Truly tectonic shifts are happening in the global industry due to coronavirus. The pandemic spurred major western corporations to abandon the policies they have followed for the past few decades – placing production in China. What was the reason, besides coronavirus, and where will the plants and factories that leave China go to?
The coronavirus pandemic, unexpectedly for many strong states, the highest ranking in terms of the global economy, showed that they are essentially colossuses on clay feet. It turned out that their multi-trillion GDP economy is directly dependent on one state, which was recently called a third-world country with disdain. The governments of the economic giants are talking about moving production home from China.
“You want to destroy it? Just don’t send antibiotics”
The first alarm was sounded by the US, which in February 2020 suddenly found that the outbreak of coronavirus in China will go sideways to America: the 97% of antibiotics consumed by the population of the US comes from China. And 80% of the pharmaceutical ingredients for drug production come from there. The first unpleasant news was followed by a second: it turns out that personal protective equipment (masks, gowns, shoe covers, respirators, etc.), in most cases, is also manufactured in China. “If you are Chinese and really want to destroy us, just stop sending us antibiotics,” said Gary Cohn, former economic adviser to the President of the United States.
Following the United States, Japan, the United Kingdom, South Korea, Germany, France, and Spain discovered their dependence on China… And it concerned not only pills, but also other vital spheres. For the past three to four decades, the Western world has been moving its industry to China in pursuit of super profits. The working hands there cost a penny, and taxes imposed by the authorities were quite divine compared to American, Japanese, and European ones.
Now the smart heads in Western governments have realised they have made a giant mistake, and have urgently decided to diversify locations for the production of vital products. But it turned out that there will be big problems with it.
In some large companies (Apple, Sony, Google etc), the understanding of the need to move factories away from China came without government prompts. However, the opinion of business leaders with the opinion of the authorities did not coincide completely.
How much does it cost to go home?
Google, Apple, and other Microsofts agreed to withdraw some of their capacity from China. But there was no question of returning to America. Why, if Vietnam and Thailand exist, where taxes are not draconian and working hands cost next to nothing? And these states lie two steps from China, i.e., the cost of transporting equipment will be much less than dragging everything across the ocean.
Perhaps the heads of these offices are well aware that they are organising for themselves a brilliant opportunity to step on the rake once again, but… No Trump can order them, it’s impossible to wake up patriotism in the capitalist shark with the words about state interests – everything will be about money, only money, and nothing but money.
According to the estimates of a senior researcher at the Institute of Financial Research at Renmin University, Liu Zhiqin, quoted by the Chinese Global Times, “If the US and Japanese governments are determined to move their companies’ production out of China, it will be a strategic mistake that will reduce their international influence substantially and cause unprecedented economic losses.” It may be necessary to build new buildings, and most importantly, to compensate for financial losses. Zhiqin believes that “if the US and Japan move their companies out of China, they will potentially lose the China market, and no other countries can import as many products as China.”
The analyst is confident that governments will be able to persuade large enterprises to return (at least to the US and Japan) “if the US and Japanese governments pay for all the companies’ moving costs and foreseeable profits for three years in advance.” “The US’ call for shifting production out of China is nothing new. Since Donald Trump took office, his administration has not stopped such agitation, but few companies have responded,” says the Chinese specialist.
In Liu Zhiqin’s words, one cannot help but notice a slight dissatisfaction: of course, for China it will not be a big problem to fill the vacuum that will arise with the departure of “whales”. The Chinese prepared their specialists, other people’s technologies were mastered. And there are their own scientific personnel. But the departure of Western companies is a loss of jobs, which in itself is unpleasant, and especially so at a crisis moment. So the analyst uses unobtrusive blackmail, warning: guys, if you leave China, we won’t let you come back – to a market of almost one and a half billion consumers.
But they are still leaving – they came when China was a third-world country whose population was ready to work for a plate of soup. Now China is a superpower that dictates its conditions, which are not always without contradictions with the interests of the United States, Japan, and the United Kingdom, all of which the market giants have to look back at. That is why leading lights choose “balanced solutions”: yes, “it is necessary to leave” China, and not to come home, where it is expensive, but to go to small countries where it is cheap and (so far) without authoritarian instructions.
Vietnam will be the new China
“Google and Microsoft are accelerating efforts to shift production of their new phones, personal computers and other devices from China to Southeast Asia amid the worsening coronavirus outbreak, with factories in Vietnam and Thailand expected to be the beneficiaries,” reports the Japanese edition of Nikki Asian Review.
“South Korea’s Samsung moved to Vietnam back in 2014 to save resources. Other high-tech firms are following suit. Upcoming flagship products of Google and Microsoft, such as the Pixel 4A and the new Surface, will enter the world market from these two countries in the second half of the year,” said the American publication Business Insider. The publication’s columnist Luis Casal estimates that companies will finish separating completely from China by mid-2021.
Casal recalls that “coronavirus hit the sales of Apple, which caused the company to fall in price by $100 billion in the first quarter of this year”. The loss is solid, but economists from the Trump administration acknowledged that a trade war over the same period reduced the US’ expected annual GDP by 1%.
The pandemic is a temporary phenomenon. But the trade war will not end soon – this is understood in Tim Cook’s circle, and therefore he decided that it is better to leave China while he’s ahead.
The Japanese government has already agreed to help its companies move out of China. Shinzo Abe’s cabinet announced 240 billion yen ($2.2 billion) in compensation for relocation costs. At the same time, it was stressed that the lion’s share of the amount (220 billion yen) is intended for those companies that will transfer their production to their homeland. Those wishing to move to any other countries will get peanuts.
Nevertheless, Japanese grands like Sharp are not in a hurry to go home, and they are still considering Vietnam as a new haven. A February survey by Tokyo Shoko Research found that 37% of more than 2,600 companies with production in China are looking for suitable countries to move their business to or are already moving.
The analyst of Bloomberg agency Isabel Reynolds very carefully estimates the beginning of the “fleeing from China”. In her view, it is not yet known what will be better for international relations in general: to leave Western production in China and thus stimulate the development of the Asian giant’s economy or to withdraw from it the corporations of the US, Japan, and others and to fight against Beijing.
Vladimir Dobrynin, Vzglyad
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