China is decoupling from the world, not the other way around

6 min read
A 100 US dollar bill and a 100 yuan banknote

Eighteen months ago, international manufacturers were considering the impact Covid-19 would have on their concentrated manufacturing processes and supply chain integrity. In particular, companies that depended heavily on manufacturing in China, the early epicentre of the pandemic, started to move out.

The continued rumbling of the US-China trade war had already caused Chinese consumers to start rethinking their purchase choices. The benefit of hewing to requirements to have local partners and mandatory transfers of technologies was increasingly questioned in Western C-suites.

It had been worth it to gain access to China’s huge and growing consumer market, but with the cost of manufacturing on the mainland rising, some companies began to re-evaluate their long-term strategies.

In addition, when Covid-19 shut borders across the globe, companies’ reliance on a single source of components for manufactured goods was suddenly thrown into the spotlight. The cost-savings from operating with a single point of failure would have to be weighed against the cost of limited availability and higher prices for components.

Numerous companies announced that they would re-jig their supply chains to distribute risk and governments were there to encourage relocation – notably Japan, which earmarked US$2.2 billion in funds to help its largest companies. And so started the move.

More than one year into the pandemic now, the best way to illustrate what has been happening may be to give some examples.


Chinese consumers have started to take sides in the trade war with the United States, favouring smartphones from Huawei, Xiaomi and Oppo. Apple’s iPhones remain popular, but if the Cupertino behemoth does something to upset Chinese consumers, I’m guessing they would start to shy away from Apple products too.

Industry watchers will be keeping an eye on Apple over the next year or so, as its products remain popular and it would have a tough time finding somewhere other than mainland China to make its products at the current scale.

Its suppliers and third-party manufacturers, however, are thinking differently. Companies like Pegatron, Delta Electronics and Foxconn are moving out and setting up in ThailandIndonesia and up-and-coming manufacturing centre Vietnam. Every Saturday SCMP Global Impact Newsletter By registering, you agree to our T&C and Privacy Policy

A large portion of Apple’s iPads are produced in Vietnam, along with its AirPods. Sharp, which is majority-owned by Foxconn, has also been upping sticks for Japan and Southeast Asia. Toshiba, too, is closing its 30-year-old plant in Dalian to shift its production of electric motors and radio transmitters to Vietnam and back home to Japan.

Samsung Electronics has all but disappeared from mainland China – its final smartphone factory closing two years ago and computer and television manufacturing following last year – closely shadowed by rival LG Electronics taking production back to South Korea.

American PC makers Dell and HP have also been on the move, progressively shifting production out while blaming US tariffs.Google has moved its Pixel smartphone production to Vietnam and its “Nest�? home security system to Taiwan and Malaysia.

Microsoft has also reportedly been walking the well-trodden path to Vietnam, looking to relocate its range of Surface laptop manufacturing there, although it has been very quiet about emigrating.

With China clearly looking to catch up in semiconductor manufacturing, and probably hoping to take the lead in time, Intel has also carefully moved some of its production out, again favouring Vietnam. Nintendo did the same for some of the manufacturing of its Switch console.

The Gap has more or less called it a day in China


Research from UBS suggests that 76 per cent of US companies operating clothing and footwear factories in China are on the move, and with the sector particularly vocal about concerns of cotton sourcing in Xinjiang, Chinese consumers have started to boycott brands. High-profile names in the crosshairs include Nike, which was already in the process of relocating to other parts of Asia and Africa.

German sports brand Adidas has also been near the front of the pack sprinting out of China, with Puma in hot pursuit according to the German Chamber of Commerce.

Much of this big brand production is moving to Vietnam, Bangladesh, Cambodia, and Indonesia. Cotton sourcing has not been the only reason cited, with some firms also worried about stories of forced labour in China. Chinese consumers took offence and shunned those brands too.

Last year the Gap and its sub-brands more or less called it a day on retail in mainland China as interest in the brand waned – and they’re out of Hong Kong as well.

Donald Trump undoubtedly played a role in the relocation of footwear manufacturing from China by imposing tariffs, with Steve Madden now favouring Mexico and Brazil for its US consumers, but keeping one foot in Asia and assembling its rebellious footwear in Vietnam and Cambodia.


Electronics brands are not the only Koreans on the move, car manufacturers have their foot on the gas too. Kia Motors and its parent Hyundai, along with affiliated parts suppliers, have been shifting production to India.

This move has in part been attributed to sales dropping off following a Chinese consumer boycott of Korean goods in 2017 after the deployment of the US-made THAAD anti-missile defence system in South Korea.

In case you hadn’t noticed, there are recurring themes here:

As countries fall from grace in the eyes of the Chinese government, Chinese consumers change their buying patterns, revealing a certain nationalistic impulse that trumps other concerns. Until recently the target of such ire was usually Japanese companies, but more countries are feeling the sting.

Chinese consumers can choose from an increasing range of competitive domestic products, which suggests to me that China is leading the decoupling from the rest of the world – rather than the other way around as has commonly been assumed. A similar trend has occurred around the world as consumers in Covid-stricken countries have tended to support their local economies when they can.

Although many companies are moving production out of China, only a few are opting for a complete withdrawal. Most are spreading their manufacturing across several countries, which in time will increase the resilience of their manufacturing and supply chains.

However, if future global pandemics are as disruptive as this one, or more, I’m not convinced that more distributed manufacturing is a fix for the problems we have witnessed recently. Logistics companies would be up a creek without a paddle in any case.

It’s clear that Vietnam has been a favoured destination for countries to relocate at least past of their production. With a highly educated, young workforce that can compete with China’s it is a logical choice.

Anyone who has visited the dense and colourful cities of Ho Chi Minh and Hanoi will wonder how on Earth people can live with the 24/7 hustle and bustle, let alone brave crossing the street in the path of mopeds carrying an entire family.

But there is another side to Vietnam, one that is accommodating to manufacturing and offers the “nuoc ngoai�? – your average gweilo – a relatively serene lifestyle once out of the city. And all the international staff that have to get brand new factories up and running over the next decades will need a good familiar pub, and given the British government has taken such an interest in Vietnam recently, it gets me thinking.

A cable car on Phu Quoc Island in South Vietnam

What does this all mean?

Perhaps, in the short term, Vietnam is the winner here. And as an investor or business owner, you certainly could do worse than to follow the money.

China will lose some manufacturing and foreign talent, but on balance domestic demand will shift towards perfectly good products made by domestic companies – which is not to be scoffed at.

International firms have executed the strategy they promised; the question now is how Chinese firms react in the long term. If a Huawei or a Xiaomi urgently needs parts at the same time as Apple does, then who gets priority deliveries?

As all this continues to unfold, I am about to become a grandfather. Consequently, I am wondering where I set up my retirement business in 10 years or so: a British pub with 50-year-old Duran Duran tunes playing non-stop, London Pride on tap with chow mein and sweet and sour pork on the menu.

I missed out on doing that during Thailand’s boom as I was too young at the time. Perhaps I’d better get a self-study course in Vietnamese.

Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets

Source: South China Morning Post

Tony Simon

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