IN THE BATTLE to control the critical industries of the future, score one for China.
Bolivia has chosen a Chinese-led consortium, CBC, to extract the lithium, a rare earth essential to the batteries that power electric vehicles (EVs), that lies in significant quantities under the South American country’s salt flats.
CATL, China’s leading EV battery maker, and the mining company CMOC (the old China Molybdenum) are prominent members of CBC. Bolivia’s state-owned Yacimientos de Litio Bolivianos (YLB) will front the project.
Bolivia’s laws require the state to exploit the country’s natural resources. Bolivia’s energy minister, Franklin Molina, made a point of saying the deal with CBC showed there were ‘sovereign alternatives to the privatisation models of lithium exploitation’.
Bolivia and neighbours Argentina and Chile sit atop the so-called ‘lithium triangle’, which contains more than half the world’s reserves. Hitherto, YLB has not been particularly successful in commercialising Bolivia’s deposits, which is why the government in 2021 called for foreign partners to participate. CBC outbid Lilac Solutions from the United States, the Uranium One Group from Russia and three other Chinese companies.
China already dominates the world’s lithium production through its processing capacity, which gives Chinese battery makers a cost advantage over foreign rivals.
CATL’s decision to squeeze efficiency gains from an older-generation lithium-ion phosphate battery technology rather than betting on newer alternatives has further enhanced its market position, generating the revenue to reinvest in other technological development that keeps it as a world leader.
German automakers have been courting it as a partner, as have several EU governments keen to create jobs in the sector and feeling irked that they have been cut out of the subsidies for EV production under last autumn’s US Inflation Reduction Act.
These subsidies are diverting investment from Europe, potentially including investment by Europe’s leading homegrown battery maker, Northvolt, which is reconsidering its plans to open a plant in Germany.
CATL, exploiting the opportunity, is considering opening a third battery factory in Europe.
IT HAS BEEN a long and winding road for Jeep in China, as the song has it, which has now ended in the bankruptcy filing of the joint venture (JV) between Guangzhou Automobile Group (GAC) and Stellantis.
The former AMC was the first US automaker to have a production JV in China, setting up Beijing Jeep joint venture in 1984. A succession of ownership changes followed: Chrysler acquired AMC; then Fiat bought Chrysler to create Fiat Chrysler, which became Stellantis after a merger with Peugeot and Citroen maker PSA in 2021.
However, with sales declining and having missed the switch to electric vehicles by Chinese consumers, Stellantis announced in July that it would end the JV.
At the time, its chief executive, Carlos Tavares, cited the growing ‘political influence’ in doing business with partners in China and indicated that the group would switch from local production to importing.
Some commentators seized on this as evidence of ‘decoupling’ in the face of deteriorating US-China relations and an example of a foreign multinational lightening its footprint n China. However, to this Bystander, Setllantis’s case seems sui generis.
Jeep’s sales in China fell to barely 20,000 vehicles in 2021, half the previous year’s total and one-tenth of 2017’s number. The decline has continued this year, with fewer than 2,000 vehicles sold.
Elon Musk’s EV maker Tesla is the only foreign automaker that has not been required to produce in China through a JV. That is a sign of the growing confidence of the domestic industry that it no longer needs foreign technology and expertise as it once did. That is especially true for EVs, which now account for between one-fifth and one-quarter of new car sales in China.
Last year, foreign automakers’ share of the Chinese car market overall, the world’s largest, fell to 45.6% in 2020, a 6.9% decline from 2020, according to China Passenger Car Association.
That is two-thirds of its peak and falling. Trade estimates put foreign carmakers’ EV market share at around 20%.
If those trajectories continue, more foreign auto JVs will follow Jeep in folding.
SHANGHAI IS THE latest city to introduce electricity rationing as drought and extreme temperatures overstrain the country’s power grid.
Buildings along the Bund have been told to turn off external lighting for two evenings early this week to save power.
In the middle reaches of the Yangtze river, where conditions are severe, falling water levels have reduced the power supply from its hydroelectric dams. At the same time, demand for air conditioning has soared.
Factories and shopping malls in Chongqing have already been subject to temporary power cuts as authorities prioritise supply to domestic consumers.
