Would the Last Company Manufacturing in China Please Turn Off the Lights

The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Taiwan, Malaysia, Cambodia, India, Colombia, The Philippines, Indonesia, Mexico and Turkey (mostly), it does sometimes feel as though within five years nobody will be making widgets in China anymore.

On top of the client and potential client calls, we have also been getting a steady stream of reporters asking us for permission to talk to our clients leaving or looking to leave China. We tell them that for various reasons, none of our clients are likely to want to discuss leaving China and then they usually tell us that they “understand.” See How to Leave China AND Survive.

With the extreme reluctance for anyone to say they will be leaving China, whenever we write about companies leaving China (especially when we do so on our China Law Blog Facebook page) we get hit with invective claiming we are making this stuff up because we hate China. Well guess what everyone, there is now strong factual support for what we have been saying for the last few months. A huge chunk of American and European companies are looking to move their manufacturing from China.

In Many U.S. firms in China eyeing relocation as trade war bites, Reuters wrote  how “more than 70 percent of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits.”

In a business survey of 219 companies by the American Chamber of Commerce in South China, “64 percent said they were considering relocating production lines to outside of China.” And just as our international lawyers are seeing, and just as we have been reporting, “the trade war is shifting both supply chains and industrial clusters, mostly towards Southeast Asia” — in other words, Vietnam, Thailand, Malaysia, The Philippines, Cambodia, Indonesia and India. “U.S. companies reported facing increased competition from rivals in Vietnam, Germany and Japan, while Chinese companies said they were facing growing competition from Vietnam, India, the United States and South Korea.”

This has led to a slow-down in orders for manufacturers in China:

Customers are slowing down orders or not placing them at all, Harley Seyedin, president of AmCham South China, told Reuters.

“It could very well be that people are holding back on placing orders until times are more certain or it could very well be that they are shifting to other competitors who are willing to offer cheaper products, even sometimes at a loss, in order to get market share,” he said.

“One of the most difficult things about market share is once you lose it, it is very hard to get back.”

Companies in the wholesale and retail sectors have suffered the most from U.S. tariffs, while agriculture-related businesses have been most hit by Chinese measures, the survey found.

The survey was conducted between Sept. 21 and Oct. 10 and I would bet the percentages would be even higher if the survey were conducted today and much higher still after January 1, when U.S. duties are set to rise sharply.

“Around 85 percent of U.S. companies said they have suffered from the combined tariffs, compared with around 70 percent of their Chinese counterparts. Companies from other countries also reported similar impacts as their American counterparts.” This reinforces what my law firm’s international trade lawyers have been seeing, which is that our European clients have been nearly equally impacted because so many of them sell their products into the United States.

The problems extend beyond just tariff costs as “nearly half the companies surveyed also said there had been an increase in non-tariff barriers, including increased bureaucratic oversight and slower customs clearance.”  It is not clear whether these customs problems are being felt in China or the United States or both, but from what we hear from our own clients, it’s both.


UPDATE: December 7, 2018

After reading the Wall Street Journal article, American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned, today, I feel compelled to write again on how companies are looking to leave China.

The gist of Areddy’s article is that American entrepreneurs are tired of China and leaving in droves and it cites a boatload of statistics backing this up. According to Areddy, “disillusion” has set in among expats in China, “fed by soaring costs, creeping taxation, tightening political control and capricious regulation that makes it ever tougher to maneuver the market and fend off new domestic competitors. All these signal to expat business owners their best days were in the past.”

Yes, but this is just the half of it. The other half is the more visceral feelings of those who are fleeing and Areddy nicely captures that too, as reflected in the following quotes from the article:

1. “He lost the feeling ‘it’s all happening’ in Shanghai and will try Thailand.”

2.  “It’s harder for them [foreign entrepreneurs] to live here now.”

3. “How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.

4. “The label of ‘foreigner’ is always on your forehead.

5. “China started to become less clear about what the endgame was for foreigners.”

The article notes how the climate for foreign businesses took a downward turn in around 2012 when Chinese government authorities “stepped up scrutiny of visas. . . ., reinforced China’s Great Firewall of internet controls. . . and [set up a situation where] big domestic tech firms thrived while laws excluded foreign rivals or pressured them to share technology.”

The international lawyers at my law firm have heard some variation of all of the above countless times from our own clients, and not just Americans; we hear it from our Canadian and our European and our Australian clients in roughly the same proportion.

And yet, most of the China complaints we hear are from companies that intend to STAY in China because the economics for doing so are still there. These companies are calling us seeking help to stay in China. Some of them are downsizing and seeking help in dealing with China’s complex employee laws. Some are looking for employment benefit advice in an effort to keep their foreign employees who want to leave. Most are calling for advice on how to make things better/safer for them in China. I alone have gotten more than a dozen calls/emails since China threatened “grave consequences” against Canada over Meng Wanzhou’s arrest.

What will China do against Canadian and U.S. companies and personnel? Hard to say, but if past history is any predictor of future performance (and we all know it is), you should expect China to (at minimum) continue to step up enforcement of its existing laws against all foreigners, but particularly against Americans and Canadians. If you are a regular reader of this blog, you know this sort of thing isn’t new as China has been stepping up its enforcement against foreign companies pretty much since we started this blog more than a decade ago. Way back in 2012, in an article I wrote [link no longer exists], entitled China’s Business Law Trends for 2013, I listed the following as the top three of four things to expect for 2013:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you are  at risk. Yes, this is more likely to impact you if you are from Africa or the Middle East, but we are definitely hearing of increased problems for Americans and Europeans too.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. China has especially stepped up its enforcement against American and European companies that operate in China but have an entity in Hong Kong without one in the PRC.  We have seen such an increase in this over the last six months that we are wondering if maybe the PRC is using a Hong Kong list.  Providing jobs to Chinese citizens does not let you off the hook on this one. Trust me on that.

3. China will increase its tax collection efforts. This has been going on for years now and if you are doing business in China already I am guessing that your response to this is “yeah, so.” In particular, China has stepped up its transfer pricing efforts and so if your China operations are not making a healthy profit, be prepared for the government to impute healthy profits to it. If you do not already have a good China accountant, get one.  Now.

If you are a regular reader you know that our perpetual advice to avoid China’s stepped up enforcement against foreigners is to do whatever you can to make sure neither you nor your company become low hanging fruit for such enforcement. What does that mean for right now? It means the following, in a way that has become more pressing than ever before: