GEAR­ING UP

As Trump calls on man­u­fac­tur­ers to re­turn to the US, what are the prospects for China’s in­dus­trial strat­egy?

China Daily (Canada) - - ANALYSIS -

Said Busi­ness School, says that de­spite progress there are still chal­lenges for China in up­grad­ing its in­dus­try.

He cites the semi con­duc­tor in­dus­try, which re­ceives large gov­ern­ment sub­si­dies but is still heav­ily re­liant on im­ported chips, in par­tic­u­lar from the US, for its high-end gad­gets.

“There are still lim­i­ta­tions as to what Chi­nese semi­con­duc­tor com­pa­nies can do,” says Thun.

The Amer­i­can aca­demic, who is an au­thor­ity on the China au­to­mo­tive sec­tor, says there have been chal­lenges in the past in open­ing up these new sec­tors for in­vest­ment.

“Some­times it has worked and some­times it hasn’t. There have been these con­cerns in the in­ter­na­tional busi­ness com­mu­nity over the past cou­ple of un­cer­tainty,” he says.

“There is frus­tra­tion that the gov­ern­ment wants to loosen things up for in­vest­ment in some ar­eas but makes it dif­fi­cult for every­one else in oth­ers.”

Whether the new US ad­min­is­tra­tion suc­ceeds in per­suad­ing more of its na­tive com­pa­nies to base their op­er­a­tions back in their home­land re­mains to be seen.

There is, how­ever, al­ready an es­tab­lished trend for com­pa­nies mov­ing some of their ac­tiv­i­ties back.

Ac­cord­ing to re­search by the non-profit or­ga­ni­za­tion Reshoring Ini­tia­tive, some 249,000 jobs were moved back in the five years up to the end of 2015. This was more than the 220,000 that left between 2000 to 2003, seen as the peak years about pe­riod for off­shoring glob­ally.

He Wei­wen, vice-pres­i­dent and senior fel­low of the Cen­ter for China and Glob­al­iza­tion, China’s leading in­de­pen­dent think tank, be­lieves there is a limit on what can be moved back.

He points to US De­part­ment of Com­merce statis­tics, which show that the value added per em­ployee for US multi­na­tional over­seas op­er­a­tions is 29 per­cent higher than that within the US.

“The only way to bridge that would be for Trump to cut the cor­po­ra­tion tax rate from 35 to 20 per­cent and then im­pose a 10 per­cent tar­iff on goods of these com­pa­nies com­ing back into the US. That would still not ac­count for the higher medi­care and le­gal costs in­volved in em­ploy­ing peo­ple in the US,” he says.

“All this, how­ever, would be a ma­jor vi­o­la­tion of World Trade Or­ga­ni­za­tion rules.”

He, a for­mer eco­nomic and com­mer­cial coun­selor at the Chi­nese Con­sulate Gen­eral in New York and San Fran­cisco, be­lieves it will be a chal­lenge to get US com­pa­nies to in­vest more in Chi­nese man­u­fac­tur­ing.

“In my ex­changes with Amer­i­can busi­nesses in China, they are not con­cerned with man­u­fac­tur­ing, but get­ting more ac­cess to ser­vices, not only fi­nan­cial ser­vices like bank­ing and in­sur­ance but also le­gal con­sult­ing, leisure and med­i­cal ser­vices.”

Wil­liamson at Cam­bridge, who was speak­ing from Switzer­land af­ter at­tend­ing the Davos fo­rum, says the prob­lem with some of the cur­rent de­bate is that it is couched in terms of man­u­fac­tur­ing still be­ing ver­ti­cally in­te­grated and com­pa­nies do­ing ev­ery­thing in one lo­ca­tion.

He says that model be­gan to die out in the 1990s — driven to a large de­gree by China — and now the whole pro­duc­tion sys­tem is built on global sup­ply chains.

“When Don­ald Trump talks about bring­ing man­u­fac­tur­ing back, what ex­actly is he talk­ing about? The real ques­tion is what bits of this com­plex global sup­ply chain can be moved and the eco­nom­ics are go­ing to be dif­fer­ent de­pend­ing on which part of the chain you are tak­ing about be­cause some bits are cap­i­tal­in­ten­sive and some la­bor-in­ten­sive.

“It would be quite some para­dox if the bit that gets moved back to the US is the fi­nal as­sem­bly op­er­a­tion.”

Fuyao was not the first Chi­nese man­u­fac­turer to set up a pro­duc­tion fa­cil­ity in the US.

Wanx­i­ang Group, based in Hangzhou, has made a se­ries of ac­qui­si­tions in the US, in­clud­ing buying bank­rupt A123 Sys­tems, a bat­tery maker, for $256 mil­lion.

Ed­ward Tse, chair­man and founder of Gao Feng Ad­vi­sory, the man­age­ment con­sul­tancy, says a pat­tern is emerg­ing of Chi­nese com­pa­nies do­ing rel­a­tively lowend man­u­fac­tur­ing in the US and buying up high-end fa­cil­i­ties in Europe.

“We have had a lot of clients come to us look­ing to make ac­qui­si­tions in the US, par­tic­u­larly in au­to­mo­tive parts, con­sumer re­tail and ar­eas like build­ing ma­te­ri­als,” he says.

“When it comes to ar­eas like high-end man­u­fac­tur­ing, they are look­ing to make ac­qui­si­tions in Ger­many, the UK and places like Switzer­land and Aus­tria.”

Tse, au­thor of The China Strat­egy, says this sep­a­ra­tion has emerged mainly be­cause of US re­sis­tance to Chi­nese tech­nol­ogy com­pa­nies like telecom­mu­ni­ca­tions gi­ant Huawei mak­ing in­vest­ments in the US.

“What you are see­ing in­stead is Chi­nese money in start-up in­vest­ments in Sil­i­con Val­ley, Seat­tle and on the east coast around Bos­ton and Cam­bridge. They are of­ten part Amer­i­can and part Chi­nese ven­tures and be­cause they are small, they are sub­ject to much less scru­tiny.”

Jef­frey Tow­son, pro­fes­sor of in­vest­ment at Pek­ing Univer­sity’s Guanghua School of Man­age­ment, says even if there is a ma­jor wave of Chi­nese man­u­fac­tur­ing in­vest­ments in the Rust Belt or ma­jor reshoring by US com­pa­nies, it is un­likely to cre­ate the jobs that Trump craves.

“The big­gest im­pact on man­u­fac­tur­ing jobs in the US has not been off­shoring to Asia or China but the ad­vance of tech­nol­ogy,” he says.

“It is wip­ing out jobs far faster than off­shoring ever did. It is go­ing to be an in­creas­ing phe­nom­e­non and is not a trend that will re­verse it­self.”

Thun at Said Busi­ness School be­lieves China is fol­low­ing the right strat­egy in try­ing to up­grade its man­u­fac­tur­ing by part­ner­ing with for­eign firms.

“This has so far in­volved ac­quir­ing Ger­man firms. There is some con­cern in Ger­many about los­ing their crown jew­els, par­tic­u­larly the fam­ily-owned mit­tel­stadt (small to medium-sized) com­pa­nies which are of­ten will­ing to sell out,” he says.

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