Companies Are Leaving China, It Doesn’t Mean What You Think

Here’s a popular story: After decades of outsourcing to China, many companies are having second thoughts. Trade wars with the United States, political interference from the Communist Party and the threat of war over Taiwan are making China a riskier place to do business, and companies are looking abroad.

AirPods maker Goertek is expanding its facilities in Vietnam and considering a move to India. iPhone-maker Foxconn is reportedly planning a $700 million factory in India. Volvo has committed to a new factory in Slovakia. BYD Electronic, which builds iPads in China, is opening a factory in Vietnam.

This is meant to be a story about Chinese decline. The symptom of US commercial pressure and Communist Party error.

But, is that the right conclusion to draw? Airpod maker Goertek is a Chinese company. Billionaire founder Jiang Bin was elected to China’s National People Congress last week. Volvo is owned by Chinese automaker Geely. BYD is listed on the Hong Kong stock exchange. What does it mean for Chinese power if Chinese companies are part of the exodus?

A few thoughts:

  • It (partly) reflects the success of Chinese development: Factories are moving offshore for the same reason they left Britain’s north or the US rust belt, the workers are well paid. And Chinese workers are well paid because they’re rather good at what they do. This isn’t new. Back in 2010, rising wages in coastal provinces had companies moving inland looking for cheaper labour.

    The days of low-cost manufacturing in China are probably numbered. The number of workers employed in Chinese industry peaked in 2012. “Made in China”, just like “Made in Japan” before it, is shedding a reputation for poorly crafted, cheap goods. In its place: cars, bullet trains, mobile phones. China is now the world’s largest automaker, a notoriously difficult technology to master (when did you last see a Proton?).

    So companies are leaving China, in part, because it is wealthier, more educated and more productive. The exodus is a symptom of Chinese strength. By joining the emigration, Chinese companies prove themselves globally competitive businesses. Apple still works with Goertek, it just wants the AirPods package to say “Made in Vietnam”.

    I don’t want to overstate the case. Clearly, there are companies leaving China to avoid technology theft, harsh rules or geopolitics. And many companies aren’t Chinese. Foxconn is Taiwanese. Samsung, which is cutting back it’s China footprint too, is South Korean.
  • Could it birth a new type of firm? A Chinese company building widgets for an American client across Shenzhen, Chengdu and Zhengzhou has different priorities to one building widgets in India, Vietnam and Cambodia. Networks of Chinese manufacturing plants across south and east Asia—what the Economist is calling Altasia—could create a constituency within China that is pro-China, pro-business and pro-trade. It’s a vision for the region quite at odds with the cold-war-decoupling-trade-blocks one.

    It’s also why I find the Altasia v China binary from yesterday’s otherwise excellent Economist article from yesterday insufficient. If Altasia does develop, then Chinese companies will be part of it.
  • The ambiguous impact of commercial pressure: Apple is worried worsening US-China relations put it’s factories in China at risk. Apple asks Goertek to open a factory in India. Goertek makes AirPods in India and exports them to the US. Is this a success for the US? In one sense, yes. If China invades Taiwan, the AirPods factory in India continues as normal.

    But there’s also a sense where the US attempt to stymie China’s economic power has failed. Goertek is making money. Some of that money is paid in Chinese taxes. China spends that money on missiles or advanced semiconductor plants, which the US would rather it didn’t.

There’s lots more on this to discuss!

Protests in India and the costs of modernisation

Some of the largest protests in history are taking place in India right now. Thousands upon thousands of farmers have surrounded Delhi and are settling into large makeshift camps in what looks likely to be a protracted struggle.

The issue in question is agricultural laws. India’s agricultural sector is massive and employs just short of half the population. Much of this is concentrated in smallholdings which average just under 3 acres in size.

Today, when farmers want to sell their produce, they must do so in a special wholesale market. Buyers are often government controlled, or operate with a floor under prices. The new laws would allow any private actor with a license to buy agricultural products at market prices, allow farmers to enter into long-term supply contracts, and allow private actors to store commodities, a privilege only granted to government regulated wholesalers today.

Most economists see the reforms as non-controversial common sense; long overdue reforms to India’s highly regulated economy. Farmers are concerned it heralds the end of the various price supports and subsidies they receive, leading to lower prices for their products, and small farms getting hoovered up by large corporations.

The protests intersect uncomfortably with two other recent trends in India :

  • Inequality – India is fast becoming one of the most unequal places on earth, undoubtedly to be made worse by Covid. While these reforms are likely to be beneficial in the long-term, the short-term dislocations could be severe and may increase poverty.
  • Authoritarianism – The laws were passed in a rush, and oppposition parties walked out after some of their members were suspended. The authorities have responded heavy-handedly to the protests, with police and paramilitaries units attacking protestors. Pro-government media has labelled the protests “anti-Indian.” Given how important the farm constituency is to Modi, there will likely be some concessions, but it does point to worrying patterns of law-making and enforcement.

Going even one step further, the whole issue touches on the difficult question of modernization. One of the trademarks of industrial modernization is the transfer of labour from agriculture to industry/services, a process usually accompanied by urbanization. In Europe, this process occurred over centuries, which is good because it comes with significant adjustment costs. People are forced to uproot their lives and move hundreds of miles to unfamiliar cities for work that is often low-skill and low-pay.

If you value modern industrial society (as I do), then the benefits of this process speak for themselves. Unfortunately, the benefits accrue collectively, and may take a generation or two to arrive in full. While I am grateful my ancestors left rural Ireland to start again in Australia, I’m very glad I don’t have to.

That process has been repeated again, to various degrees of completeness and much more rapidly, in parts of Africa, Asia and Latin America since WW2. The process has produced many miracles, like South Korea catapulting to high-income status in a generation, or Japan rebuilding itself into the world’s second largest economy after being devastated by war. China has lifted hundreds of millions of people out of poverty in a few short decades.

A process this transformative is full of political tensions and problems. Even in countries like China or South Korea, where development was managed well, inequality remains a massive problem. Elsewhere, overheated urbanisation, commodity dependence, predatory international actors, and sheer bad luck have left many countries stalled on the escalator of development.

It is on this long escalator of industrialisation and ‘modernisation’ that we should situate India’s situation today. As the following graphs show, the process is very much incomplete.

India faces several unique challenges. Unlike the Asian tigers or Southern Europe, it has a huge population spread out over an enormous landmass. Its people are ethnically and religiously diverse. Unlike China, it boasts a sprawling democracy (the world’s largest), which can make change or decisive action slower. It must also grapple with hundreds of years of direct British colonization.

While these reforms are likely to be very beneficial in the long-run, that is not likely to matter much to farmers who will then be long dead. It will be a question of how the government can smooth the transition, while still ensuring it happens.