As Trump calls on manufacturers to return to the US, what are the prospects for China’s industrial strategy?
Where next for manufacturing? The geographic location of factories and production has become one of the more hotly debated issues in recent months.
At an executive meeting of the Chinese State Council, chaired by Premier Li Keqiang on Dec 28, a guideline was issued to encourage more foreign investment in high-end manufacturing in China.
This would underpin the “Made in China 2025” strategy for the country to become a global leader in such areas as rail transport, robotics, motorcycles and industrial design within the next decade.
Meanwhile, US President Donald Trump has called upon US manufacturers to return their production from China and elsewhere to the United States to create jobs there.
Ford has already canceled plans for a $1.6 billion plant in Mexico and will build one in the US instead.
Arguably, with labor costs (once the primary driver for offshoring) now a smaller component of overall production costs because of increased automation, manufacturing is becoming increasingly mobile and can be located in developed countries with higher labor costs.
In October, Fuyao, the Chinese autoglass maker, opened the world’s biggest glass plant in Moraine, Ohio, where labor costs are eight times higher than in China.
It wants to get a larger slice of the US market and some believe that this might be part of a trend of Chinese manufacturers playing a role in Trump’s so-called jobs revolution.
The Chinese government wants its own companies to invest in manufacturing in China, partly to stem the flow of capital out of the country which has a weakening effect on the country’s currency.
The State-Owned Assets Supervision and Administration Commission issued a notice in January saying it was to monitor overseas investment by state-owned companies in certain sectors.
Peter Williamson, professor of international management at Cambridge University’s Judge Business School, says China is aiming to build an advanced high-end manufacturing sector which will be a core platform for the overall economy.
“It knows full well it can’t build a high-income economy based on low-cost, labor-intensive manufacturing,” he says
“It needs to build a more high-value industrial base, some of which it will be able to do itself, but some of it will rely on investment by foreign companies.”
Williamson, a leading expert on Chinese innovation, believes China will have little difficulty attracting such investment.
“One of the advantages of the Chinese market is that it is the fastest growing, and in many cases the biggest, market in the world. If you take a company like Apple, almost a quarter of its profits and almost all the growth in its volume came from China.”
Eric Thun, the Peter Moores associate professor in Chinese Business Studies at Oxford University’s Said Business School, says that despite progress there are still challenges for China in upgrading its industry.
He cites the semi conductor industry, which receives large government subsidies but is still heavily reliant on imported chips – in particular from the US – for its high-end gadgets.
“There are still limitations as to what Chinese semiconductor companies can do,” says Thun.
The American academic, who is an authority on the China automotive sector, says there have been challenges in the past in opening up these new sectors for investment.
“Sometimes it has worked and sometimes it hasn’t. There have been these concerns in the international business community over the past couple of years about uncertainty,” he says.
“There is frustration that the government wants to loosen things up for investment in some areas but makes it difficult for everyone else in others.”
Whether the new US administration succeeds in persuading more of its native companies to base their operations back in their homeland remains to be seen.
There is, however, already an established trend for companies moving some of their activities back.
According to research by the non-profit organization Reshoring Initiative, some 249,000 jobs were moved back in the five years up to the end of 2015. This was more than the 220,000 that left between 2000 to 2003, seen as the peak period for offshoring globally.
He Weiwen, vice-president and senior fellow of the Center for China and Globalization, China’s leading independent think tank, believes there is a limit on what can be moved back.
He points to US Department of Commerce statistics, which show that the value added per employee for US multinational overseas operations is 29 percent higher than that within the US.
“The only way to bridge that would be for Trump to cut the corporation tax rate from 35 to 20 percent and then impose a 10 percent tariff on goods of these companies coming back into the US. That would still not account for the higher medicare and legal costs involved in employing people in the US,” he says.
“All this, however, would be a major violation of World Trade Organization rules.”
He, a former economic and commercial counselor at the Chinese Consulate General in New York and San Francisco, believes it will be a challenge to get US companies to invest more in Chinese manufacturing.
“In my exchanges with American businesses in China, they are not concerned with manufacturing, but getting more access to services, not only financial services like banking and insurance but also legal consulting, leisure and medical services.”
Williamson at Cambridge, who was speaking from Switzerland after attending the Davos forum, says the problem with some of the current debate is that it is couched in terms of manufacturing still being vertically integrated and companies doing everything in one location.
He says that model began to die out in the 1990s – driven to a large degree by China – and now the whole production system is built on global supply chains.
“When Donald Trump talks about bringing manufacturing back, what exactly is he talking about? The real question is what bits of this complex global supply chain can be moved and the economics are going to be different depending on which part of the chain you are taking about because some bits are capital-intensive and some labor-intensive.”
“It would be quite some paradox if the bit that gets moved back to the US is the final assembly operation.”
Fuyao was not the first Chinese manufacturer to set up a production facility in the US.
Wanxiang Group, based in Hangzhou, has made a series of acquisitions in the US, including buying bankrupt A123 Systems, a battery maker, for $256 million.
Edward Tse, chairman and founder of Gao Feng Advisory, the management consultancy, says a pattern is emerging of Chinese companies doing relatively low-end manufacturing in the US and buying up high-end facilities in Europe.
“We have had a lot of clients come to us looking to make acquisitions in the US, particularly in automotive parts, consumer retail and areas like building materials,” he says.
“When it comes to areas like high-end manufacturing, they are looking to make acquisitions in Germany, the UK and places like Switzerland and Austria.”
Tse, author of The China Strategy, says this separation has emerged mainly because of US resistance to Chinese technology companies like telecommunications giant Huawei making investments in the US.
“What you are seeing instead is Chinese money in start-up investments in Silicon Valley, Seattle and on the east coast around Boston and Cambridge. They are often part American and part Chinese ventures and because they are small, they are subject to much less scrutiny.”
Jeffrey Towson, professor of investment at Peking University’s Guanghua School of Management, says even if there is a major wave of Chinese manufacturing investments in the Rust Belt or major reshoring by US companies, it is unlikely to create the jobs that Trump craves.
“The biggest impact on manufacturing jobs in the US has not been offshoring to Asia or China but the advance of technology,” he says.
“It is wiping out jobs far faster than offshoring ever did. It is going to be an increasing phenomenon and is not a trend that will reverse itself.”
Thun at Said Business School believes China is following the right strategy in trying to upgrade its manufacturing by partnering with foreign firms.
“This has so far involved acquiring German firms. There is some concern in Germany about losing their crown jewels, particularly the family-owned mittelstadt (small to medium-sized) companies which are often willing to sell out.”
“For China to be successful in high-end manufacturing, they need to acquire some of these German institutional and educational structures that promote this type of precision engineering. If you can’t beat them at their own game, you can always acquire them,” he says.
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