Will China’s COVID Re-Opening be Good or Bad for Business?

In What Does a Re-Opened China (Without Quarantine) Mean for Foreign Business? Renaud Anjoran of Sofeast Group looks at what China’s “COVID re-opening” will mean for foreign businesses. Let me begin by saying that I count Renaud among the group of people I consider most qualified to answer a question like this. I say this because I’ve known and worked with Renaud for nearly two decades and I know him to be both a top-tier international sourcing/quality control person, but equally importantly, I know that he always does his utmost to tell the truth.

Renaud can also be trusted on a question like this becuase he and his company provide services to companies looking to manufacturer in India, Vietnam, and Thailand — not just China. I feel compelled to add this last bit because 9 times out of 10 the person who is all rah-rah on China these days has a job that wholly depends on China, and I find some of them to be outright liars about what is happening in China and others are too deep in China and the money they make from it to be capable of objectivity.

Anyway, Renaud’s article poses all the right questions and Renaud gives thoughtful answers to all of the questions he poses. But, as much as I like and respect Renaud, my answers to Renaud’s questions differ a bit from Renaud’s answers and in an attempt to widen the perspective, I below list out Renaud’s questions, summarize Renaud’s answers, and then explain if and how I agree or differ from Renaud. As always, we truly welcome additional views in the comments.

Renaud starts his article by explaining a bit on China’s COVID history and how China is right now knee deep in a massive COVID wave.

Note that Renaud’s views are in normal font and my views are in italics. 

1. What does it mean, from a business perspective, for foreign businesses?

Renaud says it depends on the time frame. Many in China are sick now and working from home when that’s practical. Renaud is not aware of a single factory that hasn’t “had to reduce . . . production” due to sick workers and to “many migrant workers hav[ing] already moved back to their hometowns.”

Renaud advises people wait until after this COVID wave passes before going to China because “all hospitals are overwhelmed right now and you probably don’t want to end up in a Chinese hospital in an industrial district somewhere in Shandong or in Fujian, do you?.”

I agree with Renaud regarding the above. Every client with whom I’ve discussed China production has revealed that they are having production issues due to China’s current COVID wave, and most of them think it will only get worse. I am of the view that nobody should go to China now who does not absolutely have to go to China now. I was a patient in a China hospital (in Yantai of all places) during the best of times and I was appalled by the crowding, the wait time, and the lack of sanitation, and I cannot even imagine what that hospital would be like now. I have no compunction about travelling just about anywhere, but no way am I going to China. Just no way. 

2. Will other countries be afraid of mass infections and possibly a new deadly variant? 

Renaud talks about being on a recent flight from Hong Kong “that contained more than 50% mainland Chinese, and several were coughing their lungs out.” That caused Renaud to wonder whether countries will impose restrictions on travelers coming from China, especially since so many COVID experts see China’s latest wave giving rise to multiple new COVID variants. Renaud sees restrictions as something quite possible.

I agree with Renaud regarding other countries imposing restrictions against travellers from China and I expect many Asian  countries (in addition to Japan, which has already done so) to impose restrictions on travellers from China. These restrictions will not only impact companies from the countries that impose restrictions, but also companies whose supply chains depend on those countries, along with China. 

3. Will the manufacturing transfers, for example from China to Vietnam / India / Mexico / Poland, be reversed?

Renaud thinks this might happen for the companies that made a mistake in leaving China, “realize it, and correct it” but for the most part, “no way.” Renaud basis his “no way” prediction on his view that those who leave China do so based on “a change of perspective — specifically, a new understanding about the importance of structuring supply chains in a way that mitigates very high-impact risk contingencies. One of those contingencies is seeing China get excluded from the international community in the same way as Russia.” Renaud then cites to a Financial Times article, Carmakers quietly cut ties with China in supply chain shake-up:

International groups have now launched a quiet yet concerted effort to cut their reliance on China’s sprawling network of components makers, according to industry executives and supply chain experts.

“There is a large-scale rethinking of logistics operations [across the industry],” said Ted Cannis, a senior executive at Ford. “The supply chain is going to be the focus of this decade.”

Renaud also cited a recent piece I wrote, Manufacturing Outside China: Apple Likes It and You Should Too, “on that same general topic.”Renaud then predicts that companies that he does not see “China’s manufacturing output falling off a cliff” because it is often the best place [for an SME] to develop a complex new product.

