Winds of change

COVID-19 has deeply impacted the world, bringing challenges to various industries. In the post-pandemic era, reshuffles in the global supply chains and accelerated digital transformation will have a profound impact on China's manufacturing industry.

The pandemic has reshuffled the global supply chain. The safety of supply chains has become the top concern as the manufacturing industry struggles out of the pandemic into an unknown new normal. China's shrinking cost advantages have also increased the desire of multinational corporations to return to their home countries or move to countries in Southeast Asia. In addition, geopolitical uncertainty has the potential to reshape trade and investment flows.

Will manufacturers diversify their supply chains for greater safety or shift toward domestic self-sufficiency? Most strategic sectors that produce necessities for national security or public health will increase sourcing from and production in their home countries. For instance, some manufacturers in the United States are helping suppliers finance new plants or collaborate with similar manufacturers to build a supply network. Nonstrategic sectors are likely to follow the economic logic of pursuing safety, cost advantage and efficiency through supply chain diversification.

The pandemic has accelerated the adoption of technology. One thing most would agree on is the digital transformation of industry will speed up since businesses have been forced to make a rapid switch to digital tools.

Manufacturers are facing the increasing pressures of low margins and fast changes, therefore they need transparent supply chains and predictable demand to guide production and control costs. The answer lies in smart factories. For manufacturers, the ability to track quality and process parameters throughout the whole production chain will become a competitive advantage.

At the same time, the pandemic is changing the manufacturing workplace and work force in many ways: Office workers telework where possible, factories are stagging shifts to reduce the number of workers taking lunch and breaks at the same time, production lines have increased the use of collaborative robots, and companies are increasing their collection of their employees' health data. One should expect a learning curve as manufacturers devise new ways of working; one that will involve more remote workers and automation.

The changing global manufacturing prospects and trade landscape combined with China's solid plans for industrial upgrading are pushing the Chinese manufacturing industry into an important transformative stage. In other words, China's manufacturing is transforming from scale growth to quality enhancement.

China's 14th Five-Year Plan (2021-25) is expected to include a greater focus on industry value chain upgrading, core technology breakthroughs and green manufacturing, and will be the policy blueprint for this transformation. The recently launched "New Infrastructure" initiative that fosters digital infrastructure will enable the growth of all industries.

There is no doubt that manufacturers of different scales in various sectors will have different priorities and approaches to deal with the new normal. Manufacturers should figure out strategies to survive the pandemic and shrive for quality growth.

They need to rethink their industrial footprints and product portfolios. Manufacturers in China, especially export-oriented ones, are faced with excessive inventories and constrained external demand. Amid order cancellations from foreign clients, manufacturers are shifting to the domestic market in search of customers. Shifting to the domestic market means a completely new way of doing business: export-oriented manufacturers will have to develop their own brands, take care of marketing and sales, adjust product specs to better serve domestic clients, and face fiercer price competition. Manufacturers need to find ways to cut costs and increase productivity through automation and improvements in management. A wave of mergers and acquisitions is likely in the coming two years, followed by post-merger activities in product portfolios and industrial footprint adjustments.

Also, they will need to refocus on digital transformation with new purpose. Digital transformation is not just about technology and it has to be aligned with operational excellence.

Operational excellence covers product design and development, production planning, supply chain management, manufacturing execution, and the operational effectiveness of people, processes and assets. The key for operational excellence-driven transformation is transforming raw operational and assets data into actionable insights to enable humans and machines to take right actions at the right time to continuously improve performance.

The industrial internet of things (IoT),5G, smart sensors and machine learning are playing an increasingly important role here. For example, we are seeing some manufacturers optimizing their production planning, using advanced artificial intelligence analytics and rescheduling based on the prediction of inventory available or changing demand.

To achieve digital transformation objectives, manufacturing companies need to align leadership, talent and culture with clear-cut vision and a human-centered approach.

Meanwhile, manufacturers will need to be prepared for an evolving workplace and workforce. We learned during the lockdown that increasingly a lot of work can be done remotely, and we are able to run factories remotely from behind a screen. These convert the workplace for the workforce.

Automated systems and robotics in manufacturing are enabling employees to focus their skill sets on more value-added tasks, by taking up some of the more repetitive processes. Further, there will be a growing demand for skills, which generally requires a workforce with higher level of skills, technical knowledge and education. There will be likely a growing shortage of workers with the skills required for rapidly evolving jobs.

The author is a senior partner and the Industrial Products & Construction sector leader of Deloitte China. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.