More Companies Likely to Leave China as Pressures Grow, Expert Says

A file photo of Apple CEO Tim Cook as he speaks during an Apple special event at Apple headquarters in Cupertino, Calif. (Justin Sullivan/Getty Images)

The business principle of evolving comparative advantage, coupled with intense political pressures, explains Apple’s decision to shift a bulk of its iPhone production from China to India, Vietnam, and other markets, and the growing bearishness of other multinational firms toward operating in China, an expert on trade and financial markets has told The Epoch Times.

Reports last week that Apple had produced $14 billion of its iPhones in India over the last fiscal year fostered speculation as to why the company might be less focused on China, a country that U.S. firms have long turned to for its abundant supply of cheap labor in spite of well-documented human rights issues and concerns about a possible invasion of Taiwan.

Foxconn, an Apple supplier, began making the iPhone 15 in India in the summer of 2023, Bloomberg reported in August 2023, and the number of iPhones made in plants there is growing fast. Other technology firms, such as Dell and HP, have also aggressively expanded into India, Vietnam, Mexico, and other markets, and the trend shows no signs of abating.

While China’s human rights problems, and purported genocide against its Uyghur minority in the Xinjiang region, have gained increasing attention in recent years, the reality is that economic factors are primarily responsible for the about-face by Western companies.

Evolving comparative advantage is the strongest driver of this trend, in the view of Shang-Jin Wei, a professor of Chinese business and finance at Columbia Business School in New York City.

Elon Musk leaves a U.S. Senate bipartisan Artificial Intelligence Insight Forum at the U.S. Capitol in Washington, on Sept. 13, 2023. (Mandel Ngan/AFP via Getty Images)

Greener Pastures

For the last four decades, multinational enterprises (MNEs) sought to exploit the relatively low cost of labor available in China for labor-intensive assembly work, as well as a reliable local supply network, Mr. Wei told The Epoch Times. These factors figured into Apple’s calculations; but now, the dynamics have shifted significantly, he said.

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“With a wage in China that is three times higher than some wages in India and Vietnam, the cost disadvantage would eventually overwhelm the local supply-chain advantage. Therefore, it makes sense to relocate such production to low-wage countries, but not to the United States,” said Mr. Wei.

Mr. Wei identified the $250 billion worth of tariffs that former President Donald Trump had put in place, and that President Joe Biden has so far chosen to maintain, as the second factor driving the re-shoring of operations from China to other markets.

“The Trump-Biden tariffs on imports from China artificially make exporting from China less attractive than exporting from Vietnam or India. This of course reinforces the wage cost argument,” he stated.

Moreover, with the U.S. government and other governments making threats to disallow the shipment of advanced chips and other critical components to China, MNEs maintaining operations there face considerable uncertainty, Mr. Wei added.

The third factor that Mr. Wei named as a growing deterrent to MNEs making products in China is Chinese Communist Party (CCP) policy. The regime in Beijing has long pursued with Mr. Wei called an “unpredictable” stance toward both domestic firms, or national champions, and MNEs.

Beijing has failed to protect the intellectual property rights of foreign companies and made them part with proprietary data through forced technology transfers. On the domestic front, the government has allowed Evergrande, a conglomerate active in China’s heavily leveraged real estate market, to expand into myriad sectors beyond its areas of expertise, then pursued a vindictive policy when the deeply indebted company could no longer kick the can down the road, detaining members of the firm’s staff earlier this year.

The turmoil in China’s markets helped drive the world’s largest asset manager, BlackRock, to downgrade its valuation of China stocks from “neutral” to “overweight” in September 2023 and to wind up its China Flexible Equity Fund last November, after the fund garnered only $22.3 million of assets in the nearly six years it operated.

For all the volatility, Mr. Wei acknowledged, the Chinese economy is still growing at about twice the rate of the U.S. market. Hence, not all MNEs are likely to bolt just yet. But CCP mismanagement of the economy is contributing to a level of risk that some corporate leaders will simply find unacceptable, he said.

