Businesses insisted on relying less on China, but few respond

Businesses insisted on relying less on China, but few respond

BEIJING (AP) – The United States, Japan and France are urging their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed trade, few want to leave the skilled Chinese skilled labor force and efficient raw material suppliers to move to other countries.

Disruptions from the pandemic, on top of the US-China tariff war, led to warnings that too much reliance on China makes global companies vulnerable to costly breakdowns in the event of disasters or political conflicts.

Pharmaceutical manufacturers stand out as an industry that seeks to reduce dependence on Chinese suppliers by setting up resource sources in the United States and Europe. But consumer electronics, medical equipment and other industries remain with China.

“I don’t know of any company that is moving forward with plans to move,” said Harley Seyedin, president of the US Chamber of Commerce in South China.

China’s explosive rise as the world’s cheap factory helped keep consumer prices low and boosted Western corporate earnings. But it has fueled political tension over lost American and European workers’ jobs. Governments and industry advisers are concerned that dependence on China could threaten supply chains and possibly national security.

Chinese factories assemble most of the world’s smartphones and consumer electronics and a growing share of medical equipment, industrial robots and other high-tech goods. This country is a dominant supplier of vitamin C and ingredients for antibiotics and other medicines. The ruling Communist Party has built ports, railways, telecom networks and other facilities that are rated among the best in the world for 20 years.

“China continues to provide an unrivaled supply chain for any industry,” said Jit Lim of Alvarez & Marsal, a management consultancy.

Philip Richardson, who produces speakers in Panyu, near Hong Kong, said he has looked at Vietnam and other countries. But he said that while their wages could be as low as 60% of China’s, the savings will be consumed by the cost of giving up its network of Chinese suppliers.

“We’ve been thinking about it for about a minute and it makes no sense,” said Richardson, who has worked in China for 22 years. “When you buy magnets, you now have to pay for transportation and customs duties to other countries, while in China we just buy the magnets and ship them to us.”

President Donald Trump took office in 2017, promising to “bring back our jobs.” Next year’s tariff increases on goods from China in a battle for technology and trade prompted some exporters to shift production. But the changes were minor. Most went to other developing countries.

The pandemic has increased political pressure on companies to move.

The Japanese government, which sees China as a strategic rival, is offering 220 billion yen ($ 2 billion) to companies moving production to Japan in a virus-aid package announced in April. It offers 23.5 billion yen ($ 220 million) for Japanese companies in China to move to other countries.

The tariff war raised concerns about China’s dominance as a supplier of active pharmaceutical ingredients, or APIs, used in antibiotics and vitamins. Some American commentators warned that Beijing could retaliate by withholding APIs, although there was no sign that this was happening.

“There will be an increase in the repatriation of national drug supply chains and the restoration of national strategic manufacturing capabilities for key drugs,” Sakshi Sikka, who follows the industry for Fitch Solutions, said in an email.

In May, the U.S. government awarded a contract worth $ 812 million over a 10-year period to Phlow Corp., a Virginia company founded to cover drug shortages by producing ingredients and generics.

In Europe, the French drug manufacturer Sanofi SA is setting up an API supplier to reduce dependence on China. Sanofi says the company will be the No. 2 global producer, with annual sales of $ 1 billion by 2022.

India and Indonesia have announced plans to increase their own production of pharmaceutical raw materials.

Those changes are politically driven and will drive costs up, while China’s dominance as a global supplier is unlikely to change in the near future, said Fitch’s Sikka.

Companies, including Nike Inc., which made low-margin shoes, furniture, apparel and other goods in China, have been migrating to Southeast Asia, Africa and other economies in search of cheaper labor for ten years.

For more expensive shoes, however, import duties in the US should rise further before sites like Ethiopia or Southeast Asia can compete with experienced Chinese workers and flexible suppliers, said Robert Gwynne, who produces women’s shoes for brands like Steve Madden in Dongguan, nearby. from Hong Kong.

“All my customers say we have to diversify,” said Gwynne. But when costs are shown in other countries, “90% take the China scenario.”

Businesses are also increasingly connected to China due to the appeal of the 1.3 billion consumers at a time when growth in spending in the West is anemic.

Higher value car and goods manufacturers spend billions of dollars to expand Chinese production. When the economy reopened, Volkswagen AG said in May it would spend $ 2 billion ($ 2.2 billion) to buy control of its Chinese electric vehicle business and a controlling stake in a battery manufacturer.

Instead of using China to export, “many people are now producing ‘locally for locally’,” said Lim.

Only 11% of companies who responded to a survey by the European Union Chamber of Commerce in China said they “considered transferring investments to other countries” compared to 15% last year.

Some are leaving to cut labor costs, but the rest “are really committed to China,” said a Vice-President of the Chamber, Charlotte Roule.

Relocating factories or finding non-Chinese suppliers to reduce the risk of disruption “means further investment,” said Roule. “Who is going to pay for that?”

Charles M. Hubbs, founder of Premier Guard, who makes surgical gowns, masks and other medical devices in China, says he is preparing to produce face masks in Mississippi to avoid shipping issues. But he said such an approach will not work if the pandemic ends and prices return to normal.

“You can afford it now. People pay $ 12 for an isolation gown, “says Hubbs, who has been working in China since the late 1980s. “But when COVID is over, you go back to $ 3 or $ 4.”

Many companies have already pursued a ‘China plus one’ strategy in Asia in the past decade. They set up factories in Southeast Asia to serve other markets or to insure against disruption in China, even if it would increase their costs.

But when China lifted anti-disease control for businesses in March, other Asian economies closed their doors, forcing companies to relocate their work to Chinese factories, which are working overtime to make up for the deficit, Seyedin said.

Some US and other leaders are talking about potential tax cuts or other incentives to lure companies home. Trump has threatened to raise taxes on U.S. companies moving from China to a country other than the United States.

Even if tax cuts or subsidies continue, companies face the costs of setting up a factory in unfamiliar territory, training new workers, finding suppliers, and potential customer relationship disruption, Alvarez & Marsal’s Lim said.

“Switching isn’t free,” he said.

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