Yes, manufacturing really is leaving China – and authorities are scrambling to slow down the exodus

In November 2020, the American Chamber of Commerce in Shanghai (AmCham) released its annual China Business Report, which published the results of a survey of 346 of its members, highlighting findings that 71 percent of manufacturer respondents indicated “they will not shift production out of China” as evidence that foreign “[c]ompanies remain committed to the China market.” 

On January 28, 2021, Caixin, a popular online business news magazine in Beijing, published an op-ed penned by two prominent China business consultants who concluded that the “flight of manufacturing out of China is overblown.” They based the claim, in large part, on AmCham’s 2020 survey and asserted that “there is scant proof of any meaningful exodus out of the country.” The rest of the opinion was devoted to accentuating advantages in China’s “production factors in industries of the future”, which the authors praised as “unparalleled” in the global supply chain. 

But in January 2020, nearly a year prior to AmCham’s survey, The Economist published an article titled “Don’t be fooled by the trade deal between America and China: The planet’s biggest break-up is under way…”. The Economist noted that “the world’s most important relationship is at its most perilous juncture since before Richard Nixon and Mao Zedong re-established links five decades ago,” and that “[e]ach side is planning for a disengagement…”.

In September 2020, Prince Ghosh wrote in Forbes that “[a] mixture of longstanding issues…such as high tariffs, Covid-19 and increased geopolitical tensions have resulted in a mass exodus from Chinese manufacturing, and triggered the start of the downfall of the country’s manufacturing dominance.”

That same month, Johan Nylander, award-winning journalist based in Hong Kong, published his book, The Epic Split – Why ‘Made in China’ is going out of style. Nylander is convinced: “The data [on decoupling from China] is clear . . . Change is afoot . . .It’s not happening overnight, but it’s happening.”

So who’s right and who’s wrong about whether global supply chains are shifting away from China? One possible way to clear up the confusion is to examine who AmCham Shanghai polled. In the AmCham survey, only 200 of 346 members who responded were manufacturers, and of those, 141 – or 71 percent – said they had no plans to leave China. But the remaining 58 manufacturers – 29 percent – said they were moving some or all of production out. That amounts to nearly one-third of manufacturers polled by AmCham who were thinking about or already planning to exit China. Hardly insignificant. 

More consequential, however, is that AmCham’s entire survey population of 200 manufacturers is, likely, too skewed toward American businesses to be taken as a representative sample of China’s colossal manufacturing industry. While AmCham’s membership is not limited to Americans or American companies, a February 2021 membership guide said that 70 percent of its membership is comprised of US corporations.

According to the 2020 China Statistical Yearbook, an annual report published by the National Bureau of Statistics of China (NBS), the nation has over 300,000 manufacturing enterprises. Though NBS doesn’t distinguish them based on country of ownership, China’s Ministry of Commerce reported that, for the period of January – May 2018, “the top ten nations and regions with investment in China,” by greater to lesser amount of “actual input of foreign capital,” were Hong Kong, Singapore, Taiwan, South Korea, Japan, the US, the UK, Macao, the Netherlands and Germany, and the total FDI of all these “accounted for 95.2 percent of total actual use of foreign investment in the country.”

But recent news suggests manufacturers from the more heavily invested nations – like, Taiwan, South Korea, and Japan – are leaving China in droves, and, although authorities rarely publicly acknowledge an exodus, they are striving to hold on to these foreign direct investments. 

In January, the Financial Times released an astounding write-up on “[h]undreds of thousands of Taiwanese enterprises” who were leaving China due to “rising costs and trade tensions between Washington and Beijing.” According to FT analysts, the unexpected turn “reverses decades of investment” by Taiwanese firms. Last month, Delta Electronics, a major Taiwanese producer of electronic components for Apple and Tesla, told FT it planned to reduce its Chinese labor force “by 90 percent,” and that “even without the US-China conflict, China is no longer a good place for manufacturing.” Company executives cited growing wages and a high staff “turnover rate” as primary reasons.In December 2020, Asia Times said Japanese manufacturers, too, were “beat[ing] a path out of China” in a “[t]rend” that had accelerated after Tokyo gave incentives to encourage firms to leave. National security concerns about over-dependence on China in Japan’s supply chains had emerged during the coronavirus pandemic when production was disrupted by lockdowns and shortages. Billions of yen (JP¥) in subsidies have been set aside for Japanese firms who are willing to leave China for places, like, Bangladesh and South East Asia.

A June 2019 report from Nikkei Asian Review also revealed that “South Korean corporate giants . . . [were] moving production out of China” in a “Samsung-led exodus.” One source told Nikkei that the companies had “held out [that] long to avoid giving the Chinese government a bad impression, but …they [couldn’t] take it anymore.”

Finally, in February 2020, Bank of America announced the results of its survey of “equity analysts covering more than 3,000 companies globally,” which found that “[c]ompanies in two-thirds of global sectors in North America have either implemented or announced plans to pull at least a portion of their supply chains out of China, while companies in 50 percent of country-sectors in the Asia Pacific (ex-China) region [were] doing likewise.”

There are additional problems in relying on the AmCham survey as an indicator of trends in the global supply chain. In the annual report, as the organisation itself noted, over half of the companies it polled were “in China for China” – to produce goods for Chinese consumers and not those elsewhere. To avoid confusion, these companies should be removed from consideration, or at least clearly annotated, in any meaningful discussion about where the global supply chain is headed.

