Investment fleeing China is not low-hanging fruit

Source : Daily World

China’s doomsayers have been gleefully forecasting an exodus of industries from China after the international virus outbreak from Wuhan. Various countries of the world have announced policies designed for attracting manufacturers seeking to exit China. The outcome has not been as disastrous for China as predicted but at the same time the flight has not been as significant as was made out by Chinese commentators. To know the extent of the likely move of industries from China, we have to see why industries moved to China in the first place. It has always been an oppressive and opaque regime, with scant regard for the rule of law, including international law. Analysts usually cite low wages as the reason for foreign capital being attracted to this totalitarian country. Yet, many countries in Southeast Asia, Africa and Latin America can give that advantage. A high level of infrastructure is another reason given for foreign investors’ attraction to China. Most of the foreign capital, however, had moved into China when there were days-long traffic jams and the smog forced children to go to schools with face masks, years before Covid-19 appeared.

China attracted world capital by its high ratings in the ease of doing business. You could start construction within a week of your broaching the subject. Land was provided on the spot with any residents on the land being summarily removed and buildings demolished without notice, as all land in China belongs to the state. In many cases, the entrepreneur got the land and electricity and water connections free of cost. There are no effective labour laws, no inspectors, no unions and environmental pollution has been barely a concern for the authorities. Prison labour was used extensively earlier and is not unknown even now although nomenclatures may change, as in the present “gainful employment of re-educated Uighurs”. You could merrily violate intellectual property rights and quality standards were rarely enforced. Finally, there were hidden subsidies from state financial institutions and state-owned mining, oil and shipping companies supplying raw materials and logistics. Did you ever wonder how Ali Express shipped an item costing less than a dollar anywhere in the world with zero shipping charges? On top of it, the state apparatus, including the Chinese missions abroad, MNCs and Chinese researchers in foreign universities helped in stealing cutting edge research from developed countries. Further R&D within China of defense and export-potential products was assisted by state-financed research institutions. At no time in the history of the world any state had such a massive co-ordinated effort to develop, manufacture and export without any ethical, legal and environmental constraints. These advantages gave economies of scale that further reduced the costs and prices and created monopolies which easily eliminated competition.

No other country could beat these advantages and that explains the China success story. There were a few disadvantages that business ethics always ignore. Most were related to the conscience, defined by John Walcott as the “terrifying little sprite, that bat-like winks by the day and wakes by night”. An American businessman, who was gushing at the ease with which he set up his industry in China for which a whole village was uprooted, told the present writer in Beijing that he was sleepless at night. He was responsibe for implementing the one-child policy for his workers and it was his obligation to get aborted any worker who became pregnant in violation of the policy. But business is for profit and his conscience dozed off bat-like with the early rise of the golden orb in the east.

Even today, if some businesses are talking of moving out of China, it is not out of patriotic, ethical or humanitarian considerations but because of looming threats to their profits. In fact, the talk started much before the virus appeared and was stirred mainly by the trade war with the US. Taiwan had started the “Invest Taiwan” initiative in 2019, under which companies moving production from China to Taiwan could avail low-cost loans to cover the cost of relocation. Flexium, Quanta computers and SK Hynix had started moving some production to Taiwan in that year to avoid higher tariffs on imports from China. Mitsubishi had started moving its production for exports to the US from China to Nagoya in Japan. US companies like Dell too followed as in August, 2019 Trump asked US companies to “start looking for alternatives to China” citing his powers under the International Emergency Economic Powers Act (IEEPA). Not only electronics, but apparel, shoes, bags and electrical industries also started relocating in 2019.

