Returning to the US? It’s a non-starter
Taking some operations back to their roots wouldn’t make any sense at all, says expert
Paul Ni believes it will be almost impossible for US companies to move their operations back to the United States to create jobs at home.
The 34-year-old principal for management consultants Roland Berger says there is no logic for companies that have major operations in Asia, and in particular China, to do that.
US President Donald Trump has called for American companies to bring their manufacturing operations home.
“You have, on the one hand, what he wants to come back to the US and on the other hand, the reality of what can actually come back,” says Ni.
So far, only US companies in Mexico have said they are moving some of their operations back. General Motors has announced it is moving 450 jobs back. Ford has axed plans for a $1.6 billion plant in the USneighboring country, which industry sources claim was never going to get the final go-ahead anyway.
Ni, speaking at his company’s offices in Gateway Plaza, Beijing, says it would be highly damaging for some of his clients to up sticks from China and move back to the US.
He highlights the US chemicals company Cabot, which has been in China for 30 years and set up a joint venture with Hengyecheng in Wuhai in Inner Mongolia in September last year to make silica. The new investment will create many thousands of jobs.
“It has done a considerable amount of work on that project, including building a strong relationship with the local government. Why would it have to close that plant and rebuild another one in the US? It would just be illogical.”
He says Cabot, which has other hubs in Tianjin and Shanghai, is a prime example of a modern US multinational company, with 80 percent of its revenues coming from overseas.
“Its growth is driven by Asia, primarily by China. The American market is not really a growth area for the company.”
Ni believes Chinese autoglass maker Fuyao’s decision to set up an operation in Moraine, Ohio, in October was driven by very specific factors.
The Volkswagen scandal relating to disguising emission levels is set to boost sales of US cars and therefore autoglass. Fuyao already has a 60 percent share of the China market and needs to find markets outside the country.
“The economic advantages relate to energy costs, such as natural gas, being between a third and half the price they are in China. They are getting the land almost free. The labor costs, however, are almost eight times those of China.”
Ni argues it is not just the cost of labor that is likely to stop a flood of China manufacturers switching operations to the US, but also the lack of skills now available.
Cao Dewang, founder and chairman of Fuayo, has admitted that he has had to employ mainly people over the age of 50.
“He can hardly find any young working adults suitable for such blue collar jobs. This is because the industrial landscape has changed and is now very much service-orientated rather than production-orientated so there aren’t the young people with these skills anymore.”
Ni also cannot envisage Trump getting the steel mills in Pittsburgh rolling again, with the Pennsylvanian city now more noted for its robotics industry.
“We no longer talk about American companies in the steel sector, to be honest. It is either Japanese, Chinese or European ones in high-end steel production.”
Ni, who was born in Harbin but moved to Singapore as a teenager, studied electrical engineering at the National University of Singapore before doing his master’s at MIT in the US.
He began his career in investment banking with Credit Suisse in Singapore before going to study for an MBA at INSEAD in Fontainebleau, France.
He joined Roland Berger — one of the few international management consultancy firms that has developed out of Europe, rather than the US — in 2011 and now works for a wide range of clients in industrial goods, packaging, steel, utilities and energy.
Ni believes that instead of manufacturing migrating out of China, it is now more likely to remain at home, given the current emphasis on developing a high-end manufacturing sector.
The State Council issued a guideline in December aimed at attracting more foreign investment in manufacturing.
“In China you have access to a more talented, highly skilled and comparatively cheaper labor force. China has transformed from low-cost production to a technologically-driven and technically intensive economy. The Government has achieved this by investing heavily in research and development,” he says.
Ni believes there is now a major opportunity for early stage European start-up companies, in particular, to come to China to develop their products.
“This does not just apply in manufacturing, but more generally. There is just a bigger market to test any concept with. In the past, companies might have tested their products in Sweden and the Nordic region, with access to 20 million people, before taking them to Western Europe. In China, they can do this on a much bigger scale.”
The consultant says that any reservations companies may have had in the past about intellectual property protection are no longer as relevant.
“They can come to China earlier and patent their product and then continue to upgrade it to make sure the application is not being copied later on.”
Ni thinks some of China’s low-end manufacturing will continue to move to South East Asian destinations like Thailand, Vietnam and Laos but believes it will be at least another generation before it moves to Africa.
“In Africa, you have mining and some consumer-related enterprises but you don’t have a fully established industry-related infrastructure. You have the production of shoes and apparel but no more than that,” he says.
“I would be confident that in 10 to 20 years you will see an automotive hub there.”
Ni believes the real activity, however, will be in China, which is now building many advantages over the US.
“China has everything the US can offer to develop high-end industrial activity. There is a big market, which is potentially more dynamic. Even in areas like technology, you have major successes such as Didi (the China taxi-hailing service), which has now merged its operations with Uber,” he says.
“China has everything the US can offer to develop high-end industrial activity. There is a big market, which is potentially more dynamic.” PAUL NI principal for management consultants Roland Berger