Amidst ever increasing tensions between U.S. and China on trade, national security, Covid-19 and technology, it’s been hard to decipher between election year politics and real economic outlook between the top two world powers. Ken Jarrett, former president of the American Chamber of Commerce in Shanghai, recently discussed the notion of manufacturers moving out of China. DHH has compiled data on the different factors explains why have we not seen a spike in companies returning to the U.S. from China?
Short term, the answer is simple: Chinese government at all levels implemented broad, decisive actions, so thus far only China has come out of the pandemic and is fully back to work. Everywhere else factories remain closed to fight Covid-19.
Long term, should companies be looking for an alternative to China? The answer is unique for each company. A survey recently done by AmCham Shanghai found that 70% of the companies surveyed will not move manufacturing or supply chain out of China. So what are the factors that should be balanced?
One major factor is cost. The Trump administration has certainly been working hard to drive up the cost of doing business in China – $46 billion before Covid-19 according to the Commerce Department. Recent report from Peterson Institute found that from January 2018 to February 2020, tariffs on Chinese imports have increased from an average of 3.1% to 20%. However, companies in China have already made significant investments that are essentially non-recoverable sunk costs. To now pick up and move would require a great benefit to counter the new expenditure.
Labor cost is another reason why manufacturers are reluctant to move back to the U.S. Although the cost of labor has been steadily increasing in China as well, it has found a happy middle ground between U.S., Japan and Korea on the high end, and Cambodia, Thailand and Vietnam on the low end. Also, for educated labor force, China is still a low cost country. In the past 5 years, China has produced about 34 million college graduates, equal to Philippians, Malaysia and Vietnam combined.
Supply chain issues have given companies difficulties in moving out of China. It takes years to build infrastructure, find raw material, and develop the suppliers necessary. China is still at least a decade ahead of its competitors in access and reliability. According to China’s Minister of Industry and Information Technology, China is in the unique position of being the only country to obtain all the industrial categories listed by the UN. Additionally, the intrinsic top-down nature of the Chinese government is well suited to respond to natural disasters, like what we’ve seen with Covid-19. This entire eco-system is not something that can be moved overnight.
Lastly, China is the world’s fastest growing consumer market. A July 2019 McKinsey report predicted that by 2030, 58% of Chinese households are likely to be mass affluent or above. In that same report, numbers show that Chinese consumers accounted for more than 40% of electric vehicle sales, 30% of car sales, 45% of fish and seafood, and 24% of wine, globally. These numbers is what gave birth to the saying “made in China for China“.
Politics aside, China still has the largest manufacturing output in the world, and soon the largest market in the world. We will likely see a slow shift towards diversifying to other locations to mitigate risk, but China will still be the main focus.
SOURCE DHH Washington DC Law Office
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