In view of the trade conflict between China and the USA, which has been going on for more than a year now, the question arises as to the reaction of the companies affected by the duties. In one of his tweets several days ago, Trump called for American companies to look for alternatives to the Chinese market and, above all, to relocate their production “back home”.
Tech companies in particular, however, seem to be encouraged by another of Trumps tweets to leave the Chinese market. Trump twittered that he would now impose further punitive duties on laptops, mobile phones and toys from the beginning of September. Despite the postponement of some duties until mid-December to relieve the Christmas business, many American companies are confronted with rising costs and want to plan early.
According to the Nikkei Asian Review, more than 50 companies have announced their withdrawal from the Chinese market, including Apple, Nintendo and Dell, numerous Japanese companies as well as companies from other countries.
The consulting firm QIMA received a similar result, whose half-year survey showed that 80% of the US companies surveyed have already started looking for new locations or are planning to do so in the near future. This was also the case for 67% of European companies surveyed. It doesn’t seem surprising, as ¾ of US companies surveyed said they were directly affected by the trade conflict tariffs. Rising costs have the biggest (negative) impact on business, with EU companies less affected by the trade war.
A survey by the American Chamber of Commerce in China also confirms the figures. In a May 2019 survey, around 40% of the 250 companies surveyed said they “were considering or had planned to relocate production outside China”.
However, most companies are not completely withdrawing from China, but only relocating individual business units. For example, Apple asked its largest suppliers to relocate 15-30% of their production outside China. This is mainly due to a strategic decision called “In China, for China. The Chinese consumer market offers great potential and companies cannot afford to lose direct access. For example, more thought is being given to dividing production and outsourcing goods for the US market to other countries, but continuing to produce in China for the domestic market.
Another trick for companies is to ship components for products manufactured in China to another country and “substantially transform” them there. The end product may now be labelled with a new country of origin and can avoid the corresponding customs duties. The advantage is that only supply chains have to be extended, but no locations have to be abandoned. Nevertheless, it is not only the trade conflict that is responsible for the relocation of companies. China also loses the status of the “workbench of the world” at its own request, so that many foreign, but also Chinese companies have to struggle with rising wage costs and competitive pressure.
But where do companies relocate their production facilities? At least not to the USA, as Trump wants. Companies mainly move to Southeast Asia, India and Taiwan. Vietnam, in particular, is benefiting greatly from current developments.
One area, however, should currently be looked at more closely in the context of the trade conflict. From 2020, the social credit system in China will also apply to companies. A rating system is created using Big Data and AI technologies from the ongoing evaluation of various business areas. The reason for a poor rating and thus the reason for sanctions by the Chinese government are internal company procedures, but also the behaviour of suppliers and business partners, as well as board members and managers. Most of the data is freely available and therefore not directly sensitive. The way in which the individual data are brought together centrally, retrievable and evaluated with an unclear algorithm leads to data protection concerns. In addition, this system can significantly restrict market access, which could be particularly relevant in view of an escalating US and Chinese trade dispute.
Even though China is becoming less attractive as a production location for developed countries, it is increasingly attracting companies from Asian, Eastern European and emerging countries from the Middle East to China. Western companies are also continuing to set up production facilities and expand cooperation. Daimler, for example, announced that it would soon have Mercedes trucks manufactured in China as well. Other US companies, such as Tiffany and Starbucks, are following consumers to China and expanding their dealership branches. In addition, the Chinese government is trying to keep foreign companies and offered Tesla apparently preferential building land for its new production plant, as well as easier access to cheap loans. Further changes and facilitations for foreign companies will result from the ongoing adjustments to the negative lists and the implementation of the new Foreign Investment Law from January 2020.
With information from: Bloomberg, China-Briefing, Nikkei Asian Review, Forbes, Fortune, QIMA, Austrian Federal Economic Chamber, CNBC