Wednesday, 09 December 2020 10:42

Decoupling from China cheap talk for domestic consumption: US lawyer

Decoupling from China cheap talk for domestic consumption: US lawyer Image by Markus Winkler from Pixabay

All the talk about decoupling from China in the wake of the pandemic and the US trade war is mainly "cheap talk for domestic consumption", an American lawyer, who has worked with a number of law firms in China for three decades, says.

Robert Lewis, co-founder of the China Going Global think-tank, said in an op-ed in the Asia Times that while Trump administration officials had floated the idea of funding US companies to relocate back to their country, it was not going to happen.

"Although US President-elect Joe Biden also talks about bringing manufacturing jobs back home, his choice for secretary of state, Tony Blinken, has minced no words in distancing the incoming administration from the idea of decoupling," Lewis wrote.

And he quoted Blinken as saying at an event hosted by the US Chamber of Commerce during the US presidential election campaign: “Trying to fully decouple, as some have suggested, from China … is unrealistic and ultimately counterproductive. It would be a mistake."

Lewis, who has written a book The Rules of the Game of Global M&A: Why So Many Chinese Outbound Deals Fail, said that China's advantage was no longer cheaper labour costs.

As labour costs rose in the Middle Kingdom, its producers had started taking on more and more sophisticated work for their American clients.

"For example, in 2009, China performed only assembly work for the Apple iPhone 3G, representing 3.6% of the total bill for materials," Lewis said.

"By 2018, China was producing many of the more complex components for the iPhone X, including the printed-circuit board, battery pack and camera module, increasing its share of the bill of materials to 25% of the total.

"This is representative of the overall trends for China manufacturing. Based on figures from the Organisation for Economic Cooperation and Development, China’s domestic content as part of total exports increased from 74% to 84% from 2005 to 2015.

"This comprehensive ecosystem of the value-added manufacturing supply chain in China will be difficult to replicate elsewhere."

He said more and more lower-value manufacturing would continue to move out of China and this should not come as a surprise to anyone.

"But moving some lower-value manufacturing out of China as part of a pre-existing broader trend is not decoupling. MNCs [multinational corporations] cannot afford to decouple. The massive China market is just too important to ignore," he pointed out.

Lewis provided the following examples to back up his argument:

  • "China is Apple’s third-largest market, accounting for 20% of its global sales, trailing only the US and European Union markets.
  • "General Motors sells more than three million vehicles in China every year, making China its No 1 market, eclipsing US sales by more than 200,000 vehicles annually.
  • "Cummins sells approximately one-third of its engines in China.
  • "KFC now sells more chicken in China than it does in the US. McDonald’s opened its 2000th store in China in 2014 and now operates more than 3000 locations across the country.
  • "Intel generated more than US$20 billion (A$26.97 billion) in sales in China in 2019, while Qualcomm’s sales in mainland China and Hong Kong amounted to more than US$11.5 billion, more than quadrupling its US sales."

Lewis said companies like the ones he cited were highly unlikely to walk away from the China market. "Similarly, other MNCs and even many small and medium-sized enterprises will be unwilling to cede market share in China to competitors that can then leverage their China profits for competitive advantage in other markets around the world," he added.

He said his statement was borne out by foreign direct investment figures for the first 10 months of 2020. "After a first-quarter year-on-year decline in FDI of 10.9%, FDI inflows were up 8.4% in the second quarter to close the first half down only a negligible 1.3% compared with 2019," Lewis pointed out.

"For the period July through October, China FDI posted another four consecutive months of increases, including a 25% jump in September, followed by an 18.4% increase in October. For the first 10 months of the year FDI was up 3.9% over 2019.

"The kicker is that 2019 was a record year for China inbound FDI. So, notwithstanding a serious global pandemic, China is on track for another record-setting year for FDI inflows.

"The sound you hear is not the rush of foreign companies stampeding to exit China, as would be suggested by the decoupling narrative, but it is the sound of MNCs and SMEs from all around the world pressing to come in."

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Sam Varghese

Sam Varghese has been writing for iTWire since 2006, a year after the site came into existence. For nearly a decade thereafter, he wrote mostly about free and open source software, based on his own use of this genre of software. Since May 2016, he has been writing across many areas of technology. He has been a journalist for nearly 40 years in India (Indian Express and Deccan Herald), the UAE (Khaleej Times) and Australia (Daily Commercial News (now defunct) and The Age). His personal blog is titled Irregular Expression.

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