Impacts on production have varied; vehicle maker VW says its plant has shut down, while electronics maker Foxconn says the effects have been minimal.
Authorities have extended the power saving measures by five days into a second week, with Sichuan and the rest of the Southwest bearing the brunt of the extreme heat.
Falling water levels have also disrupted shipping. Tesla’s Shanghai plant has suspended production because components are not arriving from Sichuan.
The impact on agriculture is growing, too. On Saturday, Sichuan’s provincial disaster committee said that 47,000 hectares of crops had been lost and 433,000 hectares damaged. More than 800,000 people face a shortage of drinking water.
In neighbouring Hubei province, authorities say 6.9 million hectares of crops are damaged, and a further 220,000 people are short of drinking water.
Brush fires are starting to be reported, adding further peril.
State media report that the drought threatens the autumn grain harvest, which provides three-quarters of the annual yield. Authorities are cloud seeding to try to induce rain.
China issued the year’s first national drought warning last week, a yellow alert, the third highest. The summer is the hottest and driest since China began keeping temperature and rainfall records in 1961, adding to the stress on an already slowing economy.
IT IS DIFFICULT to underestimate the strategic importance of merging the three leading Chinese rare earths producers.
China Minmetals Rare Earth Co., which is part of state-owned China Minmetals Corp., Chinalco Rare Earth and Metals Co, part of state-owned Aluminium Corp. of China, and Ganzhou Rare Earth Group, which is also state-owned but whose production is suspended for environmental reasons, will form a new group under direct central government control.
The new entity, China Rare Earth Group, will control approaching three-quarters of the country’s rare earths output, which accounts for two-thirds of world output.
The consolidation will give Beijing strategic control of the industry and help it manage domestic competition, particularly pricing, to ensure stable and price-certain supplies to end-users throughout the supply chain. Beijing has used the same approach in consolidating rail transport and shipping lines.
China Rare Earth Group will likely at some point also acquire two of the three remaining rare earths producers, Xiamen Tungsten Co. and Guangdong Rare Earth Group Industry Group.
The 17 minerals that comprise the rare earths group are essential for producing components of high-tech goods from electric vehicles to defence systems. The permanent magnets needed to make electric vehicles and wind turbines account for 30% of the demand for rare earths, followed by catalysts (26%) and polishers (13%). Magnets made of rare earth alloys are stronger than those made of alternatives such as iron or aluminium nickel compounds.
Access to rare earths will become even more critical for manufacturing as the world electrifies in its transition to low-carbon economies. Global demand for rare earth elements is forecast to rise by more than 40% if the world gets anywhere near its climate change commitments.
Chinese producers are well placed to fill that additional demand as they are subject to government-set output quotas that have kept capacity utilisation to 50-60%.
The other geostrategic dimension is that while China currently accounts for two-thirds of global output, it has less than two-fifths of known rare earths reserves. The United States and other large importers of rare earths mined or refined in China want to reduce that dependency by turning to alternative suppliers.
Washington now views rare earths in national security terms. In the past, Beijing has threatened to cut off supplies of refined rare earth products to US aerospace firm Lockheed Martin for trading with Taiwan.
There are significant rare earths deposits in California and Australia, but they are more expensive to mine and refining capacity is limited (non-existant in the United States). Beijing has an interest in being able to sway world prices and thus the cost calculations on which mines to expand, reopen or develop.
THE APOLOGY TO China by US semiconductor manufacturer Intel for asking its suppliers not to use products and labour from Xinjiang due to human rights abuses against Uighurs is the latest example of a multinational company finding how uncomfortable it is to balance its reliance on Chinese suppliers and markets with the need to comply with US laws and sanctions and maintain its reputation in the West.
Its apology, posted on its Chinese social media accounts, that its commitment to avoid supply chains from Xinjiang was an expression of compliance with US law, rather than a statement of its position on the issue, was criticised for being insincere at best and duplicitous at worst in both China and the United States. The days when what is said in Chinese on Weibo of WeChat stays in China are long gone.
The nature of Intel’s product makes it less likely that it will suffer a consumer boycott in the way that Beijing punished fashion and sporting apparel companies H&M, Burberry, Adidas and Nike for similar perceived transgressions. Furthermore, like other countries, China is short of chips right now. However, the incident will reconfirm for policymakers their wisdom in expanding indigenous production to reduce reliance on US technology.
