China remains dominant player in global supply chain

Inbound FDI dropped 28.2% in the year through May, the 12th straight month of retraction. Other data released this month add weight to the 'whither China' argument.

By Tim Culpan

Declines in foreign direct investment in China bolster the thesis that global companies are turning away from the world’s most-important production hub, continuing the trend of decoupling that has policymakers and corporate leaders looking for alternative manufacturing bases. The truth of the nation’s deteriorating importance isn’t so simple.

Inbound FDI dropped 28.2 per cent in the year through May, the 12th straight month of retraction. Other data released this month add weight to the “whither China” argument.

Yet, there’s a risk of overestimating the extent to which deglobalisation is occurring. Brad Setser, a fellow at the Council on Foreign Relations, warns policymakers may underestimate the trade and economic impact of conflict, especially in the Taiwan Strait.

Instead, it’s important to recognise that some shift in manufacturing has already occurred, but this rate of change is likely to be stagnant for a little while. Both corporate and political leaders need to accept and adjust to the unsteady pace of decoupling, especially when it comes to planning for supply chain resilience.

Deglobalisation is the unraveling of global commerce, while decoupling is the gradual cessation of ties between two parties, in this case the US and China, and their spheres of influence. Fragmentation is the breaking up of previously large, centralised hubs of activity into more numerous, smaller groupings. Each of these is happening, and can be supported by data, but none is yet complete. They likely never will be.

China remains the single largest manufacturing economy and exporter in the world. Large swathes of industry have started to move out, including textiles, power tools, and electronics. But fast development in other sectors, such as electric vehicles and renewable energy, make the country even more crucial to certain parts of the global economy. As a result, you can find a statistic to support your position, whether you believe globalization of trade is continuing, reversing, or stagnant.

While there’s a growing number of indigenous Chinese firms that are global leaders in their field, such as BYD Co in EVs, Contemporary Amperex Technology Co Limited (CATL) in batteries, and Huawei Technologies Co in communications equipment, they’re not major exporters — each get more than two-thirds of their revenue domestically. Cutting them off from international markets isn’t good for the world economy, but wouldn’t much move the globalisation needle. Foreign companies shifting procurement and operations away from China, though, does change the balance. And we’re seeing just that.

Dell Technologies Inc has been forthright in wanting to reduce its reliance on Chinese manufacturing. Others, like HP Inc and Apple Inc, are doing so, but more quietly and less directly. Power-tool maker Stanley Black & Decker Inc closed its Shenzhen factory four years ago. Foreign automakers are also departing, with Mitsubishi Motors Corp withdrawing from a joint venture and Ford Motor Co saying it will cut back. Yet what we have seen leave China so far is the easy stuff, such as product assembly. Because the final manufacturing step is generally the most labor intensive — be it putting panels on a car or slotting parts of an iPhone together — migrating this phase is the easiest. It’s also better for marketing: You don’t need to label something Made in China if the final bits are completed in Vietnam or Mexico.

For decoupling to have a real impact, though, we need components including chemicals, metal sheets, circuit boards, cables, and wiring, to be built outside of China. These are made with big, expensive machines that require fewer workers, but greater integration with other parts of the supply chain. For now, China’s role in this phase of manufacturing remains dominant and likely will for some time.

If the goal is to create more resilience, reduce risk, and diversify manufacturing, then policymakers and corporate leaders can pat themselves on the back. But if the greater aim is to cut the world’s second-largest country out entirely, and ensure the global economy can withstand a massive shock wrought by any future conflict between China and Taiwan, then that’s a dream so far unfulfilled.