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Corporate America and foreign countries have seen China as the world’s factory for decades. Its hundreds of millions of consumers called it “one of the biggest opportunities,” and predictions were made that this would be “China’s century.” China became a major manufacturing hub in the late 1970s and early 1980s, opening the country's economy to foreign investment. Yet, that is all set to change as foreign companies shift investments and their Asian headquarters out of China.
There are many known reasons why, historically, companies chose China to outsource to. The Chinese government supported manufacturing, providing tax breaks, subsidies, and other incentives to attract foreign investment. The infrastructure is well developed, and there is a robust technology sector and low labor costs with a large and relatively young workforce. China has stayed competitive as its companies are at the forefront of developing new manufacturing technologies. They have become a major hub for various products, including clothing, electronics, and equipment.
It was pointed out in a report done by the European Union Chamber of Commerce for China that the security controls, the government’s protection of Chinese rivals, and the lack of progress on promised reforms are leading companies to feel uneasy. Slowing economic growth and rising costs are also impacting businesses. The economic growth sank to 3% last year, and President Xi Jinping’s government is trying to encourage foreign companies to invest and bring in technology.
The European Chamber also noted that it was more than just foreign companies moving out. Its survey reported that 2 out of 5 Chinese customers or suppliers are shifting investments out of the country.
Police raided the offices of two consultancies, Bain & CO. and Capvision, as well as a due diligence firm, Mintz Group, without public explanation. As authorities say that companies are obliged to obey the law, companies are now on edge, yet have given no indication of possible violations.
For the past five years, the United States has been pushing to reduce its reliance on China for computer chips, solar panels, and other consumer imports. Beijing’s security threats, human rights record, and dominance of critical industries have created growing concerns. Yet, as corporate executives look for ways to cut ties with China, a growing body of evidence suggests that the world’s largest economies remain deeply intertwined as Chinese products continue to make their way to America through other countries. It is questioned whether the United States has lessened its reliance on China and how the reshuffling of trade relationships will affect the global economy and consumers.
The European Chamber states that the top destination for companies moving their Asian headquarters out of China is Singapore, with 43% of companies, followed by Malaysia. Other popular destinations include Vietnam, Taiwan, Mexico, India, and Canada, where lower labor costs, closer proximity to major markets, and a more stable political environment are offered.
While it is argued that any move away from China may be good, such reshuffling appears to have consequences; shifting supply chains are associated with higher prices of goods, and a drop of five percentage points in the share of imports from China pushed prices on Vietnamese imports up 9.8% and Mexican imports up 3.2%.
Moving towards production in other countries or domestically could enforce new supply constraints. Global supply chains change slowly, as it takes time for companies to plan, invest in, and construct new factories. However, given the growing geopolitical tensions, further shifts in global supply chains may be unavoidable.
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