The greater risk to Intel is of retaliation against its operations in China, where it employs 10,000 people and generates a quarter of its revenue. Arbitrary administrative actions are the perpetual concern of foreign companies operating in China.
Late last month, Vice-Foreign Minister Xie Feng, whose portfolio is North America, met with representatives of US businesses operating in China, urging them to lobby against the Biden administration’s hardline stance against Beijing. None too subtly, he said that US companies that stayed silent could not expect to prosper in China.
Speaking out in the way Intel did was not what he had in mind.
There is an emerging divide between US businesses that trade with China or source from it and those operating within the Chinese market.
The former group seek to maintain as light a footprint in China as possible to minimise the ever-present risks against their operations and staff. Where possible, they operate arm’s length business relationships with local firms or licence their brands, products and services within the country.
The latter set has scant interest in the United States taking a harder line with China over commercial and technology issues, intermingling trade policy with national security, and the nascent decoupling of the two economies, most visible in capital markets and technology.
Those companies, it should be said, show no indications of withdrawing from China. Yet they will have to become increasingly embedded in the ‘domestic circulation’ side of China’s ‘dual circulation’ development model, with all that that entails, and adjust their risk tolerance for damaging their reputation in international markets accordingly.
Given the changing attitudes in the United States and Europe towards China among lawmakers and corporate stakeholders like employees and customers, striking that balance may prove not only uncomfortable but impossible.
THE CHART ABOVE, from the Conference Board in the United States, crosses our desk and throws some light on why there is little evidence of supply chains moving out of China on any scale.
Simply put, the chart shows that there is no ready alternative that offers the scale and scope of China’s manufacturing base. In developing economies, such as those of Southeast Asia (for which ASEAN is a proxy in the chart), the capacity for multinationals to source inputs, labour and transport is a fraction of China’s. Even the United States and the EU combined barely match it, and in both those markets, labour costs are higher.
Moving production out of China will not happen quickly for other reasons, too. Supply chains are misnamed in that they are networks more than linear chains. They take years to put together and have extensive interdependencies. Companies will not willingly dismantle them quickly, even if they duplicate capacity elsewhere to improve resilience.
Further, dual circulation and the shift of China’s economy to being consumption-driven will mean that more of what is sold in China will be made in China. One small example: German car manufacturer BMW has just announced that it will start production of its X5 mid-size luxury SUV in Shenyang for sale in the Chinese market, rather than import the vehicles from its Spartanburg plant in the United States.
CHINESE FIRMS ARE increasingly involved in owning, operating, laying and equipping undersea communications cables — creating another front in the technology and telecommunications contest between Washington and Beijing.
Undersea fibre-optic cable is the backbone of global data transmission and communications. More than 400 cables beneath the oceans carry upwards of 95% of international internet data — everything from streaming videos to billions of dollars of sensitive financial transactions and encrypted government communications.
Thus, China’s growing presence and designation of undersea cables as a ‘marine strategic emerging industry’ — part of a broader goal of capturing 60% of the global market for fibre-optic communication equipment by 2025 — is seen in Washington as both a commercial rivalry and a geo-strategic threat.
The three big state-owned telecos, China Mobile, China Unicom and China Telecom, are the principal Chinese owners and operators of commercial cables, often as consortium members. The leading Chinese turnkey supplier and installer of undersea cables and the systems running them is HMN Technologies, formerly Huawei Marine Networks. It is now rebranded and 81%-owned by Shanghai-listed Hengtong Optic-Electric, the country’s largest producer of advanced submarine-grade fibre, after a restructuring to get around US sanctions on the Huawei group.
HMN Tech says it has completed or is working on 108 projects worldwide involving 64,000 km of submarine cable. It is now the number four in the global industry, behind US-based SubCom, Nokia-owned Alcatel Submarine Networks (ASN) and Japan’s NEC Corp. The private sector dominates the installation side of the industry, as opposed to the owner-operator side, which has traditionally been dominated by a mix of private and state-owned telcos.
