From the start of his term in office, President Trump has spent a lot of time and effort trying to get American companies to relocate their manufacturing out of China and back to U.S. shores. The administration’s actions include enticing companies with massive subsidies and tax breaks, working with allies such as Australia and Japan to reroute supply chains, doing national security reviews and – most famously – imposing tariffs on Chinese imports.
While trashing China, Trump talks of a renaissance in American manufacturing, with dreams to export goods to the world. He trumpets foreign investment that promises to build giant factories, such as a 13,000-job Foxconn plant that would build LCD displays in Wisconsin and Taiwan Semiconductor’s $12 billion microchip factory promised for Arizona. He cites the coronavirus pandemic as another reason to distrust China.
So how is all that going? Here are a few facts, which should prove quite sobering to Trump and the America-firsters.
· For all his talk about manufacturing, the U.S. has lost 300,000 jobs in that sector since Trump took office. After increasing in 2017 and 2018, manufacturing jobs flatlined in the U.S. last year before plunging amid the pandemic. Foreign direct investment into the United States fell dramatically last year to its lowest level since 2006, the New York Times reported. Foreign-owned companies invested about half as much in the United States in 2019 as they did in 2016, the year before Trump took office, the Times noted.
· Economists say Trump’s trade war with China has actually caused a drag on American factories, because component prices have increased due to tariffs, the Times reported. China continues to make most of the components that go into multinational companies’ smartphones, laptops, TVs and other equipment.
· Chinese investment in the U.S. plummeted to $5 billion last year, the lowest level since 2009, according to the Rhodium Group, a research firm with deep roots in China.
· Those giant factories? The Foxconn (TW: 2354) plant in Wisconsin is not shaping up to be what was promised. Instead of building a facility that would produce large LCD panels for TVs, it will build a plant making smaller panels with different potential applications, the Chicago Tribune reports. It notes that Foxconn missed job-creation and investment targets in 2018, causing it to lose tax incentives. “The notion that it will deliver on all of its initial promise is not conceivable,” Bob O’Brien, who was hired by the state as an expert on flat-panel displays, told the newspaper.
· The $10 billion Taiwan Semiconductor (NYSE: TSM) plant in Arizona also is being met with skepticism. It was announced only in May of this year, but already the firm is seeking huge subsidies from the U.S. government – enough to cover the difference in operating costs between Taiwan and the United States.
· Depending on your viewpoint, not a lot of offshoring from China is occurring, and when it does it’s going to Vietnam, Mexico, India and other low-cost countries – not to the U.S. A survey from Gartner this year showed that despite the pandemic, despite the tariffs, despite all the pressure from the U.S. side, only about one-third of global supply chain leaders had either moved sourcing and manufacturing out of China or planned to do so within three years.
Much of this was predictable. For years, multinational companies have looked to diversify their manufacturing beyond China. The biggest reason is the cost of labor. Between 2011 and 2016, Chinese labor costs rose 60 percent, then went up another 30 percent between 2016 and 2019, according to market research firm Euromonitor. The minimum wage, common in factories, continues to rise almost every year in China’s major cities.
But often, companies looking to relocate their manufacturing find that the economics just don’t pencil out. Where it might make sense for a footwear or apparel company that doesn’t need high-skilled labor or a lot of sophisticated equipment to move to lower-cost countries, it usually does not make sense for higher-end manufacturers. Firms that make cars, telecommunications gear and construction equipment are the ones remaining in China, where the infrastructure and army of highly skilled workers are world-class. Manufacturers relocating from China to the U.S. often are surprised to encounter outmoded factories and infrastructure, an insufficient, untrained labor pool and less-developed supply networks.
Microchip experts questioned the economic logic – and massive subsidies – behind the Foxconn move to Wisconsin. “You can say I'm going to move production, I'm going to move supply chains tomorrow,” Rafael Salmi. president of a technology engineering company in Geneva, Illinois, told the South China Morning Post. “But then, when you look at it, it doesn't make sense.”
That is a common refrain.
“Reshoring was just something nice, a nice idea, mostly for companies that should never have outsourced to a country like China,” Renaud Anjoran, chief executive of Shenzhen-based Sofeast, which advises companies manufacturing in China and Vietnam, told the Post. “Their total cost was not really that much lower, they didn’t save that much, they were not that labor-intensive.”
Another key advantage to staying in China: the country’s own market. The Middle Kingdom’s consumer class dwarfs that of the U.S. The promise of selling to China’s 1.4 billion people is what lured many companies to China in the first place. That has not gone away, despite the pandemic. China already accounts for 20 percent of global GDP, and that will keep rising.
"Diversification and some redundancy in supply chains will make sense given the level of risk that the pandemic has uncovered," Doug Barry, spokesman for the U.S.-China Business Council, told Reuters. "But we don’t see a wholesale rush for the exits by companies doing business in China."