China scrambles to stem manufacturing exodus as 50 companies leave

China scrambles to stem manufacturing exodus as 50 companies leave

China is racing to keep foreign enterprises in-country, dangling special benefits so that the advantages of staying outweigh the heavy tariffs imposed by the US.

A year into the trade war with Washington, more than 50 global companies, including Apple and Nintendo, have announced or are considering plans to move production out of China, Nikkei research has found.

And not just foreign companies. Chinese manufacturers, as well as those from the US, Japan and Taiwan, are part of the drain, including makers of personal computers, smartphones and other electronics.

“We need permanent measures to avoid the risk of tariffs and be eligible for US government procurement,” said Kiyofumi Kakudo, chief executive of PC maker Dynabook. The unit of Sharp is considering a plan to relocate production of its US-bound notebook PCs to a new plant being built in Vietnam. Such PCs account for 10 per cent of the unit’s total notebook production.

Dynabook makes almost all of its notebook PCs in China, mainly at a plant in Hangzhou, 175km south-west of Shanghai. “Although the fourth round of US tariffs has been temporarily shelved, we cannot tell what will happen nor when,” Mr Kakudo said.

This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Apple has called on major suppliers to consider moving 15 to 30 per cent of iPhone production out of the country. The Nikkei Asian Review reported on July 17 that Apple is about to start trial production of its popular AirPods wireless earbuds in Vietnam. Trials such as these are usually precursors to mass production.

US PC makers HP and Dell are thinking of moving up to 30 per cent of their notebook production in China to south-east Asia and elsewhere. Japan’s Nintendo will also shift a portion of its Nintendo Switch game system production from China to Vietnam.

There is concern that these moves could squeeze Chinese employment and consumption. To minimise the blow, Beijing is rolling out the red carpet for foreign businesses.

Tesla is at the forefront of such government efforts. The company is now moving equipment into its new plant on the outskirts of Shanghai, on which it broke ground just half a year ago. It is hiring workers to staff its lines starting as early as next month.

The US electric-car maker is believed to have secured the land at a discount from the local government and probably received lending on the cheap as well.

China has been gradually opening up to overseas businesses since 2018, when trade tensions with the US deepened. Foreign direct investment into China increased 3.5 per cent on the year to about $70.7bn in the first half of this year, according to China’s Commerce Ministry.

The country announced in late June that it would ease restrictions on foreign investment in seven fields, including oil and gas. It is also working to bring forward plans for opening up the financial sector.

Whether these are enough to offset the impact of the trade war is unclear.

At UE Furniture’s main factory, about 200km west of Shanghai, employees start to file out of the building around 4:30pm.

“We no longer work overtime because of the tariffs,” one employee said, echoing similar statements by others. The company has decided to set up production facilities in Vietnam to avoid US tariffs. It appears not to have cut staff at home so far, but many employees face shrinking earnings from shorter hours.

Women work on a production line manufacturing air conditioners, at a factory of an electrical engineering company in Huaibei, Anhui province. Many companies may be forced to set up dual supply chains: one for China and one for other markets © Reuters

Concern over the situation is growing among political leaders. China’s State Council decided in May to set up a group to lead employment measures and plans to bolster job training programmes using surplus funds from state insurance schemes.

The trade dispute is beginning to show up in flows of goods and capital. In the first five months of the year, exports from China to the US fell 12 per cent on the year in value terms, while those from India, Vietnam and Taiwan logged double-digit gains. Exports aimed at bypassing US tariffs by disguising the origin of products may also be increasing.

Many companies, alarmed by the prospect of a prolonged trade conflict, are hedging their bets. While looking for alternative production sites for US-bound goods, many will keep factories operating in China for the domestic Chinese market. Thus, many manufacturers will be forced to set up dual supply chains: one for China and one for other markets, raising their costs and denting profits.

“The possibility of the world market dividing into China and non-China is growing,” said Yuji Miura, a senior economist at the Japan Research Institute. “Decoupling” — that is, an unwinding of economic ties between the US and China and a division of the world economy into hostile blocs — is a real possibility.

Other than higher costs, companies will probably face excess capacity in a decoupled world economy.

Quanta Computer, a Taiwanese contract manufacturer of PCs, including Apple’s MacBook, is set to shift some operations to Taiwan. But negotiations with client companies over the cost of relocation are expected to be difficult. Quanta cannot afford a further decline in its already low profit margins, according to chief executive Barry Lam.

An executive at one Japanese machinery maker that has shifted production for the US market to a south-east Asian country noted that, because the new location does not have as extensive a supply chain as in China, “we need to either transport parts from China or to establish a new procurement network. In either case, costs will rise.”

Since last July, the US government has imposed three rounds of new tariffs on Chinese imports, covering goods worth ¥27tn ($250bn). Although a fourth round covering virtually all goods shipped from China is on hold, companies need to prepare for the worst.

Much of the shift is to south-east Asia, especially Vietnam, which is becoming home to many manufacturers of electrical and electronic equipment. Among them is South Korea’s Samsung Electronics, which makes smartphones in the country. Vietnam also offers logistic advantages because it shares a land border with China.

Japan’s Kyocera is thinking of transferring printer production to Vietnam. Chinese electronics maker TCL will set up a TV plant in the country.

Manufacturers are also moving production back home to take advantage of existing procurement networks for exports aimed at large, developed-country markets. Komatsu has partially shifted output of parts for construction equipment to Japan and the US. Companies are also working to raise productivity at their plants by promoting digitisation and automation.

A version of this article was first published by the Nikkei Asian Review on July 18, 2019. ©2019 Nikkei Inc. All rights reserved

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