HMN Tech is estimated to have a 10% share of a worldwide installation market worth $5 billion last year and forecast to grow at 10% a year for the next seven years as the bandwidth-devouring giant cloud and social media platforms drive an investment boom in new capacity, including their own cables, and route prioritisation.
Geopolitics
Earlier this month, the World Bank pulled the plug on a cable project it was funding on which HMN Tech had reportedly outbid ASN and NEC for the installation contract. The East Micronesia Cable System (EMCS) would have connected three Pacific island nations, Nauru, Kiribati and the Federated States of Micronesia.
However, it would have an onward link to the cable connecting Guam with the United States. Guam is a US territory, 29% of whose land area is occupied by US military bases. Washington let it be known that it objected to Chinese involvement in the EMCS because of a possible threat to US national security from potential Chinese espionage or disruption. The World Bank diplomatically decided that all three bids were ‘non-compliant, leaving the project in limbo.
Huawei’s first involvement in the industry dates back to 2009, a joint venture with the UK’s Global Marine, to lay a Hong Kong to United States cable. However, the People’s Liberation Army and the Ministry of Information Industry have played a strong role in developing the country’s submarine cable technology and capabilities since the 1990s. The PLA Naval University of Engineering and Hengtong Optic-Electric, along with others, established a joint submarine cable R&D laboratory in 2016 and the PLA-N has at least eight cable-laying and repair ships. As that might suggest, undersea cable technologies have dual-use.
The so-called ‘underwater great wall’ — a network of subsurface sensors connected by cable networks — is central to the PLA-N’s monitoring of in-shore waters (and beyond) for submarine activity, similar to the US SOSUS system that monitored Soviet-era submarines. During the Trump administration, one of the concerns of US security planners was how this could erode American naval superiority in the South China Sea.
Trump
These concerns aligned with the Trump administration’s twin objectives of stymieing both China’s indigenous technology development and the modernisation of the PLA. This was a broad front. The administration barred the use of Huawei equipment in government procurement contracts in 2018; the following year, it put Huawei and 68 affiliates on its Entity List, which stopped the use of any of its gear in US networks. However, a couple of measures had specific relevance for China’s undersea cable capacity.
One was the formalisation of an ad hoc US interagency group known as Team Telecom that advised the US Federal Communications Commission on national security issues. The Commission routinely referred applications for licences for operating landing points for undersea cables to the ad hoc group. Referring them to the new committee did not provide a substantive change in that regard. However, like the updating of the Committee on Foreign Investment in the United States (CFIUS), the more formal structure and stringent deadlines for reviews will likely have a chilling effect on new applications from consortia with Chinese members.
The Trump administration also called for closer scrutiny of submarine cables connecting the United States to ‘adversary countries’. Of the three cables directly connecting the US and China, two are partially owned by Chinese state-owned companies.
Hong Kong
A year ago, with its attention focused on Beijing’s imposition of a national security law on Hong Kong, the Trump administration blocked approval for the city to be a landing point for a fourth direct link, the Pacific Light Cable Network (PLCN). This connects Los Angeles and Hong Kong with branches to Taiwan and the Philippines and was backed by Google, Facebook and Dr Peng Telecom & Media Group. The latter is a former speciality steel smelter turned Beijing-based internet services provider listed on the Shanghai exchange. The Trump administration argued national security grounds, albeit with its customary lack of public evidence.
Google and Facebook subsequently were permitted to light the Los Angeles-Taiwan and Los Angeles-Philippines links only. As a result, the leg to Hong Kong has stayed dark.
PLCN’s fate has had a chilling knock-on. Three consortia of other planned trans-Pacific cables to Hong Kong withdrew landing license applications, including Amazon, Facebook and China Mobile’s proposed Bay to Bay Express linking San Francisco to Hong Kong cable, the China Telecom, China Unicom, Facebook, Tata Communications and Telstra Hong Kong-America cable between Hong Kong and Hermosa Beach in California; and Google’s Hong-Guam cable. In addition, two other proposed trans-Pacific cables, Facebook’s Bifrost and Facebook and Google’s Echo, announced earlier this year that they would avoid Hong Kong landing points.
This suggests that Hong Kong will not be a growing gateway for trans-Pacific cables as long as US-China tensions persist. However, that will not necessarily stop it from remaining an intra-Asian regional cable landing hub.