A Dell laptop is seen on display at a Best Buy store in Austin, Texas, on June 2, 2023. (Brandon Bell/Getty Images)

Political Currents

While the economic factors driving firms to head for the rails are formidable, it would be a mistake to discount the fierce diplomatic and political pressures that have made some executive decide running plants in China is a losing proposition. One index of the strength of these high-level pressures is Beijing’s sharp retaliation against them.

That’s the view of Christopher Tang, chair of the business administration department at UCLA’s Anderson School of Management.

U.S. business leaders have been eyeing the potential of other markets and considering at least partial re-shoring since long before the trend’s current acceleration, Mr. Tang believes. In fact, the strategy of “China plus one” has gained popularity for more than 10 years as executives looked for ways to diversify their supply bases in the face of rising Chinese labor costs compared to some markets, he said.

Then came the Trump administration in January 2017, and the trade war went into high gear the following year.

“Due to political pressure, and cost pressures, shifting to Vietnam or Thailand was a natural move. Once the momentum starts and the press begins to cover it, the shift becomes more pronounced,” Mr. Tang told The Epoch Times.

“It was happening before 2018, but the public was not aware of this gradual shift. The humanitarian concerns drove pressures from politicians and NGOs,” he said.

Here, Mr. Tang believes, is the explanation for a gathering trend exemplified not only by Apple’s shift to India, but those of other leading tech firms. By way of example, Mr. Tang cited Dell’s announcement in 2022 that it planned to move at least 20 percent of laptop production to Vietnam, and HP’s sharp pivot away from China last year and its selection of Mexico for the production of commercial notebooks and Thailand for consumer laptops.

In Mr. Tang’s analysis, the choice of Mexico is an example of “near-shoring” designed to take advantage of the United States-Mexico-Canada Agreement (USMCA), which took effect on July 1, 2020, superseding the better-known but controversial North American Free Trade Agreement (NAFTA).

Beijing Lashes Out

The political impetus behind much of this activity is not lost on Beijing, and the dangers of retaliation are impossible to overlook, Mr. Tang said. Much of it looks, to China’s rulers, like a critique of their human rights record and anti-democratic stance in the guise of economic strategy.

“De-risking from China through friend-shoring or near-shoring can improve supply-chain resilience, but it is not risk-free,” said Mr. Tang, identifying a few key perils.

“First, it may trigger risks, including retaliation, that impede future U.S. economic growth,” he said.

For example, in May 2023, Beijing slapped Chinese operators with a ban on the importation of chips from Micron Technology, Mr. Tang pointed out. That company draws more than a tenth of its $31 billion annual revenue from China, he said. The Cyberspace Administration of China faulted Micron for failing to meet certain security standards, without specifying how the company had fallen short.

In September, Apple’s shares declined by 3.6 percent following reports that officials in China’s central government agencies no longer may use iPhone, according to a Wall Street Journal report, Mr. Tang continued.

Mr. Tang cited an Investors Business Daily report from September 2023 which found that Texas Instruments, Qualcomm, Monolithic Power, and other top S&P 500 stocks derive more than a quarter of their annual revenue from China. They, and other U.S. tech firms, may face severe fiscal consequences if China’s rulers ban or limit the use of more products in retaliation for companies packing up and leaving, he said.

He cited a growing aversion on the part of Chinese consumers to the use of U.S. goods as the trade war heats up, noting a Barron’s report that found GM’s market share of auto sales in China, including through its joint ventures, had dropped from about 15 percent in 2015 to under 10 percent in 2022.

“The trade war between China and the United States is escalating, and I hope it does not lead to something more serious—like a hot war. It is crucial for the Biden administration to maintain an open and fair dialogue with China to prevent further deterioration,” Mr. Tang said.

“The economic ties between China and America have benefited many, but not equally. This creates tension, and both governments need a plan to reduce income inequality for their citizens,” he added.

The Department of Commerce did not reply by press time to a request for comment.