I agree with Renaud that virtually no company that has left China will return to China. Why should they? I’m always telling clients who are contemplating a move to China that I’ve had dozens of clients bemoan their having failed to leave China but I’ve yet to have one that left China ever talk about returning to China. But, in all fairness, we did have a client leave China for Vietnam well before COVID that for the first year or two in Vietnam would talk about how “absolutely everything” is better in Vietnam than in China, but then it moved back to China! It moved back to China because it was costing it too much to get various parts from China to Vietnam for some of their new products. They were not at all happy about moving back to China, but their costings and timing on their new products demanded that they do so.

Where I differ from Renaud is in my belief that China manufacturing will eventually fall off a cliff. I predict that some combination of geopolitics and ESG will cause a huge number of companies to leave China in a rush, much like they left Russia. This may take three years, five years, or ten years, but it is inevitable. 

4. Will FDI from midsize European and American companies resume at the same pace as before covid?

Renaud notes how “foreign direct investments into China fell off a cliff over the past 3 years,” but he expects it will pick up but remain below 2018/2019 levels. Renaud sees boards of directors viewing “China as a major source of risk,” and that will impact their willingness to invest. But he says that companies that don’t plan to sell into China will prefer not to expand their presence there.

I agree with Renaud that most who have their products made in China either want to or are starting to reduce their investments there. But I think Renaud has it wrong with respect to those who sell into China, as I see a reduction in China investment from those companies as well. Generally, those who make money from China are not looking to exit China entirely, but many of these companies are looking to reduce their China footprint and thereby reduce their China risk. We have seen companies do this footprint and risk reduction via the following:

1. Reducing the number of their entities, offices, and/or their employees in China, particularly their foreign employees there. With this typically comes a reduction in China FDI. Many of these companies are moving key personnel from China to Singapore.

2. Stop selling directly into China and start using a distributer, reseller to sell for them. This usually leads to closing down all entities and offices in China and terminating all employees there as well. Obviously, this reduces China FDI.

3. Switch from making money by selling widgets into China and instead licensing the brand name and/or the technology to a Chinese company. This usually entails closing down all entities and offices in China and laying off all employees there as well. Obviously this reduces China FDI.

The above sort of lightening of a company’s China footprint is far more common than people realize and it’s become even more common after companies saw what happened to foreign companies in China. In the first few weeks after McDonald’s exited Russia I must have gotten a half dozen calls from companies who said that they wanted to be out of China (yet still making money from China) within a year. Every time the China invading Taiwan threat level goes up, our law firm sees an increase in calls from companies wanting to explore how they can leave China while still profiting from China. 

5. Will Chinese citizens be able to travel as freely as before, and will the country remain as open in general?

Renaud notes that the Chinese people “are perceived a bit differently now, especially in scientific and high tech sectors” and “signs that were bilingual [in China] are now only in Chinese” and “teaching English to kids is now a lower priority” but he isn’t sure whether this people-to-people decoupling will continue.

I wish I could be optimistic on this, but I fear that as tensions betwen China and the West escalate over China’s “unlimited friendship” with Russia, people to people relations will deteriorate as well. Also, many countries (including the United States) have imposed restrictions on passengers incoming from China and I expect nearly all countries not on China’s payroll will soon do the same, and it’s quite likely China will retaliate by doing the same to passengers from any country that restricts China passengers. 

6. Will a lot of Western people go back to China to live and work?

Renaud notes the decline of Westerners in China but says their return will depend on people-to-people relations and ease of travel. Per Renaud, “many . . . see China as a high-tax country that doesn’t follow the examples of Western countries and can enforce brutal policies. However, if opportunities abound, Western bars re-open, people show a positive attitude toward Europe and North America, and … it becomes a more attractive place, more people will come. But I don’t see a big reversal of the recent trends.

I see no chance of Westerners returning to China in great numbers and I see a continued exodus of those who are still there. Nearly all of my friends who were in China have already left and those who are there are justifiably concerned about what might happen to them should China invade Taiwan. 

Renaud concludes his piece by talking about how unexpected things could happen that could influence his predictions and then mentions how an “aggressive US Congress, on its own, can accelerate the “decoupling” trend dramatically.”

I find this particularly interesting because I know many who believe that the 2024 U.S. election will be a fight to see which party can be the most anti-China. These people think this will in turn lead to further increases in U.S. sanctions and limitations involving China and that these sanctions/limitations will greatly impact EU companies as well. I mostly agree with these people, but I also think that we will see greater distancing between the West and China in the meantime. See e.g. ‘A sea change’: Biden reverses decades of Chinese trade policy

I’ve said it before and I’ll say it again: we live in interesting times.

Read More

China Business