Biden
The East Micronesia cable example suggests that the Biden administration is carrying through with the thrust of its predecessor’s policy. That includes extending its discouragement of other countries from using Huawei and other Chinese telecoms equipment manufacturers’ kit in their 5G networks and other critical infrastructure to undersea cable systems.
The Biden administration is starting to rally its allies around the idea of creating a more cohesive and updated legal framework to protect undersea cables. These are covered by Articles 113-115 of the UN Convention on the Law of the Sea (UNCLOS) and the International Convention on the Protection of Undersea Cables. The latter dates to the 1880s and has 36 signatory nations. China is not among the three dozen.
As most cables are privately owned and operated, the US wants to establish stricter global standards and norms for private companies to make their cables and network management systems secure from cyberattacks and physical disruption.
This would go beyond the code of conduct of The International Cable Protection Committee (ICPC), a forum for submarine communications and power cables companies. It would also include greater sharing of intelligence between governments and companies on cyber threats to the cables. This Bystander understands that the United States raised both these notions at the recent G7 and NATO summits.
Vulnerabilities
Submarine cables are surprisingly vulnerable for such critical infrastructure. There are an estimated 150-200 accidental fractures a year. Undersea earthquakes can break them, but ships’ anchors and fishing nets snagging them are the most frequent cause. In the Soviet era, there was a suspicion that Soviet trawlers deliberately fished for cables.
US security planners fear that Chinese trawlers could employ the same tactic, particularly against Taiwan in the event of conflict or the threat of it, or even just as a muscles-flexing exercise. Taiwan is a telecoms hub for the region, so the damage to regional economies and financial markets could be severe.
A different set of concerns surrounds espionage risks and an adversary’s ability to divert or monitor data traffic. This is an additional concern for governments. They use the global network of commercial undersea cables for their communications, albeit encrypted. Government-owned classified or military cables are surprisingly uncommon.
There are three ways to hack into undersea cables’ data:
remotely via backdoors in the kit inserted during manufacturing or in the network management software systems;
infiltrating facilities at the landing points or where the cables connect to domestic networks; and
tapping the cable directly on the seafloor.
The last is technically the most challenging and beyond most countries’ capabilities. Unverified reports say that the United States, the United Kingdom and Russia have managed it by using specialist submersible craft to place physical listening devices on cables. Earlier this month, a Foreign Ministry spokesman accused the United States of ‘unacceptable’ espionage of undersea cables.
Believing that Chinese espionage efforts concentrate on targeting landing points, the Biden administration is addressing the first two attack points by pushing ahead with Trump’s strategy of banning approvals for equipment in US telecommunications networks from foreign companies deemed national security threats, i.e., Huawei and ZTE, and getting their kit removed from US networks.
The US Congress passed the Secure and Trusted Communications Networks Act in 2019, authorising the FCC to do that through its rule-making. Earlier this month, the FCC said it was moving onto the next stage of that process — public comments on the proposed rule that would revoke the certification of any equipment listed by the 2019 Act, signalling it had had a green light from the Biden administration.
Digital Silk Road
China sees undersea cable networks as a component of its Digital Silk Road under the One Belt, One Road initiative. For example, HMN Tech has laid or is laying cable under the Java, Andaman and South China Seas, the Gulf of Thailand and the Indian Ocean.
It is also laying a 15,000km submarine cable connecting Pakistan to East Africa and Central Europe (PEACE) via the Red Sea, another project on which the United States has been expressing disquiet. The Peace cable will have a landing point at Gwadar in Pakistan, whose port is owned by state-owned China Overseas Port Holdings and where China will likely have a military base. The Peace cable would connect to China from there by an overland route through Pakistan.
HMN Tech has also laid a barely shorter cable of 14,530km connecting South Africa and the United Kingdom, with a dozen landing points along the west coast of Africa.
Authorities regard the company as a national champion, although the company, like its forebear parent, asserts its independence at every turn.
To this Bystander, this is shaping up to mirror the contest over 5G networks, with HMN Tech and the Chinese telcos squeezed out of undersea communications cables with landing points in the advanced economies where the United States and its allies hold sway, but growing their market share in the Global South where their lower prices and political and financing support from Beijing will prove attractive.
