Market Extra: Here’s why companies won’t move their supply chains out of China, says Morgan Stanley

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As the coronavirus pandemic reveals vulnerabilities in global supply chains, businesses have learned the dangers of over-relying on a single manufacturing hub.

But analysts at Morgan Stanley suggest businesses are unlikely to take the opportunity to tilt parts of their manufacturing operations away from China, at least for now.

They said cash-starved companies currently lack the funds to invest in new operations and tinker with existing supply chains. At the same time, Chinese assembly lines have been swift to bounce back, even as other economies remain in lockdown.

“Technology vendors are encouraged by the pace at which China’s production has ramped up post the COVID-19 shock, and this has reinforced their belief in locating the production of their high-volume products in China. This provides reassurance that China will remain a large base for manufacturing in these products,” said Katy Huberty, head of equity research for North America Technology Hardware at Morgan Stanley, in a Wednesday note.

Although Huberty was speaking more specifically on how makers of computers, semiconductors and smartphones were unlikely to shift their operations elsewhere, her analysis has broader implications for any business reliant on Chinese factories, as supply chains in the IT hardware sector tend to be more spread out internationally than other industries.

She did not preclude the possibility of some parts of the supply chain moving outside of the country dubbed the “factory of the world,” but added businesses were unlikely to take steps anytime soon.

“While there will be some diversification in the supply chain to economies like India, Vietnam, Mexico and Taiwan, companies are currently focused on cash preservation and costs, which will limit the scope of such diversification moves in the near term,” she said.

Similar expectations for supply chains to move outside of China came into view after the two biggest economies in the world clashed over trade.

In markets, the S&P 500 SPX, +2.65% gained 2.7%, and the Dow Jones Industrial Average DJIA, +2.20% booked a more-than-500-point surge on Wednesday. Equities extended their rise this week amid hopes that some parts of the U.S. could re-open soon, allowing investors to look past the immediate economic fallout from the COVID-19 disease.

See: Disappointment on corporate earnings could undermine hopes for Fed to rescue markets, says ‘Warren Buffett of bonds’

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