Historically, successful Taiwanese firms had a natural springboard in mainland China when they grew enough to look at expanding. But with tensions at a boiling with the Chinese Communist Party (CCP) and coupled with the disproportionate number closures imposed by the CCP’s zero COVID policy, Taiwanese multinationals prefer to implement their expansion strategy in Southeast Asian countries or even in Mexico and the United States.
Many Taiwanese companies that have developed potential in mainland China are now suffering multimillion-dollar losses due to the supply crisis caused by the diplomatic conflicts between Taiwan, the CCP and the West This serves as an example for those firms that must choose their growth path today.
It is true that this downturn in Taiwanese investment in China is not new; rather, it began a few years before the pandemic. But the trend seems to have rebounded strongly this year after more stringent restrictions due to the coronavirus and the escalation of tension between the CCP and Taiwan, and the Western world.
Taiwanese investments in China during the five years prior to the pandemic had already recorded steady annual declines, but in the last two years the jump was exponential. However, these companies are not investing less, in fact investments have increased. It is only that the Taiwanese are investing in other countries such as Indonesia, Japan, Malaysia, Vietnam, the United States, and Mexico.
The decision to avoid investing in China is not easy, since distances to other countries are greater, language barriers make negotiations difficult, and the market of millions of Chinese inhabitants is left behind. But the incentives offered by certain countries and the dissatisfaction with the CCP seem to be enough reason to seek new and more promising horizons.
Foreign investors flee China
Hundreds of multinational companies currently operating in China are re-evaluating their situations and devising contingency plans for possible flight. Exhaustion due to the asphyxiating measures imposed by the CCP, added to the escalation of warlike tension caused by the regime’s threats to invade Taiwan, are enough reasons to devise a plan B or even decide to withdraw as many firms have already done.
Jörg Wuttke, head of the EU Chamber of Commerce in China said, “There’s a lot of scenario thinking going on… all the way to: ‘What shall we do in case there is a war? Should we close our China operations? How can we sustain our business and overcome possible blockades?’”
Wuttke also announced in May that 23 percent of EU Chamber of Commerce members in Beijing are now considering moving current or planned investments out of China. This is the highest level since record keeping began. And 77 percent report that China’s attractiveness as a future investment destination has declined.
The president of the American Chamber of Commerce in Shanghai, Eric Zheng, also expressed his deep concern. Added to the crisis with Taiwan, are the impacts of deteriorating relations between the United States and China, as reflected in trade tariffs and bureaucratic obstacles that are forcing companies to relocate to other countries.
Of course, moving many of these gigantic industries to other countries is not a simple matter. Besides being extremely expensive, it implies that firms may have to give up profits for years until they are able to settle in other industrial centers. Is this feasible? Is it really possible that the global economy will suffer as a result of a decoupling between China and the West? These are some of the questions that large firms suffering the consequences of producing communist China are trying to answer.
Although the communist regime has not acknowledged it, the Western media has been reporting for several months now that foreign investors are ceasing to invest in China. On May 18, the Financial Times estimated (based on Hong Kong bond data) that foreign investors sold more than 108 billion yuan (about $16 billion) in Chinese bonds in April, bringing capital outflows (from yuan-denominated bonds) in the first four months of this year to a record 235 billion yuan (about $34 billion).
The Southeast Asian country that could replace China as a ‘global manufacturing hub’
For many years China has been par excellence the “global manufacturing center.” The number of foreign firms that decided to invest there, motivated mainly by cheap labor, allowed China to have the infrastructure to encourage any type of industrial investment.
However, it seems that the factors already mentioned are weighing enough so that the enormous infrastructure and cheap labor offered by the Asian giant are not an advantage that absolutely prevents investment in other countries.
What options are emerging to replace China? In principle, neighboring Vietnam is fast becoming a major player on the manufacturing scene. Currently, there are signs that Taiwanese and other investors are targeting Vietnam as one of the top alternatives to replace China as the world’s factory.
In addition to promoting manufacturing, this small Southeast Asian country is fast becoming one of the world’s largest chipmakers, with companies such as Intel pumping hundreds of millions of dollars into assembly plants and research facilities in Ho Chi Minh City, the country’s economic and financial center. Some of the world’s leading artificial intelligence (AI) companies have also invested heavily in the Vietnamese market.
Recently, Nikkei Asia reported that Apple would manufacture its iPads for the first time in Vietnam to diversify its supply chain and reduce dependence on China, its main manufacturer.
The company is moving some iPad production from China to Vietnam after strict COVID-19 lockdowns in and around Shanghai led to supply chain disruptions for months.
China’s exit as a “global manufacturing hub” is unlikely to happen overnight, but the shift seems to be happening faster than could have been imagined just a few years ago. These changes will undoubtedly bring major upheavals in the world market that will affect society as a whole.