If there is a difference, it is that Washington and its allies can offer a realistic alternative to China in both the installation and operation of cables in a way it cannot with 5G networks.
RESTRICTIONS ON INTERNATIONAL travel and China’s place in the vanguard of global economic recovery is accelerating the recasting of the luxury goods industry. Unable to travel freely to the world’s shopping malls, where most Chinese spending on luxury brands occurred, Chinese consumers are buying their favoured luxury brands at home. The industry is expanding its sales channels in the country in response.
An early sign of this was a decision by the Paris fashion house Louis Vuitton to eschew a virtual fashion show in Paris to present its men’s spring/summer 2021 collection for a physical event in Shanghai. Since then, several fashion events and runway shows previously held in Europe and the United States have been staged in China. New stores, pop-ups physical and digital, and other e-commerce channels for Chinese consumers have followed.
Marketing campaigns are being built around events like the Qixi Festival. Those, though, can put foreign luxury brands on cultural thin ice. Balenciaga and Dolce & Gabbana were two who felt it cracking under them this year.
Doubling the challenge, the market’s growth is being driven by Millennial and, particularly in digital, Gen Z consumers, two demographic cohorts with distinct characteristics.
Unlike elsewhere, most high-end stores in China have been open in the second half of the year as the country bought its Covid-19 outbreak under control. Brands like Tiffany and Burberry have reported significant recoveries in their sales in China even while their other markets shrink.
Luxury goods sales in China will rise by 48% this year to 346 billion yuan ($52.9 billion), according to a joint estimate by the consultancy Bain & Co. and Alibaba’s TMall shopping platform, a leading conduit for foreign luxury retailers entering the Chinese market. That would near double China’s share of the global luxury goods market to 20%. (The chart above is reproduced from the Bain/TMall report.)
However, luxury good purchases by Chinese overall are forecast to fall by 35% this year compared to 2019, according to the Bain/TMall report, contributing to a 23% contraction in the global luxury market and emphasising the impact of Covid-19 induced closings of international borders.
The question is how permanent the changes will prove. Luxury groups’ focus on the world’s second-largest economy and the accelerated shift to more digital retailing will likely prove lasting. The luxury brands also probably have at least a year before their other main markets are operating with a semblance of pre-pandemic normality and international travel and tourism are reestablished.
The wild card is what opportunities the recast China luxury market will create for domestic producers and whether those will help them go in the opposite direction and achieve that elusive status of a global luxury brand.
REPATRIATING US MULTINATIONALS’ supply chains from China is a nagging obsession for US President Donald Trump. On Monday, he returned to the theme, holding out the prospect of tax credits for US companies that do so, and threatening the denial of government procurement contracts to those who do not. However, China’ anchoring of global supply chains will not be slipped easily or quickly.
Governments in all the advanced economies are now talking about the need for their home companies to diversify or repatriate their supply chains (different things, though conflated in the political discourse). The coronavirus pandemic has revealed their dependence on China for healthcare products and pharmaceutical supplies. However, China’s centrality to global manufacturing across a range of industries from vehicle-making to consumer electronics has been hiding in plain sight for a decade.
China has been the world’s leading manufacturing nation since dislodging the United States from that position in 2010. Accounting for 28.4% of global manufacturing output, it is now more than ten percentage points ahead of the United States, according to the United Nations statisticians looking at the 2018 data, the latest full set available.
The United States is leading discussions with regional allies including Australia, Japan, South Korea, Vietnam and India about co-ordinating incentives for Western multinationals to lessen their value-chain dependence on China. This Bystander does not expect those discussions to go very far, mainly because supply-chain reconfiguration is primarily a business, not a political decision.
Supply-chain ecosystems
Nor is it a decision companies take casually. Manufacturing is long beyond the point where the lowest wages determine the place of production. Building supply chains is arduous. It takes time to find the suppliers, sub-suppliers and sub-sub suppliers who can be trusted to deliver with the quality and reliability at the scale that a multinational requires. Once assembled, such a network of relationships is not cast aside lightly.
Beyond the production chain is an ecosystem of hard and soft infrastructure that has to be in place to make the shipping and logistics work: seaports, airports, roads, railways and storage facilities, and trained staff to operate them efficiently and continuously both inbound and outbound.
