CHina has been making headlines for the news of its growth slowdown, after a decade-long, progressive slowdown. What lies behind those headlines is the relocation of many factories and supply-chain dependencies away from China. But such is the scale and depth of China’s four decades of success in manufacturing and trade that the new wind blowing through corporate boardrooms around the world is likely to undermine the country’s status as “the world’s factory” and major trading power. Not there.
Still, it’s important to note how industrial policy has made a dramatic comeback as countries compete to attract companies away from China.
Tokyo is paying Japanese firms to move their factories from China and elsewhere to Japan. It also introduced a new economic security law last summer, which covers 14 sectors that are considered part of social infrastructure. South Korea and Taiwan have comparable “re-shoring” programs that primarily target China. Therefore, the three most industrialized countries in Asia are offering incentives to move their companies out of China and back on a domestic basis.
Tokyo’s budget for re-shoring is $2.5 billion. Some 250 Japanese companies have left China in recent years, a trend that has accelerated. The move is back not just in Japan but other countries in the region as well.
For example, the Asahi Shimbun reported that 135 companies moved out of China last year alone and reestablished factories making semi-conductors, automotive, appliances and clothing. Sony has partially moved its smartphone production to Thailand, which sees increased foreign investment in 2021 (some of it coming from Chinese companies).
South Korean companies are also doing not only re-shoring but also “friend-shoring”. Samsung has chosen Vietnam, which has also attracted Google for the production of its Pixel phones, Apple for its MacBooks and iPhones as well as Nike and Adidas.
Malaysia has benefited from 32 re-established projects from China. And in response to US President Joe Biden announcing incentives that outpace Asia’s industrial giants, Hyundai has announced an electric vehicle and battery plant in Georgia, while LG is partnering with Honda for a new battery factory in Ohio. Used to be.
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CHina hasn’t helped herself with her aggressive behaviour. A (two-way) visa restriction has affected both Japan and South Korea, reflecting political tensions. South Korea’s Lotte retail chain, Sweden’s Ericsson, Australian brewers, Taiwanese pineapple growers and people in Lithuania are all among those who have felt the heat of the dragon’s breath.
Naturally, global companies see the growing political risk and complain about discrimination, rising production costs (entry-level factory wages are 60 percent lower in Vietnam), tighter environmental regulations and, of course, constrained supplies. A European survey found that 23 percent of companies are considering moving away from China.
None of this should be taken to mean that China should be abandoned as a production base or market. Foreign direct investment in China actually increased in 2022. For example, Germany’s BASF is repositioning in China. and this week’s two part series financial Times It detailed how intertwined the Apple production network is with the Chinese ecosystem.
Countries like the US and India have tried to restrict imports from China, only to see their China trade deficit increase. Still, the change of mood is undeniable. A CNBC supply chain “heat map” showed China losing out to Vietnam, Malaysia, Bangladesh, India and Taiwan.
So the revival of industrial policy, much derided in the days of globalization, is very real – driven by concerns about national security, supply-chain vulnerabilities and political tensions, which in combination affect direct competitiveness.
China itself announced in September (without disclosing details) a comprehensive national security system described as “the securitization of everything”.
For better or worse, this picture shows that India’s current policy thrusts (production-linked incentives, capital subsidies, etc.) are in line with East Asian if not global trends. But although India ranks seventh on the 2021 UN list for foreign investment, it is not the default choice for most global companies over China.
To change this, India must integrate more with East Asia by joining regional trading regimes, reduce its tariff walls and improve the quality of its workforce.
By special arrangement with Business Standard
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