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Big tech companies moving production out of China over geostrategic concerns

Apple. Amazon. Google. Samsung. Volvo. They’re just some of the big names shutting up shop and moving out of China.

“A weakening economy. Covid-related lockdowns. Reciprocal trade sanctions. Possible conflict over Taiwan. There are many reasons for companies to curb China operations,” says American Enterprise Institute (AEI) think-tank senior fellow Derek Scissors.

Nothing about doing business with China has ever been easy.

Accessing its cheap workforce and infrastructure has always come with an indirect cost.

Human rights violations. Intellectual property theft. Business restrictions. Market manipulation. Compulsory Communist Party boardroom involvement.

Tech companies have been moving out of China due to the failing economy.

A recent political risk survey conducted by Willis Towers Watson found that 95 percent of multinational corporations are concerned about China. That’s up from 62 percent in 2020.

“Overwhelming majorities of respondents believed that trends towards geostrategic competition and economic decoupling between China and the West would intensify in the future,” the report reads.

“A majority of respondents expressed concern that private companies would be targeted in international diplomatic disputes.”

And it’s this risk of becoming a political plaything – just as Europe’s gas economy has been manipulated by Moscow – compelling corporations to move.

Apple is switching some of its iPhone production to India. Its AirPods, Apple Watch and iPads are going to Vietnam.

Amazon is now getting its FireTV devices from India. And it recently closed its Chinese Kindle facility.

Samsung led the charge in 2019 by shifting its manufacturing to Vietnam. Now Microsoft and Google are following suit with their Xbox Pixel phone production.

Political playthings

Chairman Xi this weekend called on Communist Party members to embrace their “historical mission” and prepare for “great struggles” ahead.

“Our party must be united to lead the people to face major challenges effectively, defend against major risks, overcome major barriers and resolve major contradictions. We must press on with great struggles under new historical characteristics,” he wrote in the CCP’s journal Qiushi. “We will not walk back to the old path of isolation and dogmatism, nor shall we ever take the evil path of changing flags (revolution).”

It’s precisely this kind of belligerent but vague rhetoric that has businesses nervous.

In August, China accused the Netherland-based automotive manufacturer Stellantis (maker of Peugeot, Citroen, Crysler, Opel etc.) of a “lack of respect for customers in the Chinese automobile market”.

It was a veiled call to boycott the company’s products after it decided to close a Chinese plant because of excessive “meddling” by Communist Party officials.

“Firms exporting from China are already shifting operations on a small scale — Xi’s aggressiveness overseas and insistence on near-absolute control make commercial risk too high to ignore,” says AEI’s Scissors.

“Exporters to China have long faced barriers such as protection of state enterprises from competition. Xi Jinping’s desire for less dependence plus global tensions could see barriers rise further.”

Part of it is the US-China trade war initiated under President Donald Trump. Tariffs are making Chinese imports unattractive. Technology transfer restrictions are choking development.

That's up from 62 per cent in 2020.
A recent survey conducted found that 95 per cent of multinational corporations are concerned about China.

Then there’s the productivity loss brought on by Chairman Xi Jinping’s broad-sweeping and draconian Covid-19 lockdowns. And the widespread power problems brought on by flooded coal mines and drought-stricken hydro-electric plants.

It’s just business

“China’s slowdown is far more than an arithmetic event,” former Morgan Stanley Asia chairman Stephen Roach said.

“Three powerful forces are also at work – a structural transformation of the economy, payback for past excesses and a profound shift in the ideological underpinnings of Chinese governance.”

None are proving popular to international players.

And local entrepreneurs have no choice but to toe the Party line – or be disappeared.

A recent European Union Chamber of Commerce in China survey found that 23 per cent of respondents said they were considering moving out of the country. In addition, more than 50 per cent stated business has become “more politicised” than it had been.

“The only thing predictable about China today is its unpredictability, and that is poisonous for the business environment,” says European Chamber vice president Bettina Schoen-Behanzin. “Increasing numbers of European businesses are putting China investments on hold and re-evaluating their positions in the market as they wait to see how long this uncertainty will continue, and many are looking towards other destinations for future projects.”

Meanwhile, business in India, Vietnam, Malaysia and other Southeast Asian countries is booming.

And one of the less stated reasons is labor costs.

Apple’s Foxconn factory in Vietnam wants to fill 5000 new jobs urgently. It’s offering $300 a month for an entry-level position. That’s against the $650 paid for the same job in China.

India’s workforce is similarly poorly-paid.

“Companies will continue to run their operations in the locations that make the most financial sense because they’re accountable to their shareholders, not former workers or the wider public,” says AEI fellow Elisabeth Braw.

“And while a few CEOs may feel a moral obligation to their companies’ home countries, such sentiments won’t come between them and their quarterly results.”

State of the economy

China’s economy was booming. Beijing was opening up to the world. It was embracing global markets, trade deals and regulations. It recorded 10 percent annual growth between 1980 and 2010.

“Then came Xi,” says Roach.

“Initially, there was hope his “Third Plenum Reforms” of 2013 would usher in a new era of strong economic performance. But the new ideological campaigns carried out under the general rubric of Xi Jinping Thought, including a regulatory clampdown on once-dynamic internet platform companies and associated restrictions on online gaming, music and private tutoring … have all but dashed those hopes.”

He says Xi Jinping Thought is all about political power, central control and ideological constraints.

Australian wine, coal, beef, barley, coal, seafood, cotton and other exports are victims of this ideology. As are many other international businesses, such as Sweden’s Ericsson, Taiwan’s pineapples and the entire economy of Lithuania.

“China doesn’t play fair,” says Braw. “Measures often aren’t officially announced or given a legal standing, just enforced slowdowns at ports or pressure on consumers or suppliers to break ties”.

But China also suffers from these political maneuvers.

Its coal supplies, for example, have become erratic and expensive.

“With the upcoming 20th Party Congress likely to usher in an unprecedented third five-year term for Xi, there is good reason to believe China’s growth sacrifice has only just begun,” adds Roach.

On Friday, China’s Premier Li Keqiang told local CCP branches that China had an “extremely unusual” year and faced “complex and difficult domestic and international situations”.

“Our economy right now is facing many challenges and difficulties. Time waits for no man. We must focus all efforts on implementing measures to stabilize the economy. We still have the confidence and ability to keep our economic growth within the accepted range.”

Meanwhile, The World Bank cut its growth outlook for China to 2.8 for the year, down from 5.0 percent.

“If correct, this would be the first time China’s growth has lagged behind the rest of the Asia-Pacific region in more than three decades,” says former The Economist editor Bill Emmott.

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