Globalization gained momentum in the 1990s, and then the Western public learned about a new economic concept – the transfer of business processes and services to other countries, or the so-called “offshoring”. Corporate executives gleefully welcomed the prospect of cheaper and less empowered labor, even when it was frowned upon in their own societies. China, with its well-trained workers and a growing middle class willing to buy Western goods, was the ideal combination of a center of production and a market.
For corporations, offshoring to China was a financial imperative, given that workers in American factories earned $20 an hour and were easily replaced by workers earning less than a dollar an hour. Many citizens of the US and Western European countries were outraged that their livelihoods were being taken away.
Today, however, Western companies are rethinking this model, trying to move their production to “friendly” countries, where they don’t need to worry about being “scorched” by geopolitical fires, writes “Foreign Policies” analysis.
Corporations will continue to conduct their operations in the places where there is the greatest financial benefit because they are accountable to their shareholders, not to their former workers or the general public. However, the situation with China is unlikely to remain the same, the specialized publication for foreign policy points out.
In a June survey by the European Union Chamber of Commerce in China, 23 percent of Western firms said they were considering relocating their operations, while 50 percent believed business in the country had become more politicized in the past year.
Today, “every company I speak to is committed to rethinking their (China-linked) supply chains,” Tony Danker, director general of the Confederation of British Industry, told the Financial Times. “They (companies) foresee that politicians will inevitably move towards a world of division with China,” he added.
The reason for this is Beijing’s zero covid policy. It affected supply chains and left factories closed. Pay levels in the Asian country, which have risen, are also a factor being watched by investors. Labor wages became more expensive, shrinking the pool of potential workers.
The growing confrontation between China and the West, and the maintenance of ties between the rulers in Beijing and the Kremlin, also worries businesses.
“An increasing number of European companies are suspending their investments in China and reassessing their positions in the market as they assess how long this uncertainty will last, and many of them are also looking at other destinations for their future projects,” said Bettina Schoen-Behanzin, Vice President of the EU Chamber of Commerce.
Against this background, the American company “Apple” (Apple) began to move production facilities from China to Vietnam, where the wireless headphones “AirPods Pro 2” (AirPods Pro 2) will probably be produced. It is also likely that the “smart” watches “Apple Watch” (Apple Watch) and notebook computers “MacBook” (MacBook) will be produced there.
A tech giant recently revealed that it plans to manufacture its new iPhone 14 smartphone model in India. Apple’s Taiwan-based supplier Foxconn has investigated the process of sourcing components from China and assembling the device at its plant around the southern Indian city of Chennai, Bloomberg reported.
Two years ago, the South Korean giant Samsung moved its Chinese production to Vietnam. Clothing and footwear companies such as Adidas also moved their production there. As of August 20, the South Asian country has more than 35,500 valid foreign investment projects, with a total value of more than 430 billion dollars, the Vietnam Information Agency (VIA) reported.
The Japanese automobile concern “Honda” (Honda) is considering the construction of a parallel supply chain outside China to reduce its dependence on the country where it currently carries out about 40 percent of its production, informs in “Sankei”.
Meanwhile, Mazda has announced that it is considering moving production out of China. The company earlier reported an operating loss of $115 million for the second quarter of the year due to production problems caused by the lockdowns in the Celestial Empire. In response, the company will build component inventories in Japan and seek new production outside of China.
At the end of July, a Chinese joint venture partner of the automotive group Stellantis accused it of “lack of respect for customers in the Chinese car market” after the company closed a factory in China due to the intervention of government officials.
A survey of political risk to international business conducted by the insurance consultant “Willis Towers Watson” (Willis Towers Watson) indicates that 95 percent of multinational companies are concerned about doing business in the Indo-Pacific region, and in particular – China. This is an increase of 62 percentage points from two years ago.
“The majority of respondents believe that trends toward geostrategic competition and economic division between China and the West will intensify,” entrepreneurs are concerned that private companies will be targeted in international diplomatic disputes, experts noted in the report.
Some companies with outsourced production or services in China are planning to relocate to countries such as Turkey, Serbia, India and Vietnam, while others are planning to spend a little more and go to countries traditionally allied with the West. “I see a lot of this happening, especially in electronics,” said Venkat Sumanthran, an expert on the Indian auto industry. According to him, Vietnam and India are subject to many new investments.
At a meeting in July dedicated to supply chains and organized by US Secretary of State Anthony Blinken and Commerce Secretary Gina Raimondo, not only European partners were invited, but also those from Australia, India, Indonesia, Japan, Singapore and South Korea. recalls “Foreign Policies”.
“It’s partly the old adage of eggs and baskets,” said Sam Wilkin, director of political risk analysis at Willis Towers Watson. “Recent events have reminded that too large exposures, regardless of which country, expose companies to the risk of large losses or even bankruptcy,” he concluded.