US Companies Reevaluate China Strategy: In the not-so-distant past, hordes of U.S. businesses flocked to China, establishing factories in what was viewed as the world’s fast-growing economic powerhouse. Iowa-based Vermeer, a major player in industrial and farm machinery with 4,000 employees, was part of this wave, inaugurating a plant in China two decades ago. CEO Jason Andringa was a frequent visitor to what was seen as an economic Eldorado. But today, the mood among Vermeer and many other global manufacturers has soured on China.
Jason Andringa puts it plainly: “If we didn’t already have a plant in China, we sure wouldn’t start one now.” Despite being content with the existing operation, he has no intentions of expanding further in a climate where U.S.-China relations appear more likely to escalate than ease. The growing tensions have raised concerns about employee recruitment and fair treatment in a country locked in a mutual antagonism with the United States.
The latest episode in this unfolding drama came when the Biden administration announced plans to halt shipments of advanced artificial intelligence chips to China, a move designed to limit Beijing’s access to cutting-edge technology that could potentially be weaponized.
Recent surveys show that U.S. corporate leaders want to limit their China exposure. They’re moving their investments to friendlier countries, a big change from the days when Wall Street celebrated outsourcing to China and claimed multi-million-dollar increases in the world’s second-largest economy. The Bureau of Economic Analysis reports that U.S. corporations increasingly favor Mexico over China for foreign direct investment. According to a U.S.-China Business Council poll, more U.S. corporations are cutting back on China investments.
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This exodus from China began on a smaller scale during the Trump administration’s trade war, as manufacturers restructured their supply chains to bypass tariff costs. However, the trend has gained momentum as relations between Beijing and Washington have further deteriorated under the Biden administration, shifting from a mere trade conflict into a geopolitical struggle concerning Taiwan and China’s recent aerial activities.
After a visit to China in August, U.S. Commerce Secretary Gina Raimondo received complaints from American companies, asserting that China has become “uninvertible” due to government actions such as fines and raids that have made it risky to do business in the country.
Matt Dollard, a senior analyst at RSM US, a consulting firm focusing on mid-market companies, notes that businesses are planning full exits from China. For example, Dollard is currently working with a group of auto suppliers with a three-year plan to completely exit the Chinese market. However, the complex web of supply chains often necessitates that businesses expand operations in other countries while still relying heavily on Chinese factories for parts and raw materials.
Data supports the negative feeling toward China. In June and July, the U.S.-China Business Council conducted an annual poll and found that over a third of respondents had reduced or halted their China investments. This is a record high and up from 22% last year. The majority of survey respondents are huge U.S. multinational firms.
Many companies are now adopting a “China-plus-one” strategy. Instead of expanding further in China, they’re directing new investments to other low-cost countries like Vietnam and India. Of course, some companies are taking the opposite approach, doubling down on China. For example, Ryan Gunnigle, CEO of Atlanta-based toy maker Kids2, continues to invest in his Chinese factories, citing the combination of a strong infrastructure, high-quality producers, and low costs as indispensable in the toy industry.
However, regardless of their chosen strategy, companies face a common problem when building new factories or finding suppliers in other countries: they often end up still heavily relying on Chinese factories for essential parts and materials. Jim Estill, CEO of Danby Appliances, a Canadian company that sells over half of its products in the U.S., grapples with this issue. Five years ago, 85% of the company’s goods came from Chinese factories. In response to growing concerns, Danby has been shifting to suppliers in countries such as Turkey, with the goal of reducing its Chinese supply base to 50% within the next year.
The primary concerns revolve around political risks, and the shifting global landscape is a testament to how businesses are recalibrating their strategies to navigate the turbulent waters of U.S.-China relations. With the future uncertain, it’s a challenging landscape for businesses caught in the crossfire of geopolitics and global commerce.
Our Reader’s Queries
What American companies rely heavily on China?
China’s influence on the global economy is undeniable, and this is particularly true in the semiconductor industry. Companies like Qualcomm, Monolithic Power Systems, and Texas Instruments generate a significant portion of their revenue from China, with percentages ranging from 49.2% to 63.6%. Even NXP Semiconductors, with a comparatively lower percentage of 35.66%, still relies heavily on the Chinese market. As China continues to grow and develop, it’s clear that these companies will need to maintain strong relationships with the country in order to remain successful.
Are US companies still investing in China?
McDonald’s has set its sights on expanding its reach in China with the opening of 3,500 new stores in the next four years. Meanwhile, Starbucks has invested a whopping $220 million in a manufacturing and distribution facility in eastern China, marking its largest project outside of the United States. These moves demonstrate the growing importance of the Chinese market for these global brands.
Why are US companies leaving China?
Beijing’s policies have raised concerns among companies. A third of them have reported that policies and regulations towards foreign companies have worsened in the past year. Additionally, 70% of companies have stated that data localisation and cybersecurity requirements are hindering their businesses.
What is the US strategy toward China?
Our strategy towards the PRC is twofold: firstly, to strengthen our institutions, alliances, and partnerships to better withstand the challenges posed by China; and secondly, to pressure Beijing to stop or minimize actions that threaten the United States’ crucial national interests and those of our allies. Our approach is competitive and aims to enhance our resilience while compelling China to act in a manner that is more favorable to our interests.