Companies are moving their manufacturing out of China to countries much closer to their markets
The negative news about the Chinese economy seems to flow from a bottomless well these days. As if the ongoing Evergrande default and the looming shadow debt crisis weren’t enough for the Chinese Communist Party (CCP) to worry about, the world now finds itself in the worst supply chain crisis in modern history.
The Bloom Is Off the China Rose
The fact that the Chinese regime is the source of the crisis is not lost on the world, either. Nor is Beijing’s despicable role in the pandemic and its callous attitude toward countries heavily afflicted by the CCP virus, commonly known as the novel coronavirus.
These and other challenges are the reasons why foreign manufacturers are finding China much less desirable than they used to. As a result, “nearshoring” has become a major trend in the world and China’s economy will take a hit from this trend. In short, nearshoring refers to companies that are moving their manufacturing to countries much closer to their main markets.
There’s little wonder why.
China isn’t the country that it used to be. That can be said of many nations today; but from a manufacturing perspective, the climate in China—business and political—is rapidly deteriorating. Fundamental trade elements such as production supply chains that originate in China, for example, continue to be disrupted by pandemic-induced labor shortages and scarcer resources, among other reasons.
In a telling response to worsening conditions, Guangdong Province, the largest manufacturing region in the country, has lowered foreign investment barriers in an effort to attract more multinational corporate manufacturing. How much such policies will stem the nearshoring tide is not known, but it does show that Beijing knows which way the wind blows.
Rising Costs and Falling Margins
Gone are the days when an American or European company could dramatically increase profit margins simply by moving their manufacturing operations to China, as opposed to other countries. Huge profits were possible when the CCP helped tens of thousands of foreign firms take advantage of slave labor wages.
But today, China’s labor costs are among the highest—if not the highest—in the region. Vietnam is more competitive in terms of labor costs than China and is trying to expand its manufacturing capacity. Mexico’s labor costs are lower as well, and U.S. manufacturers avoid the expense and risk of overseas shipping.
That’s a big deal because shipping costs are going through the roof. A year ago, it cost about $2,000 to ship a container of goods from China to the United States. Today, that price is at least $12,000, if not higher. And lately, shipping costs from China are up ten-fold. Furthermore, rising fuel costs and product scarcity will likely reinforce that trend.
Some economists predict that the supply chain problems will be a relatively short-term situation, lasting perhaps a year or maybe two. That may be the case, but it’s doubtful that they will recover in a way similar to how they were pre-pandemic.
Long Term Damage to the Chinese Economy
All of these confluent factors are driving the Chinese economy into the red, despite the inflated GDP reports. For example, with a savings rate of 34 percent, Chinese consumers aren’t spending their money. They’re saving more this year than they did in 2020. Gross savings rate is over 45 percent.
Where then, is the real growth in the economy? It’s much less than reported by the CCP. More to the point, the collapse of China’s debt-laden real estate development sector is not a sign of a healthy economy, but rather, of a failing one.
The reality is that the impact of nearshoring is likely to be much deeper and more damaging to China’s economy because it involves a long-term trend. Companies don’t leave a manufacturing base like China on a whim, or due to short term headwinds. Moving manufacturing operations from one country into another is expensive and takes years of planning. They do so only after concluding that changes in conditions there are declining in fundamental ways, and will therefore have an extended negative impact on the future earnings and even viability of their companies.
China’s Loss Is Others’ Gain
On the plus side of the nearshoring trend, countries such as Vietnam, Poland, Turkey, and Mexico are benefitting from China’s loss. The benefits range from lower labor costs and quicker time to market to minimal shipping risks and costs.
Vietnam, of course, is gaining a manufacturing business for the Asia-Pacific market, while Turkey is becoming the manufacturing base of choice for the Middle East and North African market. Poland is becoming the new manufacturing base for European-based companies serving the European market. Mexico is proving to be a welcome manufacturing base for U.S. manufacturers and others.
What’s becoming quite clear is that the impact of European, Asian, and American companies nearshoring will be felt in the near term by China, as well as in the medium or even longer term. That’s because the CCP will face an almost immediate slowdown in GDP, as well as stiff unemployment challenges. Manufacturing jobs and money, after all, tend to go away when manufacturers leave a country.
Nearshoring: The Beginning of the End for the CCP?
Firms leaving China for nearshoring and the resultant unemployment crisis may well aggravate an already growing civil unrest problem stemming from the Evergrande debacle and other failures. Adding those stresses of investment loss with the other problems mentioned above could also trigger a deep recession or even depression in China.
These two economic crises don’t bode well for the health of China’s economy, nor that of the CCP. Keep in mind that economic growth and full employment are the twin pillars justifying the rule of the CCP—promises that it made with the 1.4 billion citizens after the Tiananmen Square massacre in 1989.
If economic stagnation and extended unemployment persist, could a significant part of the Chinese people conclude that the CCP is no longer able to justify itself as the rightful rulers of China?
Perhaps. However, how soon such a conclusion may come about, if it comes about at all, remains to be seen.
But one certainty that is already here is the nearshoring trend. It’s gaining speed and volume as the world’s manufacturers flee China, taking jobs and money with them. As the trend grows, the CCP may find itself facing much bigger problems from a much larger part of the citizenry tomorrow than it does today.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.
