The advantages of ‘Made in China’ still outweigh the risks
While some companies have announced that they are looking elsewhere, there is little evidence of a systemic spike in the number of firms shifting production away from China in the wake of the trade dispute
Herald van der Linde
Published: 7:35pm, 13 Apr, 2019
The “Made in China 2025” industrial modernisation programme aims to make the country a dominant player in 10 strategic industries. Photo: Reuters
Export manufacturers in China are clearly worried about the potential impact of raised US import tariffs, but the latest evidence seems to suggest that most are not yet worried enough to shift production away from the mainland.
True, some companies have announced that they are looking to set up export manufacturing capacity elsewhere. South Korean memory chip maker SK Hynix says it intends to move some output back home; Taiwan-headquartered Foxconn, which assembles the iPhone, has said it is looking at expanding in Vietnam; and officials at both Toshiba Machine Co and heavy equipment manufacturer Komatsu have told the media that they are already moving some production out of China.
Manufacturers of high-volume, low-margin products in search of cheaper labour and land have been moving capacity elsewhere in Asia for years and it is difficult to determine how much these more recent shifts have been prompted by the uncertainties of the US-China trade relationship or if they are part of the longer-term trend to diversify production prompted by rising costs in China and new opportunities elsewhere.
Whatever the motive, there is little evidence of a systemic spike in the number of companies shifting production away from China in the wake of the trade dispute. It is notable that the trade deficit in goods between the US and China reached a 10-year high of US$419 billion in 2018 despite the threat of raised tariffs. While this is at least partially a result of stockpiling ahead of any announcement, more granular data tells a similar story of business as usual.
Capital expenditure levels in the rest of Asia are actually down in 2019 year to date compared to 2018. If companies were investing significant sums in buying property or machine tools ahead of a move, they would be expected to rise. Indeed, orders from the Japan Machine Tool Builders’ Association, a useful leading indicator for investment in new manufacturing capacity, are also down from the same time last year.
These are all indicators that initial worries of a mass exodus from China in response to the trade tensions are overdone. We argue that China will be investing more in new equipment or factory extensions, suggesting that exporters have chosen to upgrade existing facilities to improve quality and productivity to allow them to raise prices to offset the negative impact of the tariffs.
It seems that although export manufacturers are looking at the prospect of raised tariffs with alarm, for most the benefits of staying put outweigh the potential downside.
Push factors such as growing protectionism and rising wages for Chinese workers are a concern, but even the problem of rising wages has a silver lining. The Chinese middle class now numbers some 400 million and we expect it to grow to 850 million by 2030. Chinese workers have more spare cash to spend.
There are other strong pull factors. The mainland has a supply chain ecosystem unrivalled anywhere else in the world. The clusters of parts-production expertise that have grown up around centres like Shenzhen and Chongqing would take years of work and billions of dollars to reproduce elsewhere in the region.
China is also years ahead of the rest of Asia in both hard and soft infrastructure. High-speed rail and air links have opened up the middle of the country with its vast resources of labour and cheaper land to manufacturers. Its education system is turning out millions of new university graduates, new intellectual property laws have given added protection to proprietary technology, and authorities are still working hard to make exporters’ lives easier: for example, the central city of Chongqing, which manufactures a third of the world’s laptops, reduced export clearance times by 98 per cent in 2018.
For most manufacturers, it seems that the continuing advantages of “Made in China” outweigh the threat of new US tariffs.
Herald van der Linde is HSBC Global Research’s head of equity strategy in Asia-Pacific
This article appeared in the South China Morning Post print edition as: The advantages of ‘Made in China’ still outweigh the risks
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