Reshoring Jobs To The US Versus Made In China

China is losing US companies.

Over the past decade, American companies like Apple AAPL , Dell DELL , and Carter’s, have gradually started to move their factories outside of China, including in some cases bringing facilities back to the US.

A report by A.T. Kearney, shows imports from low-cost Asian countries fell from 816 billion USD in 2018 to 757 billion USD in 2019, which is almost exclusively driven by a collapse in imports from China. In addition, around 14 billion USD of US imports were shifted from China to Vietnam from 2018 to 2019. China is facing challenges, but will still be the “World Factory.”

“China Plus One” Strategy

Increasing costs have pushed major firms away from producing in China, but at the same time its massive consumer market remains a compelling attraction for foreign businesses. For the last 20 years, wages for Chinese workers in urban areas have increased eight-fold. China’s cheap labor and land no longer exist, especially in coastal or tier 1 cities. As a result, many multinational companies and Chinese firms have for the past several years focused on diversifying production and global supply chains outside of China, which has become known as the “China Plus One” strategy.

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That being said, China’s developed infrastructure and huge consumer market remain an essential market for many companies. General Motors GM sold more cars in China last year than in the US. Nike NKE reported double digit growth from its Greater China region despite the impact Covid-19 had on global sales. For a Fortune 500 company with significant resources, China remains an attractive option to invest in.

Tesla TSLA is a great example. In July 2018, Tesla and the Shanghai Government signed an agreement to construct a factory plant. Since then, the company’s stock has almost quintupled due in part to sales performance in China. In 2019, Tesla realized revenue of 2.98 billion USD in China, an increase of 69.6%. Due to attractive government incentives coupled with broad demand for electric vehicles in China, Tesla decided to expand its Shanghai super factory and reaped huge dividends.

Trade War

President Trump has threatened to apply tariffs which could potentially include total Chinese imports worth 550 billion USD started from 2018. The administration’s intention was to force China to buy products from the US such as agriculture, oil and natural gas and ultimately to decrease the US-China trade deficit. Yet despite Trump’s “terrific” relationship with President Xi, the Trump administration failed to decrease the US-China trade deficit and according to figures from The Peterson Institute For International Economics the trade deficit has actually increased.

The Phase I trade deal initially eased tensions, however, whatever economic engagement the Trump Administration previously flirted with, now seems tenuous at best and entirely illusory, at worst. Those who had hoped for a second romantic date in the form of a Phase II trade deal will be disappointed, as in the words of President Trump, it is now “not a priority.” Things have gone downhill fast: The 72 hour closure of The Chinese Consulate in Houston, followed by the swift Chinese response of shutting down the US consulate in Chengdu; China’s passage of the Hong Kong Security Law; US withdrawal of its Peace Corps and Fulbright programs in China; Covid-19; and the list goes on. Chinese Foreign Minister Wang Yi said, “The US has lost its mind, morals, and credibility.”

Many fear the Sino-US relationship could result in a “decoupling” or economic detachment. Analysts describe decoupling between the US and China as a zero sum game. It is true that certain aspects of the economies between the two countries are decoupling, however it is impossible for America and The People’s Republic of China (PRC) to fully isolate their economies as that would have a catastrophic impact for both Washington and Beijing.

For corporations with established supply chains in China, it would be a massive undertaking to move these factories back to the US. Craig Broderick, Wall Street’s longest serving Risk Officer formerly at Goldman Sachs GS said, “the scale of investment by US and other international companies in their Chinese supply chains and distribution channels is so extensive that a wholesale relocation is not feasible.”

In the American Chamber of Commerce in China (AmCham China) 2020 China Business Climate Survey Report, only 9% of American businesses reported starting to relocate manufacturing or sourcing outside of China, with another 8% considering the move. Former AmCham Shanghai President Kenneth Jarrett offers this comment: “U.S. companies are always reassessing their manufacturing and supply-chain footprint in China. China is no longer a cheap place to manufacture and the politics of tariffs have introduced another wildcard. On top of that, the disruptions caused by Covid-19 have highlighted the importance of supply-chain redundancy and resilience. That said, most U.S. companies manufacture in China for the China market. Thus, while there is some shifting of manufacturing away from China, this is mainly to Southeast Asia and India and not back to the United States.”

Covid-19

One of the quintessential lessons learned of Covid-19, has been the perils of over-reliance on China as a single global supply chain. After the coronavirus broke out in January, all factories located in China had to shut down. Some companies, like Hyundai and Fiat Chrysler, had no choice but to cease production outside of China as well, as they couldn’t obtain essential components from China. Authorities in China initially concealed the extent of the pandemic, and the People’s Liberation Army stepped in to ultimately take control of the situation in Wuhan and neighboring cities with strong coordination from the central government which culminated in reopening China’s economy in around two months. In early March, 91.7% of employees of Chinese state-owned key enterprises, and over 80% of employees of foreign companies based in China went back to work. Now almost all companies in China have returned back to work while America is struggling with an unprecedented surge of new Covid-19 cases and the US economy saw a 32.9% annualized GDP decline in the second quarter of 2020 which was the most acute fall in more than 70 years of record keeping at The US Department of Commerce.

The decision to reshore US companies from China is not as easy as American politicians would have you believe. While Covid-19 has exposed the over-reliance of the western world on China, reshoring jobs and factories to the US comes with baggage: underdeveloped infrastructure; higher labor, health, and training costs; and a more complex regulatory environment. China’s 14.3 trillion USD market coupled with a growing middle class, and its emphasis on technology and innovation will continue to make China the “World Factory” at least for the short run.

Authors:

Mr. Earl Carr is a Vice President of International Research at Momentum Advisors, a New York based SEC-registered international wealth management firm.

Ms. Bining Cai is a Research Consultant at Momentum Advisors and a recent graduate from Fordham University with a Masters degree in Global Finance.

Dr. Kevin Chen is The Chief Economist at Horizon Capital and an Adjunct Professor at NYU.

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