Supply chain managers also need to be sure that there is a qualified labour force of adequate size and quality to tap into. Legal, regulatory and administrative regimes also need to exist that are supportive of international business, can ensure that contracts are enforced and can provide the transparency needed for monitoring compliance with international standards in areas like child and forced labour.
Places like Thailand, Indonesia, Vietnam and the Philippines all have some of that and are trying to create more. Yet even collectively, they do not have them on the scale that exists in China, let alone China’s track record in process engineering and innovation.
Small-scale shifts
Those are all reasons that, for all the talk of multinationals moving their operations out of China, the evidence remains anecdotal or small scale. That is not to say that some low-end production has not shifted from China. Even Chinese companies have been outsourcing to regional neighbours.
Nor does it mean that every time a multinational makes a new investment in its production that it will go to China by default. Foxconn, one of the big technology hardware contract manufacturers for multinationals like Apple, is adding capacity in Vietnam and India as well as at home in Taiwan. However, it says it still expects the share of its output produced in China not to fall below 70%. It is currently 80%.
Such decisions are driven more by long-term trends that were in place long before the current trade and technology war between Washington and Beijing and the Covid-19 pandemic broke out.
Changing trade
Changing patterns of global trade, particularly the rise of South-South trade relative to North-South trade, have driven the creation of regional supply chains, often around regional trading blocks. All trade routes no longer lead only to the United States or Europe. These regional supply chains service the markets that have emerged in emerging economies the likes of India, Brazil and most of all, China. It is in East and Southeast Asia that the rise of South-South trade has been most pronounced.
Surveys of US and European multinationals operating in China show scant indication of downsizing of production in China. These firms still see the domestic Chinese market to be rich with opportunity, so they want to produce close to market. All the signs are that when China’s next five-year plan is announced, it will emphasise import substitution and the securing of domestic supply chains. This will make the Chinese market and the necessity of producing inside it, of yet greater importance to multinationals.
Regional resilience
Yes, multinationals will do the same in other regional markets, albeit it on a lesser scale. Yes, they will take the reputational brownie points for reducing their carbon footprints through shorter supply chains. And, yes, they will take some of their home and other governments’ bribes to increase the resilience of their global supply chains by building in more redundancy elsewhere than in China.
Japan’s inclusion in its pandemic stimulus in April of 248.6 billion yen (2.3 billion dollars) for Japanese businesses to evaluate their value chains, supports its existing ‘China +1’ policy to encourage production diversification back home or to ASEAN. Beijing responded by reminding Japanese companies in China that it remains a critical market for them and that relocating operations would be expensive and disruptive. That is true for all multinationals.
More blatantly, in March, India offered electronics and pharmaceutical manufacturers a payment equivalent to 4-6% of their incremental sales over the next five years if they switch production from China. Some two dozen companies involved in making mobile phones, including Foxconn and Samsung, have expressed interest, although unpicking what is de novo investment and what is moving from China may prove difficult. Nonetheless, India is considering expanding the programme to the auto, textiles and foot processing sectors.
In the longer-term, technological change, including the application of big data and blockchain technologies to streamline value-chain management, automation to reduce costs, and 3-D printing to allow production at or near the point of sale, may change multinationals’ calculations again. The direst forecast of trade and technology decoupling of the world’s two largest economies may come true, prompting the need for parallel manufacturing worlds with standards and supply chains to match. Even then, China’s sphere would likely be economically larger. But for now, little production capacity will move out of China, even if more of the output stays there.
AS A FOOTNOTE to our earlier observations of the impact of the coronavirus outbreak on supply chains, we read with interest a report in the Financial Times about how one carmaker, Jaguar Land Rover, has been carrying parts out of China by hand in suitcases.
What caught this Bystander’s eye was that the component in the most immediate critical short supply for the company was key fobs of all things. But then, if you cannot get into the vehicle in the first place, it probably does not matter what else is missing.
Joking aside, carmakers from Fiat Chrysler to Volvo are now warning that parts shortages because of disruption to their supply chains in China could force a suspension to production in their plants around the world, in perhaps as soon as a couple of weeks.
China Bystander 