Goodbye China: Chinese manufacturers follow multinationals out the door
Chinese companies are following their foreign counterparts out of the country in search of alternative production bases to mitigate the impact of the prolonged trade war with the US
Since last June, 33 listed companies have informed China’s two stock exchanges of their plans to set up or expand production abroad, according to data compiled by the Nikkei Asian Review.
As with foreign manufacturers, US president Donald Trump’s multiple rounds of tariffs on Chinese goods, combined with rising wages and other costs, are prompting Chinese companies to move out of the country.
Almost 70 per cent of the 33 companies cited Vietnam as their preferred destination, while the remainder chose Cambodia, India, Malaysia, Mexico, Serbia and Thailand.
Among the companies is Jinhua Chunguang, a rubber product maker, which announced on July 19 an investment of $4.35m to set up a production base in Vietnam. This is in addition to its three existing plants in Malaysia and China. The company, based in Zhejiang province near Shanghai, said the investment was a response to “changes in international environment”, as well as part of its global expansion plans.
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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Jinhua makes hoses used in vacuum cleaners, which are subject to Mr Trump’s third round of punitive import tariffs that he imposed on Chinese goods worth $200bn in the second half of 2018, citing unfair trade practices.
Zhejiang Henglin Chair Industry is also looking to Vietnam, where it acquired a Taiwanese-owned factory as part of a $48m investment to accelerate its expansion.
“We will begin production in the second half of the year,” an executive at the company told Nikkei at its factory in Anji county. Henglin counts Swedish furniture maker Ikea and Japan’s Nitori among its clients.
Textile manufacturers have also decided to increase production in Vietnam, despite the growing concerns of garment companies already operating there.
Huafu Fashion announced in December it was investing Rmb2.5bn ($354m) to build a factory there. The rolled yarn maker said setting up a manufacturing facility in Vietnam would allow it to source cheaper raw materials, reduce labour costs and avoid the tariff barrier.
China’s nominal wage jumped 44 per cent to Rmb6,193 ($876) per month in the five years to 2017, according to data from the International Labour Organization. That is big compared with a 30 per cent rise in Vietnam, 28 per cent in Malaysia and 11 per cent in Mexico during the same period.
Rising costs had been encouraging companies to move overseas even before the trade war, according to analysts. Indeed, China has had a “going out” policy encouraging such moves since 2001, but few companies felt an urgent need to pursue it due to the huge market at home.
“What the US-China trade war has done is to accelerate this trend in the short term, potentially benefiting countries like Malaysia, Thailand and Vietnam,” said Darren Tay, a risk analyst at Fitch Solutions.
Competitive wages are not the only thing attracting foreign investors to these countries. “A skilled, well-educated workforce, good infrastructure and a strong network of free trade agreements, including being part of the Asean Free Trade Area and EU-Vietnam FTA” were also factors, according to Rajiv Biswas, a Singapore-based economist at IHS Markit.
While most countries welcome foreign direct investment from China as they would from anyone else, they are also cautious of being used to avoid Mr Trump’s punitive tariffs. The US president recently threatened to impose a 10 per cent tariff on the remaining $300bn worth of imports from China starting September 1.
“The authorities must set up measures to prevent Chinese products relabelled as Vietnamese bound for the US,” said Vu Duc Giang, chairman of the Vietnam Textile and Apparel Association.
In other countries, the production shift and accompanying investment are being embraced after a heavy focus on infrastructure projects linked to China’s Belt and Road Initiative had sparked a backlash.
Jiangsu Xinquan Automotive Trim announced in May it was investing RM64.4m ($15.4m) in Malaysia. The investment will support its principle customer, Zhejiang Geely Holding, which produces vehicles in partnership with Malaysia’s national automaker Proton Holdings for sale in the south-east Asian market.
“Malaysia welcomes Chinese investment that comes with technology transfer, the use of local talents and certainly not massive migration of Chinese labourers,” said an official with the trade office.
Malaysian prime minister Mahathir Mohamad has been deeply critical of Chinese investments approved by his predecessor. Mr Mahathir told Chinese premier Li Keqiang in Beijing in August last year that Malaysia would not allow a “new version of colonialism”, referring to big-ticket infrastructure projects carried out in his country by Chinese companies.
The projects were part of the Belt and Road Initiative, which has attracted criticism for leaving several developing countries deep in debt. Some of the companies involved in BRI projects in Malaysia had raised the ire of the 94-year-old Mr Mahathir by importing equipment and labourers from China, rather than using local labour and resources.
The diversification of Chinese investment from a focus on resources and infrastructure towards manufacturing will be welcomed by many developing countries, said Mr Biswas of IHS.
“Many developing countries are still dependent on commodities exports and their governments put a high policy priority on building up their manufacturing sectors to diversify their economies and create new jobs,” he said.
Nikkei staff writer Yusho Cho contributed to this article
A version of this article was first published by the Nikkei Asian Review on August 12 2019. ©2019 Nikkei Inc. All rights reserved