For American companies in China, the meltdown of bilateral relations represents the biggest concern in 2020, but few businesses invested in the country long-term are inclined to leave while enjoying healthy profits in an economy that has rebounded strongly from the coronavirus pandemic.
Almost two-thirds of respondents to the American Chamber of Commerce in Shanghai’s annual business survey said US-China tensions were their biggest worry – the first time bilateral issues have led the poll, and well ahead of the second biggest concern, domestic competition, on 58 per cent.
Yet, 92.1 per cent of members said they do not have plans to leave China. Only 5.1 per cent of companies with global revenues over US$500 million plan to flee the country, even as the Trump administration pushes to decouple the world’s two largest economies.
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“Under my administration, we will make America into the manufacturing superpower of the world and we’ll end our reliance on China, once and for all, whether it’s decoupling or putting in massive tariffs like I’ve been doing already,” US President Donald Trump said in a Labour Day address in which economically separating from China featured prominently.
Our biggest concern is to understand what the White House’s goals are and where we are headed
Only 4.3 per cent of AmCham’s members plan to move parts of their operations back to the United States, the fourth most popular destination for diversifying supply chains, with 70.6 per cent of businesses planning no change in production allocation, up 5.1 per cent on last year.
The profile of the members surveyed suggests that these are not short-term players in China looking for manufacturing arbitrage.
More than 85 per cent of the firms have been in China for a decade or longer, with just 4.6 per cent there for under five years, suggesting they are hardened by the realities of working in China and less moved by short term fluctuations in markets and geopolitics. There is also the fact that China was the first in and out of the pandemic, while other markets still in its grips would certainly look less attractive.
“Our membership is fairly stable, most companies have been here a long-time and are well-rooted,” said Ker Gibbs, the president of the chamber. “But this is why we’re also so disturbed to see all the calls for decoupling. Our biggest concern is to understand what the White House’s goals are and where we are headed.”
Gibbs pointed to a potential ban on US firms using WeChat and the lack of clarity over whether this would apply to businesses based in China. “We are waiting for September 20 for clarity, and frankly we have pins and needles right now. If American businesses in China have to stop using WeChat, this would be devastating.”
Some 22.5 per cent of respondents said they were delaying investments due to trade war tariffs, compared to 32.3 per cent in 2019, suggesting that American businesses in Shanghai are adapting to a new normal, riding out the volatility to tap the world’s largest consumer market.
This is reflected in the fact that more than half, 57.5 per cent, are now operating a “China-for-China” strategy, meaning they serve the mainland with their operations there, with facilities elsewhere catering for demand outside China.
Almost all chemical companies are in this position, but just 25 per cent of technology hardware, software and services companies – down from 55 per cent in 2019, showing that a major decoupling is ongoing in this sector.
A lot of members do feel a bit of whiplash from the past three-and-a-half years and want to see a more long-term strategy
But firms in China cannot avoid geopolitical tensions altogether. One-third said that a souring of the US-China relationship is impacting their ability to retain staff in China, with the toxic relationship playing into Chinese people’s desires to work for US firms. This was particularly pronounced in the education and training sector, where 55.5 per cent of companies said they were having staffing issues, and the warehousing and distribution sector, where 50 per cent were having trouble.
The pay-off is clear: despite the trade war 78.2 per cent saw higher profits last year than 2018, with 32.5 per cent greater revenues in 2020 versus 2019, despite the world being in the grips of a pandemic.
“Members are concerned, but dedicated to the market, which is attractive, large, and growing. We are aware of the national security issues and members hope that there can be some rebalancing of the relationship,” Gibbs said. “A lot of members do feel a bit of whiplash from the past three-and-a-half years and want to see a more long-term strategy.”
This article Trump has called on US firms to leave China, but no mass exodus among ‘well-rooted’ companies first appeared on South China Morning Post