The legality of Trump’s threat was questionable, yet with rising labour costs in China, increased cyber security risks, terms in contract compelling surrender of IPR, boycott of products using slave labour from Xinjiang or derived from cruel methods of farming and slaughtering animals, meant that manufacturing in China was making less commercial sense. Of course, most of them retained production capacity in China corresponding to the large local demand. Forbes reported in October 2019 how Vietnam, that was carpet bombed by the US with not only explosives but also with herbicides and napalm bombs, became an unintended beneficiary of Trump’s actions. Many industries, particularly furniture and footwear manufacturers shifted production to that poor country, which was still run by communists but offered ease of doing business and cheap labour. Vietnam has been part of this silent revolution for two decades and as early as 2010, 37 per cent of Nike’s production came from that tiny country against 34 per cent from China. Even European companies, that had not been burdened by punitive tariffs by their countries were moving part of their production out of China because even in July 2019, the dominant role of China in the global supply chain was perceived as a significant business risk.

The Covid-19 epidemic and suspicions about China’s role in its international spread as well as its taking advantage of human misery by jacking up prices of personal protection equipment and supplying shoddy goods further increased the consumer clamour for moving out of China. Governments and trade could not ignore consumer sentiments against the “Made in China” label and many countries including India started investigating even the false labelling of the country of origin. As the number of infected people worldwide moved into the millions and deaths into the hundreds of thousands, the push became a shove. Countries of South and Southeast Asia, Eastern Europe and Latin America vied with each other to grab the global investment that was streaming out of China.

Most of the capital machinery and electronics companies from Taiwan and Japan are likely to rather go home than to developing countries. Not less than 40 companies from Taiwan have decided to move out at least partly from China with some like Quanta Computers, which makes data servers for the largest US companies like Facebook and Google, having already started construction in the Taiwan city of Taoyuan. More than 100 other companies, that were already in China or were planning to go to China, have obtained the Taiwan government’s approval for expanding capacity or for starting new ventures in Taiwan. Among these is bicycle maker Giant Manufacturing, which has taken approval for investing $5 billion in Taiwan to shift from China. Japan has budgeted $2.2 billion to assist companies coming home. Even the Japanese companies that were moving from China to Vietnam, Thailand, Myanmar and other Southeast Asian countries will get financial assistance under the programme.

The biggest success story of attracting investment that is fleeing China, and not going to the home country, has been that of Vietnam. As if anticipating this exodus, that country had improved its infrastructure, simplified approvals and invested in health and education, particularly primary education after opening up in 1986. Microsoft has already started making some of its Surface Line in Vietnam. Google has also chosen Vietnam for producing its low-cost smartphone Pixel 4A while taking its smart devices’ production to Thailand.

There is a long list of countries including Turkey, Mexico, Malaysia and even Nepal that are eying the capital fleeing China. Each of these offers cheaper land and labour but comes short on one or more of the following – ease of doing business, law and order, infrastructure and skilled manpower. So, where does India stand in this race? The recent Ladakh clash with China has reduced the ambivalence that our successive governments have displayed towards China. Now it is not forbidden to call out China for unfair trade practices and to claim that trade with China hurts India. Government orders have restricted China’s capability to take over Indian companies and there is deeper scrutiny of China’s FDI in India. Large tracts of lands have been reserved for companies moving out of China.

In spite of these moves, ease of doing business and infrastructure remain our weak spots. While highways have improved and power shortages have been more or less taken care of, grid constraints still limit optimal utilization of generation capacity. Loss-making public sector distribution companies continue to be monopolies over most of India, with their workers resisting privatisation.

In spite of the pronouncements of successive governments, a long line of inspectors continue to harass industries and workers’ unions do not play a constructive role as they do in a country like Japan. Our ports are slow and internet speeds are slower than in most of the competing countries. Parts of the country have unreliable phone connectivity and satellite phones continue to be banned for personal and commercial purposes. Goods movement through public sector railways is prone to pilferage and delays. There is no focussed state effort to subsidise R&D for making our exports competitive in cutting edge technologies.

It was indicated two months ago that 1000 companies are in dialogue with India to relocate from China. It remains to be seen whether that number translates into reality, or whether these companies ultimately go to Vietnam or some similarly small but smarter country.

The writer RN Prasher is a retired IAS officer of Haryana cadre | Personal Opinions

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