#731 – Companies begin to rethink manufacturing in China

Posted on | The Agurban

We generally try to stay away from most things political. However, when something as important as our country’s manufacturing base is involved, we feel that is information worth sharing. Even if a few of the jobs from China come back to the United States, it is a win for everyone in manufacturing. Following is a recent article, in part, that looks at this movement of jobs from China.

Companies begin to rethink manufacturing in China
New York Times News Service, Keith Bradsher, April 7, 2019

Whatever deal Washington and Beijing reach over the trade war, President Donald Trump has scored a big victory: Companies are rethinking their reliance on China.

…spurred by tariffs and trade tensions, global companies are beginning to shift their supply chains away from China, just as some Trump administration officials had wanted.

The move, known as decoupling, is a major goal of those who believe the world has grown far too dependent on China as a manufacturing giant. As Beijing builds up its military and extends its geopolitical influence, some officials fear that America’s dependence on Chinese factories makes it strategically vulnerable.

Companies in a number of industries are reducing their exposure to China. GoPro, the mobile camera maker, and Universal Electronics, which makes sensors and remote controls, are shifting some work to Mexico. Hasbro is moving its toy-making to the United States, Mexico, Vietnam and India. Aten International, a Taiwanese computer equipment company, brought work back to Taiwan. Danfoss, a Danish conglomerate, is changing the production of heating and hydraulic equipment to the United States.

Still, chief executives say the trade war has prompted a fundamental reassessment of China as the dominant place to make things. Even Chinese companies are expanding overseas, although they have most of their production in China.

“China was the factory of the world,” said Song Zhiping, the Communist Party chief at the China National Building Materials Group, a state-owned giant.

… China dominates the market for items like solar panels and has emerged as the world’s largest producer of cars, car parts and many other sophisticated products. It plans to build jetliners, advanced computer chips, electric cars and other goods of the future.

Any deal is likely to leave in place new American tariffs on cars, aircraft parts, equipment for nuclear power plants and other items that administration officials see as essential for economic and security reasons. But more broadly, the trade hawks hope companies in other industries will also find friendlier countries in which to do business.

China emerged as a manufacturing powerhouse over the past two decades. The workforce was low cost and relatively skilled. The Communist Party prevented the emergence of independent labor unions. Subcontractors abounded, meaning companies could strongly negotiate for lower supply costs. China built an extensive network of highways and rail lines. It has a vast and growing local customer base, meaning companies don’t have to go far to sell their products.

Businesses flocked there. China accounted for one-quarter of the world’s manufacturing by value last year, up from 8 percent in 2000, according to the United Nations Industrial Development Organization.

The value created in China by manufacturing last year was bigger than in the United States, Germany and South Korea combined.

But wages and other costs in China have been rising for years. A growing number of businesses complain that Chinese officials too often favor local competitors or don’t do enough to stop intellectual property theft.

Decoupling efforts appear to be in their early stages. A broad survey by UBS of chief financial officers at export-oriented manufacturers in China late last year found that a third had moved at least some production out of China in 2018. Another third intended to do so this year. The typical company was moving the production for about 30 percent of its exports, UBS found.

Companies want to depend less on one place, which means looking for an alternative to China, Bill Winters, the chief executive of Standard Chartered Bank, said at the World Economic Forum in Davos, Switzerland, this year.

Countries seeking to displace China have begun pointing out that exports from their countries are less likely to face tariffs.

For companies with operations in China, “the trade war between the United States and China creates a new uncertainty,” Airlangga Hartarto, Indonesia’s minister of industry, said in an interview in Davos.

The ability to diversify depends on the industry. Some auto parts companies have run their U.S. factories more hours each day to avoid tariffs on Chinese-made goods, said Razat Gaurav, the chief executive of LLamasoft, a supply chain management company in Ann Arbor, Michigan.

By contrast, he said, manufacturers of smartphones and smartphone components — which have generally not been hit by Trump’s tariffs — have found few places to move work because China dominates that supply chain. Still, some in that industry are shifting, too, such as Sony’s closure of a Beijing smartphone factory last month after expanding production in Thailand.

For now, companies are looking for alternatives. Steve Madden, the shoe company, is moving production to Cambodia. Hasbro, the world’s leading toymaker, has a goal for the end of next year “to be 60 percent out of China,” by shifting production to the United States and elsewhere, Brian Goldner, the company’s chairman and chief executive, said in a recent conference call.