.

But Europe's reassessment of supply chains also conflicts with its own open-market ideology, which has dominated the bloc's trade and competition policies for decades.

"This is an untrained muscle in Europe," said Jan-Peter Kleinhans, supply chain security expert at the Berlin-based Stiftung Neue Verantwortung think tank. "We're slowly realizing that if we want to be serious on this, we have to start thinking about [supply chains]."