China Grown by Offshoring Faces Crisis with Friendshoring? [Global Focus]

Production Disruptions Due to Zero-COVID and Geopolitical Uncertainty Rising Amid West-China Conflicts
EU Chamber of Commerce: "23% of Western Companies in China Considering Relocation to Other Regions"

[Photo by AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] The ‘AirPods Pro 2,’ expected to be released by Apple at the end of this year, is anticipated to be produced in Vietnam rather than China. This is because Apple is recently trying to reduce its excessive dependence on China for product manufacturing.

Apple experienced production disruptions this year due to China’s stringent COVID-19 prevention measures. Moreover, with U.S. President Joe Biden strongly checking China, the political uncertainty surrounding business in China is increasing.

Accordingly, Apple recently requested its contract manufacturers to increase production outside China. According to market research firm Counterpoint Research, 95.3% of Apple products were produced in China last year.

In the 1990s, amid the wave of neoliberal globalization, China emerged as the world’s factory. At that time, offshoring?relocating production bases overseas to secure cheap labor and raw materials?became the dominant trend, and investments concentrated in China, which offered not only cheap labor but also a huge market. China achieved high growth, surpassing Japan to become the world’s second-largest economy.

However, with the Russia-Ukraine war ushering in a new Cold War era and the U.S. strengthening its check on China, offshoring is declining, and friendshoring is becoming a new trend. Friendshoring refers to relocating production bases to more friendly countries to avoid geopolitical risks.

◆Global Companies Leaving China= Recently, Foreign Policy, a U.S. diplomatic media outlet, reported that as friendshoring becomes a new trend, companies are leaving China.

Samsung has steadily moved its production facilities from China to Vietnam and India since the 2010s. In June 2020, Samsung Electronics announced it would relocate a significant portion of its display production facilities from China to Vietnam. Prior to that, Samsung Electronics withdrew its smartphone factories in Shenzhen and Tianjin in April and December 2018, respectively, and in October 2019, it halted operations at its only smartphone production line in China, the Huizhou plant in Guangdong Province.

American toy company Hasbro announced in 2019, during the U.S.-China trade war, that it would reduce its sales proportion in China. At that time, Hasbro CEO Brian Goldner stated that the production share in China, which was 67% in 2018, would be reduced to 50% by the end of 2020 and below 33% by 2023. Adidas also moved its production base to Vietnam.

Volvo, whose major shareholder is Chinese automaker Geely, announced last month plans to establish a production plant in Slovakia. This is the first time in 60 years that Volvo is setting up a production plant in Europe.

According to a June survey by the European Union (EU) Chamber of Commerce in China, 23% of Western companies said they are considering relocating outside China. Additionally, 50% of companies responded that business in China has become more politicized than before.

This marks a significant change in atmosphere compared to 2-3 years ago. Before the COVID-19 pandemic in 2019, the EU Chamber of Commerce assessed that European companies had firmly contributed to China’s development into a more mature and dynamic market.

Tony Danker, Secretary-General of the Confederation of British Industry (CBI), said in an interview last month, “All companies say they are reviewing supply chains centered on China,” adding, “This is because they expect political decoupling between China and the world to accelerate.”

In a survey conducted earlier this year by insurance brokerage Willis Towers Watson, 95% of Western companies expressed concerns about business risks in the Indo-Pacific region. Two years ago, the proportion of those worried was 62%.

Willis Towers Watson concluded, “An overwhelming majority believe that geopolitical competition and economic decoupling between China and the West will intensify,” and “Private companies are concerned about becoming victims of diplomatic disputes.”

◆Boycott Movement Targets, Growing China Risks= As conflicts between the West and China intensify, cases of Western companies suffering from boycott movements in China are increasing. According to data released last month by the Swedish National China Centre, since 2016, there has been at least one foreign product boycott movement per month on average in China, and more than one-third of these were caused by the Chinese government.

Whenever the U.S. and European countries raise human rights issues such as Xinjiang, Uyghurs, Tibet, and Hong Kong, the Chinese government has expressed strong dissatisfaction, and such clashes have increasingly triggered boycott movements.

According to the Swedish National China Centre’s tally, at least 78 foreign company product boycott movements occurred in China over six years from 2016 to 2021, which is six times more than the number of boycott movements in the eight years before 2016. Cases of the Chinese government imposing regulations on foreign companies without official announcements or legal grounds are also increasing, fueling growing dissatisfaction among foreign companies.

President Joe Biden of the United States [Photo by AP Yonhap News]

◆“Quad Will Be the Core of Friendshoring”= President Biden is promoting the expansion of U.S. manufacturing jobs under the economic slogan “Build Back Better.” Between 1993 and 2011, when China rapidly grew through offshoring, U.S. manufacturing jobs decreased from 16 million to 10 million. Similar trends appeared in other Western countries. While automation caused some job losses, countless jobs moved to low-wage countries.

In 1982, 30% of the overseas workforce of U.S. multinational companies was abroad, but by 2014, this proportion doubled to 60%. Job losses in Western countries due to offshoring became a social issue.

Foreign Policy analyzed that offshoring may have been the fundamental cause of class divisions between those who benefited from reduced production costs and those who lost jobs, and that such divisions may have contributed to Donald Trump’s election as U.S. president.

Foreign Policy expects that the Quad (a security consultation body among the U.S., India, Japan, and Australia) will play a central role in friendshoring in the future. It also highlighted that at the supply chain meeting hosted last month by U.S. Secretary of State Antony Blinken and Commerce Secretary Gina Raimondo, officials from various countries including Europe, Australia, India, Indonesia, Japan, Singapore, and South Korea were invited.

Since it is impossible for a single country to replace the massive factory that is China, it is necessary to ally with traditional allies, which is why friendshoring will be needed.