The recently announced move by sports video camera maker, GoPro to shift part of its manufacturing out of China within the next six months clearly won’t have much of an impact on the gigantic economy of China. It won’t be blip, in fact not even a fragment of blip, on the charts of China’s economic planning ministry.
But while small, it is clearly indicative of the impact the ongoing transpacific trade war between the US and China is having on foreign firms manufacturing in China. Being a well-known, ‘hot’ brand, the news may also carry some educational value for an American public not generally known for being well-versed in the generalities, never mind the nuances, of international trade.
GoPro is actually only the tiny tip of the very big iceberg that has seen a steady flow of companies migrating all or some of their production capabilities to other countries, quite often to neighbouring Southeast Asia.
The growing list of foreign firms moving supply chains away from China include toy company Hasbro, camera maker Olympus, shoe brands Deckers and Steve Madden, among numerous others. Enough that Beijing is surely concerned.
The key trifecta of global benefactors of this shift are Vietnam, Mexico and Serbia, with Southeast Asia’s Cambodia, Thailand, Indonesia, Malaysia and the Philippines also benefiting.
The trend is not new, however. Rising wages in recent years has already been fostering strategies of production diversification, as well as wholesale uprooting. What the tariff war has done is essentially give new impetus to the shifting of part or all of many firms production facilities.
Take for instance GoPro’s chief financial officer Brian McGee who specifically cited the need to “proactively address tariff concerns” by moving production out of China. But significantly and in a clear nod to other issues like rising labour costs, he adds, “we believe this diversified approach to production can benefit our business regardless of tariff implications.”
While still holding the mantle of ‘factory of the world’, China has become less advantageous as a production site. Over the past decade or so, China’s average manufacturing wages have tripled. Taxes, including social security, energy prices and exchange rates have increased. And then there is the trade war. All told, the soaring costs have weakened China’s competitive advantage.
John Calverley, head of global research at Standard Chartered, cites a survey by South China Manufacturing Center in 2015, long before the trade war, that 11 per cent of factories in southern China planned to move to Association of Southeast Asian Nations (ASEAN) countries, India and Bangladesh to avoid rising costs. What more with the ongoing trade war?
Analysts have said that 60 per cent of Japanese companies operating in China have been transferred, or in the process of transferring out of China to other countries, while the remaining 40 per cent are planning how to withdraw their funds, according to a recent report by Kyodo News.
And Taiwanese companies in China that manufacture shoes for Nike, Adidas, Under Armour and other brands have moved their production lines to Southeast Asia and India, according to September report by Japanese financial newspaper Nihon Keizai Shimbun.
Sourcify, a business-to-business manufacturing platform has production facilities in Guangzhou as well as India, Bangladesh, Vietnam, Philippines and Mexico. Sourcify’s CEO, Nathan Resnick was quoted by Forbes as saying that currently, “labour costs are actually more affordable outside of China, so for products like apparel where there is a lot of cut-and-sew labour, most companies are moving out of China anyway.”
When these trade war tariffs are added, the incentive to manufacture in China is greatly diminished, he adds.
And while Sourcify is relatively small, Hong Kong-listed Kerry Logistics Network, is not. The SCMP reported that Kerry shifted part of the production lines it handles from mainland China to its seemingly more expensive corporate home in Hong Kong in order to avoid tariffs.
“Our clients have been shifting part of their production lines as early as March from China to other Asian countries where they already have manufacturing plants,” William Ma, Kerry’s managing director, was quoted saying in the Hong Kong daily. “This is a reallocation of global production bases,” Ma added.
Chinese manufacturers too
But less discussed are the Chinese manufacturers who are also looking to ‘duck and roll’ to avoid the tariffs. Chinese factories making everything from bikes to tires, plastics, LED lights, solar panels, textiles and even medical devices are moving production lines abroad to escape the higher duties on their exports to the US.
Hl Corp, a Shenzhen-listed bike parts manufacturer, made clear to investors last month that tariffs were the number one factor in mind when it decided to move production to Vietnam. The factory will “reduce and evade” the impact of tariffs, management said.
“It’s inevitable” that the new duties will lead companies to review their global supply chains because “overnight they will become 25 per cent less competitive than they were,” Christopher Rogers, a supply chain expert at trade data firm Panjiva, according to AFP.
