Language : English 简体 繁體
Economy

Why American Companies Are Reluctant to Withdraw from China

Sep 27 , 2019
  • Ma Shikun

    Senior Journalist, the People’s Daily

Since the start of the trade war with China, U.S. President Donald Trump has repeatedly urged American companies to leave China. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA,” he tweeted.

Although pressure is high, it has been ineffective. According to the U.S.-China Business Council (U.S.CBC), 87 percent of companies have not moved or have no plans to move out of China in 2019. According to reports, some large American companies are openly refusing to leave and even investing in new projects in China. ExxonMobil, the U.S.’ largest oil and gas company, decided to invest $10 billion to build a large-scale petrochemical project in Guangdong, China. In January this year, construction started on Tesla’s mega plant in Shanghai, which is progressing smoothly and should be running by the end of this year.

American companies are reluctant to leave China because they do not want to harm their economic interests. Many American companies have been operating profitably in China for decades. According to the latest survey released by U.S.CBC, 97 percent of American companies in China believe they are making profits. Other data shows that one-third of U.S.-funded companies’ global sales growth from abroad comes from China.

What is even more attractive to American companies is that China is constantly opening up further to the outside world, which means huge economic potential and attractive prospects for profitability. According to The Brookings Institution, China will add 850 million people to its middle class from 2009 to 2030. The middle class will rise from 12 percent in 2009 to 73 percent in 2030, and consumption in China will reach $1.433 billion, accounting for 22 percent of the global total.

China also provides an increasingly optimized business environment for foreign companies. In the World Bank Group’s report Doing Business 2019: Training for Reform, China ranked 46th of 190 economies last year, up 32 places from 78th in 2018. European countries, as well as the Republic of Korea and Japan, are optimistic about the Chinese market and have significantly increased their investments in China. From January to May this year, Germany, the Republic of Korea, Japan and the United Kingdom increased their investments in China by 100.8, 88.1, 19.9 and 9.2 percent, respectively; and the EU’s investments in China increased by 29.5 percent.

American companies face the reality that if they leave China, competitors will fill the gap at once. Moreover, once they leave, it would be difficult to return. This means that American companies would retreat without a fight and hand the economic benefits to their competitors. They are not, of course, willing to do this.

Trump wants American companies to look for an alternative to China; this is easier said than done. In fact, with the transformation and upgrading of Chinese enterprises, labor-intensive American companies with low technological content in China have begun to shift to China’s neighboring countries. This is the result of the natural allocation of resources and is rational and expected. However, it would be difficult to relocate higher-tech enterprises out of China. Some American companies preparing to leave China have found it difficult to find areas that match the Chinese production environment. A New York Times report on August 24 pointed out that China is the most efficient place to produce a wide variety of goods. The report stated that China has built vast networks of smaller factories that supply essential components to large factories; has a workforce of hundreds of millions of people who know how to staff an assembly line; and has fast trains, smooth highways and efficient ports that dependably move goods from the factory floor to the world.

Vietnam is the preferred target for American companies that want to leave China, but a recent report by The Wall Street Journal clearly stated that Vietnam could not replace China, as China has a 15-year head start on Vietnam in manufacturing. This gap means that Vietnam is unable to compete with companies in China. As for Bangladesh, Myanmar, Indonesia and even India, infrastructure, transportation, worker skills and social security are not comparable to even Vietnam. Thus, it is not surprising that American companies are hesitant about moving to these countries.

If American companies move back home from China, they will face many difficulties, including in recruiting qualified employees. Fuyao, a glass factory in China, produces more than 60 percent of the China’s automotive glass. In 2010, in response to General Motors, it invested in setting up a factory in America to produce automotive glass. Since the factory opened, it has struggled to recruit young people. The impediment is not that the salary offered is not competitive in the industry, nor is it discrimination against the Chinese company. American youth are willing to live on Wall Street and in Silicon Valley, but they are unwilling to engage in manufacturing. Fuyao’s owner believes that this is the result of years of hollowing out the U.S. manufacturing industry. This is another crucial factor for American companies considering a return home from China.

Some commentators believe that American entrepreneurs in China have come to a consensus on Trump’s order: This unreliable order will end with his departure, because it is a bad idea that violates natural laws as well as public opinion, and threatens serious damage to the United States and its businesses.

You might also like
Back to Top