Companies prodded to rely less on China, but few respond

Drug makers stand out as one industry reducing reliance on Chinese suppliers

as Ethiopia or Southeast Asia can compete with experienced Chinese workers and flexible suppliers, said Robert Gwynne, who produces women’s shoes for brands including Steve Madden in Dongguan, near Hong Kong.

“All my clients say, we have to diversify,” said Gwynne. But when shown costs in other countries, “90% take the China scenario.”

Companies also increasingly are tied to China by the appeal of its 1.3 billion consumers at a time when the West’s spending growth is anemic.

Makers of automobiles and higher-value goods are spending billions of dollars to expand Chinese production. As the economy reopened, Volkswagen AG said in May it would spend 2 billion euros ($2.2 billion) to buy control of its Chinese electric vehicle venture and a controlling stake in a battery producer.

Instead of using China to export, “now a lot of people are producing ‘local for local,’” said Lim.

Only 11% of companies that responded to a survey by the European Union Chamber of Commerce in China said they were “considering shifting investment to other countries,” down from 15% last year.

Some are leaving to cut labor costs, but the rest “are really committed to China,” said a chamber vice-president, Charlotte Roule.

Moving factories or finding nonChinese suppliers to reduce the risk of disruption “means further investment,” Roule said. “Who is going to pay for that?”

Charles M. Hubbs, founder of Premier Guard, which makes surgical gowns, masks and other medical devices in China, said he is gearing up to produce face masks in Mississippi to avoid problems with shipping. But he said such an approach won’t work once the pandemic ends and prices fall back to normal.

“You can afford it now. People are paying $12 for an isolation gown,” said Hubbs, who has worked in China since the late 1980s. “But when COVID is over, you’re going to go back to $3 or $4.”

Many companies already have pursued a “China plus one” strategy in Asia over the past decade. They set up factories in Southeast Asia to serve other markets or insure against disruption in China, even if that raised their costs.

But as China lifted anti-disease controls on business in March, other Asian economies shut down, forcing companies to shift work back to Chinese factories, which are working overtime to make up the shortfall, said Seyedin.

Some US and other leaders are talking about possible tax breaks or other incentives to lure companies home. Trump has threatened to raise taxes on American companies that move from China to any other country but the United States.

Even if tax breaks or subsidies go ahead, companies face the costs of setting up a factory in unfamiliar territory, training rookie employees, finding suppliers and possible disruption to customer relations, said Alvarez & Marsal’s Lim.

“Shifting is not free,” he said. (AP)