But a second, overriding factor, and something the authors of the Caixin op-ed failed to address, is that AmCham’s survey was conducted prior to the US total ban on Xinjiang cotton in response to forced labor allegations. On January 13, 2021, US Customs issued a “region-wide withhold-release order on products made by slave-labor in Xinjiang,” which sent the fashion industry racing to extricate its supply chains from cotton-growers in China’s western-most province. In February, the Washington Post reported that the ban had impacted “87 percent of China’s cotton crop” and had “splintered” global trade “almost overnight,” as US brands told textile manufacturers they wanted nothing to do with Chinese cotton.

In the same dispatch, WaPo highlighted a January 2021 corporate filing showing that Huafu Fashion, a Chinese cotton producer, alerted to a worrying cancellation of orders by American brands that “brought negative effects to the company.” In its statement to investors, the company said it lost tens of millions of dollars in revenue in 2020 from sanctions previously imposed on it by the US.

But David Uren, at the Australian Strategic Policy Institute, predicts that China’s massive display of outrage toward Swedish clothing brand H&M, for an old statement which made declarations against sourcing cotton from Xinjiang over forced labor concerns, will cause a “shift in the big apparel brands away from China, whether by choice or coercion…”. In late March, the company was “erased” from e-commerce and other Chinese internet platforms when social media users, egged on by the Chinese government, called for a boycott of its products.

Managing the ripple effects of production on its way out has been a particular concern for China’s central government who is stepping up efforts to woo firms back. Ever since South Korea’s Samsung closed its Smartphone factory in Huizhou in Guangdong Province in 2019, at least 60 percent of local businesses, including smaller ancillary factories, shops and restaurants, have also been forced to shutter. Samsung’s Huizhou plant had been operating since 1992. As the business boomed, so did the city. Jobs for the locals in the Samsung factory, residential buildings for its workers, restaurants, smaller factories built by local Chinese suppliers – all depended on the expansion of Samsung business. But they abruptly came to a halt when Samsung shut its plant.

The ripple effect was felt even in the neighboring town of Changan in Dongguan, to the west of Huizhou. A local factory in the town relied on big orders from Samsung, and faced severe losses after the shutdown leading to thousands of workers and executives who were either furloughed or had working hours reduced, depressing the local economy.

Knowing this, the Chinese government is working desperately to slow down the exodus of foreign manufacturers to mitigate its effects on China’s post-Covid-19 economic recovery, which has been beset by rising unemployment, especially among new graduates, and declining domestic demand. In December 2020, Asia Times revealed that “[a]n emerging exodus from China, in which more than 1,700 Japan-invested firms and manufacturers have pulled up stakes this year has worried Communist Party cadres in charge of cities with big clusters of such entities.” It cited newspaper reports that disclosed “officials in Guangdong, Jiangsu and Zhejiang [were] beseeching businesses from the Asian neighbor, [then] the third-largest source of foreign direct investment for China, not to pull out en masse.”

To retain Japanese firms, authorities have rolled out powerful incentives like tax cuts, mandates for local officials to buy Japanese cars, and offering up fiscal revenue to help one company build a new electric and hybrid vehicle plant. A professor of industrial economics told South China Morning Post that local government would “lose face” if Japanese companies left.

All things considered, overreliance on limited survey samples or anecdotal observations coming out of China, especially concerning something so politically sensitive for Chinese leaders, like a dramatic decline in the amount of FDI that has pillared the Chinese economy for years, is ill-advised. Foreign companies hesitate to announce relocation plans publicly, until they can be certain in managing the risks involved. It may be difficult to trust even anonymous surveys conducted by private business associations in China – since Beijing can legally order any entity to hand over additional identifying data under its new cybersecurity law. In-country executives might prefer to withhold sensitive information from their competitors. They may also fear retribution from Chinese authorities that could harm future business or result in the levying of punitive exit fees, the nationalisation of assets, and corporate ransoms.

But a more crucial element for global investors and businesses to take into account is how quickly, and dramatically, geopolitics can upset the status quo in international business and turn insight gathered from surveys and “boots on the ground” anecdotes obsolete. The post-Covid-19 era is volatile, and relationships between China and other countries are changing. To manage risk, stay on top of it by assessing trends that may impact your business from many angles using a sizeable variety of credible sources.

Finally, while Chinese state media denies or considerably downplays reports that foreign firms are leaving, the actions of Chinese officials belie such statements. The introduction of President Xi’s new “dual circulation” strategy – a plan to jump-start internal market forces to reduce the country’s dependence on foreign business and technology – is the clearest sign yet that China’s leaders take decoupling seriously. The policy was announced in 2020, after relations with the U.S., under the Trump administration, took a nosedive. As South China Morning Post explains, the changing “external environment” made “it unsustainable for China to continue relying on overseas demand to keep its vast manufacturing apparatus running.” Dual circulation was put forward as “a defensive approach by Beijing to prepare for the worst-case scenario…”. 

China, after all, is a place where booming megacities, like Shenzhen, were built-up over decades to support the manufacturing ecosystems of international trade. It has a great deal to lose from an exodus of foreign investors. In 2020, the trade war and coronavirus pandemic slowed Shenzhen’s capital inflows to a trickle. President Xi responded by making the city’s hi-tech sector the central focus of his self-reliance plans, calling for greater innovation that would be copied and pasted into other cities and special economic zones. For him, the question is not whether foreign manufacturers are quitting China, but if and how quickly China can readjust once they’re gone.

Shannon Brandao is an international business lawyer and the founder and editor in chief of China Boss News on Substack, and the China Boss newsfeed on LinkedIn