China Is Still Unpredictable for Businesses. Is the Friendshoring the Only Solution?
The only thing predictable about China today is its unpredictability, and that is poisonous for the business environment and global supply chains
In the 1990s, as globalization got more robust, the Western public became aware of a novel idea: offshore. Even then, despite corporate bosses' delighted acceptance of the concept of cheaper and less empowered labour, it was frequently unpopular with the common public. And
China was the ideal market and producer combination due to its skilled workforce and expanding middle class, which was eager to purchase Western goods. How much of a change can a few decades make? Currently, businesses are attempting to relocate their production to safe places where they won't have to worry about being caught in a geopolitical conflict.
"President Bush is on an eight-day tour of Asia. He's visiting American jobs," David Letterman quipped in 2005 about the 43rd president of the United States. Indeed, many American jobs had departed the country, but it was only the beginning. Manufacturing employment in the United States fell from about 16 million to just over 10 million between 1993 and 2011, and other Western nations shared the trend. Yes, some jobs were eliminated by automation, but many others were exported to low-wage countries. U.S. multinational corporations had 30% of their labour force abroad in 1982; by 2014, that percentage had increased to 60%. None of these foreign locations had more popularity than China, a developing nation with the world's factories, thanks to its workforce's high levels of basic literacy and numeracy and its quickly increasing transportation infrastructure.
For corporations, offshoring to China was an imperative financial considering that U.S. manufacturing workers, who earned $20 per hour-or more-could be replaced by workers making less than a dollar an hour. And lots of white-collar Western jobs went to China, too. IBM, for example, moved its global procurement chief and some of its research and development functions there. Many ordinary Americans, Germans, Italians, Swedes, and others were enraged, too unsurprisingly, given that their livelihoods and often their identities had been taken away. They could retrain, and many did, but offshoring may be the original sin that caused always-existing divisions between so-called elites and so-called ordinary people to erupt into the barely manageable divisions that plague Western societies today.
Offshoring is here to stay, but that doesn't mean manufacturing in China is. In a June survey conducted by the European Union Chamber of Commerce in China, 23 per cent of Western firms said they were considering moving operations away from the country, while 50 per cent reported that business in China had become more politicized in 2022 than it had been in previous years.
Zero-COVID Policy of China
The European Chamber stated in its 2019 survey that European businesses had an "increasingly firm commitment toward the mature and vibrant Chinese market." However, Tony Danker, the director-general of the Confederation of British Industry, stated last week that "every company that I speak to at the moment is engaged in rethinking their China-focused global supply chains." China's strict "Zero-COVID" restrictions managed to contain COVID-19 at the start of the pandemic. The nation's persistent restrictions are still harming its economy and delaying global supply chains more than two years later. Beijing's "Zero-COVID" strategy is severely hurting economic growth. Mostly, this is due to the frustration experienced by the international business community.
For more than 40 years, Western corporations have contributed significantly to China's technical advancement. However, the last two years have severely deteriorated its relationship with many of its trade partners and global supply chains. The effects of COVID-19-induced uncertainty on business have historically been a source of concern for the American, British, and European Chambers of Commerce. Their worries coincided with mounting concerns about the state of the Chinese economy. Bloomberg reports that although industrial production surprisingly increased in May, consumer spending kept declining. The housing market painted a negative image as well. Retail sales also decreased throughout the spring, and the youth jobless rate increased to 18.4%, according to SCMP. The picture for China's economy for the rest of the year also appears hazy, according to the European Chamber of Commerce and Industry, as Beijing still needs to give up on lockdowns and other steps to stop the virus' spread.
"Over the past year, doing business in China has been much more challenging. Additionally, many European-based businesses criticize politics's growing impact on different business procedures and global supply chains in China. For instance, this relates to issues like securing market access, unfair treatment of the participants represented there, as well as ineffective control mechanisms," the European Chamber highlighted. According to the American Chamber of Commerce and Industry in Shanghai, only 31% of U.S. businesses in the manufacturing and service sectors operate at total capacity. Most others reported that their staff members have trouble getting to work. Additionally, according to Bloomberg, profits for foreign industrials operating in China fell by 16.2% between January and April, a far more significant decline than that experienced by Chinese private enterprises (-0.6%). State-owned businesses even saw a 13.9% increase in profits during this time.
Additionally, many businesses felt under pressure after China and the European Union each slapped sanctions on the other over the Xinjiang region's human rights status. Buyers of European products have already been subject to boycotts in China.
Friendshoring is a Business-Saving Attribute
"The only thing predictable about China today is its unpredictability, and that is poisonous for the business environment," Bettina Schoen-Behanzin, a vice president of the European Chamber, said in a statement accompanying the 2022 survey. "Increasing numbers of European businesses are putting China investments on hold and re-evaluating their positions in the market as they wait to see how long this uncertainty will continue, and many are looking towards other destinations for future projects."
And the majority of businesses are starting to friends here rather than reshoring. Friendshoring is precisely what it sounds like: relocating business operations to friendly countries in manufacturing, back-office, R&D, or any other area. Of course, "friendly countries" was foreign to most business leaders until recently. Geopolitically speaking, there are no friendly or enemy countries for the post-Cold War generation currently in charge of Western corporations; instead, there are only various markets, some of which are more difficult to operate in due to corruption, violence, or other disasters. These entrepreneurs don't see their businesses as ambassadors for the nation they are in.
But where to friendshore? Companies currently operating in China are planning moves to countries including Turkey, Serbia, India, and Vietnam. In contrast, others plan to spend a bit more and go with locations in countries that are traditional allies. Turkey and India are hardly bosom buddies of the West, but they won't be willing or able to exploit globalization for geopolitical gains.
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