In 2018, Fabien Gaussorgues found that what was once the property of his manufacturing company — which produced 100% of its electronics and consumer goods in China — was quickly becoming a headache.
Then-President Trump began imposing tariffs on Chinese goods, launching further measures among U.S. and Chinese counterparts as companies scramble to offset the financial impact.Vietnam, Thailand, Malaysia, While there seemed to be plenty of other options on paper, such as Indonesia and the Philippines, Gaussurg realized that relocating production would not be easy.
Four years later, his company, Agilian Technology, designs, manufactures and sells products for overseas customers, We continue to rely entirely on factories in southern China. But the move away from what has long been considered the foundation of global manufacturing is only escalating.
Multi national company With worsening US-China relations, continued restrictions due to the pandemic and the specter of war with Taiwan, doing business in China faces many new challenges.
“It wasn’t always a strong strategy before, but let’s see how it goes,” said Gaussorgues, 51, who founded Agilian, whose parent company is in Hong Kong, five years ago. “Now it’s like something, we have to do it. That’s a big difference.”
President Xi Jinping’s draconian zero-COVID policy has had a particularly strong impact over the past two years, keeping foreign workers out of China and shutting down entire cities and industrial hubs for months at a time. Meanwhile, Russia’s invasion of Ukraine underscores the economic risks of war and sanctions if China pursues territorial claims to Taiwan with similar attacks on the democratically controlled island.
As more foreign companies look to exit, China will lose an integral part of its domestic economy and booming export market. At the same time, the lessons of the past few years have made it clear that there is no silver bullet for reducing the world’s dependence on China.
“Businesses don’t want this,” said Michael Walsh, a partner at law firm Foley & Lardner and a former chief of staff at the Department of Commerce. “It’s really challenging, and without the Russian invasion, I think the push might have gone astray.”
Given the obstacles to chilling turkeys, many companies are looking to supplement Chinese production rather than withdraw from China entirely. Tech giants Samsung and Apple are among the companies that have moved some of their production out of China in recent years in places like Vietnam and India, seeking to cut costs.
Gaussorgues has no plans to close his 200-employee business in China, but geopolitical uncertainties are his alternative as customers worry about the potential impact of a military conflict with Taiwan. Accelerated the search for manufacturing bases. “They are very worried,” he said.
In 2019, he began evaluating the possibility of moving some manufacturing functions to Vietnam. The company hired freelancers, visited factories, started marketing, and put a full-time team in place. However, he abandoned the plan after eight months because a price increase on about half of the company’s projects upset customers. Product development also took time. In China he had a prototype completed in three weeks, in Vietnam it took him six months.
Reviews of other countries in Southeast Asia have proved even less fruitful, he said. He decided that the Philippines, Malaysia and Indonesia were too close to comfort in the South China Sea, another geopolitical hotspot.
By the end of 2020, Gaussorg has gone further afield, to India. The local electronics and automotive ecosystem has reduced manufacturing costs and made parts easier to access. Although it shares a border with China, it is unlikely to become the center of a major conflict. In December, we started recruiting in Chennai and Hubali. With five of his employees so far, he aims to start assembly work next year and hopes to have the majority of manufacturing done here in five years.
“In terms of risk management, this is probably the safest,” he said. “It takes a lot of effort to grow it.”
Leaving China presents many hurdles and often takes years, consultants and lawyers say, but companies are politically sensitive and rarely discuss it publicly. It is struggling to keep up with demand, and the war in Ukraine has ruled out any possibility in Eastern Europe, making this task even more difficult.
“All of our clients want to stop manufacturing in China, and people are saying, ‘We want to stop manufacturing in China. Why don’t you stop?'” he said. “There are myriad reasons why it’s not easy.”
Most critical supplies such as semiconductors, zippers and shoelace rings are readily available in China, but importing these materials into facilities outside of China can increase costs. Labor shortages and tighter resources are also putting upward pressure on prices, while the departure from China is boosting demand elsewhere. More worrying than the end result for some companies is the potential disruption to their supply chain at new, untested facilities. They will not be able to deliver the final product.
Daniel Carlsson, founder of Asia Perspectives, a Chinese consulting firm for European companies, said a handful of clients had abandoned plans to diversify their businesses after facing complex issues.
“I have seen many clients who have a business plan, but when they start implementing it, they see difficulties and increasing costs, especially for consumer goods,” says Karlsson. “At a high level, people made decisions. But at a low level, there’s a lot of confusion.”
For companies serving Chinese consumers, there is still no better option than being based in China. Companies that rely on low-cost, high-volume production also benefit greatly from China’s logistics and infrastructure, and are unwilling to give up in the face of heightened uncertainty.
In retrospect, he arrived in China 12 years ago in a “golden age” when the country emerged as the world’s second largest economy and thought the business opportunities were too good to pass up. I’m here. At that time, foreigners were warmly welcomed, and new employees were enthusiastic about China.
Currently, the country’s economic growth has plateaued and has slowed further this year under President Xi’s zero-coronavirus policy. Many expatriates have left the country, fueling fierce nationalism and suspicion of foreign influence in China.
A survey conducted in June by the American Chamber of Commerce in China reported that 44% of respondents said they had reduced or postponed investments in China as a result of COVID restrictions. One in 10, he said, would be encouraged to move their businesses out of China if the restrictions lasted another year. Another survey released by the European Union Chamber of Commerce in China that month showed nearly a quarter of businesses considering moving current or planned investments elsewhere due to lockdowns. it was done.
There are few signs that President Xi Jinping will give up coronavirus-free anytime soon, but officials are aware they need to regain trust. ‘s conference call emphasized the development of foreign investment and the support of foreign companies. Government agencies are also courting foreign workers with additional perks and tax exemptions.
“China is very competitive and will still have great interest in staying on the world’s factory floor,” said Eric Cheng, president of the American Chamber of Commerce in Shanghai. “Many local governments are very actively looking at what they can do to help multinationals.”
Even if Agilian promises to increase its investment in India, Gaussorgues knows it won’t be a perfect replacement. It was difficult to find stable workers, and it was more difficult to identify delivery dates from suppliers. must be imported.
“We still don’t know how to fix it,” said Gaussorgues. “I don’t know if it’s something that doesn’t use Chinese components at all, but some of it is impossible.”