Another example cited by Hong Kong’s SCMP is Xie Xusheng, who owns a garment making and embroidery processing factory in Dongguan, a manufacturing hub in southern China. Xie laid off about 160 workers soon after he opened a new factory in Vietnam’s Ho Chi Minh City early this year to supply big-name American brands with shoes, bags and accessories.
He only kept on about 40 senior skilled workers at his plant in Guangdong province for complicated sample development. The decision by Xie to cut workers are part of a subtle but growing trend of smaller Chinese firms shifting production and cutting their employment levels in a straight forward bid to survive.
The question then becomes, can the Chinese economy handle this snowballing of this manufacturing flight? China has responded to the current trade war by implementing new fiscal stimulus, including tax breaks and GDP growth has remained largely solid at 6.8 per cent in the first half, with retail sales and property investment holding steady.
China does enjoy some insulation by virtue of the fact it has become a domestic consuming economy, meaning it’s own brands have gained enough acceptance by Chinese consumers to support a degree of domestic growth. But Chinese premier Li Keqiang recently said Beijing would do everything possible to prop up the domestic economy in light of a trade war, suggesting that the impact is clearly being felt.
The SCMP report notes that this year alone, the number of lay-offs at small and medium-sized manufacturing firms, tech start-ups and financial organisations has grown at a double-digit rate in percentage terms, according to industry analysts. A situation many believe will only worsen should the trade war deepen.
China’s official unemployment rate has hovered between 4.0 and 5.0 per cent for decades, but most analysts say this does not reflect the true reality and one increasingly under pressure from the trade war.
According to the report, Xie said he made his decision to move most of his production to Vietnam after his biggest customer moved his supply chain to Southeast Asia.
“A growing number of Chinese textile and garment suppliers are setting up factories in Vietnam and Cambodia because overseas customers are increasingly placing orders only from factories in these countries, instead of China,” he said. “That’s why I had to follow and set up a plant there. ”
The foreign brands that are Xie’s main customers “used to source from 25 Chinese suppliers on the mainland, but now are partnered with just two because of worries about tariffs,” the SCMP reported.
Yet another example quoted by AFP is that of Zhejiang Hailide New Material. The Chinese company ships much of its industrial yarns, tyre cord fabric, and printing materials from its plant in eastern Zhejiang province to the US and other countries.
With all of the company’s production in China the company decided, at great length, to evade the risks of anti-dumping cases and tariff hikes by setting up a factory in Vietnam.
“We hope to speed up its construction, and hope in the future it can handle production for the American market,” a company vice president said of the USD 155 million investment that will ramp up production by 50 per cent.
They are by far, not alone on this front, with other companies seeking to avoid tariff risks including garment makers going to Cambodia and Myanmar, a mattress company opening a plant in Thailand and a case of one electronic motor producer acquiring a Mexico-based factory.
A windfall for Southeast Asia
The clear winners in this trade war are the ‘new centres of production’, many of which are in Southeast Asia. For this rapidly developing region this is very good news. Long the sub-component manufacturer for Chinese production, this new environment is a bit of a leap-frog that should stand the region in good stead going forward.
Vietnam has pulled off many of the quick wins as a result of China’s wage and tariff problems, in part due to proximity, but also because of trade-friendly policies and a skilled labour force.
And others too, such as Thailand, have been quick to seize upon this opportunity to step into China’s competitive space. The country, the largest manufacturer of computer hard drives, has been actively promoting itself as a regional manufacturing hub. This includes offering incentives such as exemptions on corporate income tax for some industries and exemptions on import duties for some raw materials.
It’s probably fair to say that things will never be the same after this, and for the countries of Southeast Asia, at least, it’s a good thing. What impact it will have on the global air cargo supply chain is another, less clear issue. Luckily for carriers, their assets are portable. Less good for airport infrastructure, cargo handlers and forwarders who have built up substantial investment around this seemingly endless supply of cargo.
Certainly less concentration in one specific market that is renowned for experiencing surging over-capacity when times are good, would be one plus factor. But with more manufacturing spreading rapidly across the Southeast Asian region, and indeed further, a key question is whether the infrastructure can handle it.
Indeed this was an issue highlighted back in August by Lucas Kuehner, Panalpina’s global head of Air Freight Asia-Pacific, who warned that capacity constraints on the ground throughout Southeast Asia as result of re-routed cargo in the peak season because of the tariff war, could be a major problem.
At the end of the day, China will likely remain ‘factory of the world’ in a somewhat diminished sense, but alongside it there is a new up-and-coming ‘ASEAN factory of the world’.