China’s consumer spending, factory production, and private investments all experienced upswings in the second half of last year as China recovered from a COVID-induced recession. In the end, its economy managed to grow by 2.3 percent, making China the only country to experience growth in 2020. Still, supply chain shocks were felt around the world as countries scoured for masks and medical products. Shortages of other goods, like semiconductor chips, still exist today.
Last week, President Biden mandated sweeping reviews of US critical supply chains, a first step toward preventing the shocks and that wreaked havoc last year. National security imperatives aside, economic growth predictions indicate that moving manufacturing away from China could be a long and arduous road.
Companies staying put
Less than a year ago, the United States was dealing with the worst US-China rift in 50 years and the COVID-19 pandemic had forced millions of Chinese into lockdown. At the time, China hawks predicted US companies would leave China in droves.
Almost a year on, China has not witnessed anything resembling a mass exodus. Some companies de-risked their China exposure and found secondary and tertiary supply chains in Southeast Asia, while others set up smaller, “safety” factories closer to home to provide options in the case of future supply chain shocks. But these are by far the exceptions rather than the rule.
Japanese companies, for example, continue to be bullish on China. In a recent survey conducted by the Japan External Trade Organization, only 7.2 percent of Japanese companies reported they were contemplating moving production out of China, down from 9.2 percent in 2019.
Similarly, in a February survey, the German Chamber of Commerce in China reported 96 percent of German companies in China plan to stay, and 72 percent intend to invest more in China.
And for US companies, the percentage planning to move operations outside of China has stayed relatively static since 2015 according to a survey of US-China Business Council Members conducted last year.
Last year’s shutdowns were not enough to deter Kingston Technology, a major producer of computer memory, from China. Kingston relocated some of its manufacturing to Taiwan to limit tariff exposure but has no plans to move its China operations, the bulk of which are in Shanghai, despite facing 4 months of COVID-related shutdowns last year.
Other markets do not compare when it comes to advanced infrastructure, business-friendly regulations, a highly skilled labor force, and scale.
Foreign investment on the rise
Kingston has committed to investing an additional $20-$30 million in China over the next few years. “It’s a no brainer,” said John Tu, Kingston’s CEO. And with China leading the global economic recovery, companies plan to continue investing.
Walmart recently announced that it will invest $400 million in China over the next 5 years, while Starbucks committed to a $150-million venture to open a roasting plant in Kunshan. In total, the list of companies with China expansion plans reads like a “who’s who” in business, with multinationals like Tesla, Disney, Astra Zeneca PLC, Honeywell, and Adidas all eyeing a bigger market share.
Tetsuro Homma, CEO of Panasonic’s Chinese company, told Nikkei Asia last month he, “ [does not] think that the Japanese manufacturing industry could survive globally without being present in a market as big as China’s.”
The reasons to be in China are evolving. In the ’80s, it was the low-cost manufacturing that coaxed companies to the market. The country then moved up the food chain as businesses wanted to sell to its thriving middle class and up-and-coming unicorn companies. That China has been resilient to the pandemic and the trade war may give companies even more impetus to double down, even in the face of calls for economic decoupling.
What does this mean for Biden’s new supply chain review?
So far, Biden’s executive order is just a preliminary step toward making US critical supply chains more resilient and boosting domestic manufacturing. The first assessment will look at supply chains for pharmaceutical, rare earth materials, semiconductors, and large-capacity batteries used in electric vehicles. The second, drawn-out assessment is tasked with identifying critical and essential supply chains. Recommendations for how to remedy any supply chain vulnerabilities will come at the end of this process.
China and other countries have invested billions in manufacturing infrastructure, including rare earth processing technologies, according to Jack Lifton, founder of the firm Technology Metals Research. The United States lost its production of pharmaceuticals and rare earth materials over 30 years ago and would need considerable time–10 years or more–just to reach parity with competitor nations, let alone be cost-effective.
While it is impossible to predict what conclusions and recommendations will come from these reviews, what is certain is that supply chains will not see drastic changes in the short term.
Stanley Chao is the author of “Selling to China: A Guide for Small and Medium-Sized Businesses” and Managing Director for All In Consulting which assists companies in their China business development.
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