Foreign Companies Leaving China Is a Test For the Economy
Media reports said that Japanese watch maker Citizen shut down its factory in Guangzhou, south China's Guangdong Province, and dismissed more than 1,000 employees right before the Chinese Lunar New Year, which fell on February 19 this year. In January Microsoft announced it will formally shut down manufacturing plants in Beijing and Dongguan, Guangdong Province, in the first quarter of 2015 and will move Nokia manufacturing from China to Viet Nam. A total of 9,000 employees will be dismissed in the wake of the shutdown of Beijing and Dongguan factories.
Media reports also said that many Japanese companies, including Panasonic, Daikin, Sharp and TDK, are planning to move their manufacturing bases back to Japan. Other multinationals, such as Uniqlo, Nike, Foxconn, Funai, Clarion and Samsung, are setting up factories in Southeast Asia and India.
Once the world's largest manufacturing powerhouse, is China now facing such severe challenges that foreign companies are leaving it? Business difficulties explained why many foreign companies left China in 2008, but this time, the reason is more pragmatic. This adds more uncertainty to its economy in 2015.
Since the second half last year, China's economic growth has slowed down. Its real economy, especially the manufacturing sector, is facing problems.
Previously the backbone of the economy, the manufacturing industry has now become a burden. This is mainly because of an overreliance on the virtual economy, particularly the real estate industry, during the past decade has set the Chinese economy off-balance. Although China has become the world's second largest economy, the foundation for Chinese economy is still weak.
For years after the 1997 Asian financial crisis, China had an export-oriented economy, which pursued growth at the cost of its environment, resources and the value of labor power. When China lost cost advantages, the export-oriented economy lost its vitality. An investment-driven model, represented by investments in the real estate industry and urban construction, also temporarily boosted the economic growth, but failed to push the Chinese economy onto the track of sustainable growth. Upgrading of the manufacturing industry was delayed because of the real estate bubble, making the Chinese economy "hollow."
This round of foreign companies fleeing China is happening because profits and returns the manufacturing industry can offer are sharply declining. Even private Chinese capital is reluctant to remain in the manufacturing industry, then why must foreign companies stay? Furthermore, labor costs in Southeast Asia and India are much lower than in China.
However, it is unnecessary for us to worry about the departure of some foreign companies, because this is also related to the transformation of the Chinese economy.
On the one hand, most of the production facilities Nokia and other multinationals move out of China are low-end ones, which would be removed by China in the future; on the other hand, since China has made rapid progress in these sectors, Chinese companies have been able to compete with famous multinationals. Under these circumstances, foreign companies' profits have been dwindling, and their products have become less competitive. Those companies have had to make timely adjustments. It also reflects their flexible business strategies. For this reason, it is unnecessary to exaggerate the negative impacts of foreign companies' leaving.
What's more important is the fact that some foreign companies are moving production bases back to their home countries, because most of these facilities are for high-end products. Developing high-end manufacturing is the focus of China's future economic restructuring and transformation. If many of these production facilities are leaving China, the results will be serious.
Foreign companies engaged in low-end manufacturing leaving China will not significantly affect the Chinese economy in the long term, but the immediate impact, particularly in 2015, should not be ignored. The manufacturing industry will undergo real tests. Important manufacturing provinces such as Guangdong, Jiangsu and Zhejiang should emphasize on revitalizing their manufacturing sectors instead of indulging in urban construction by borrowing money.
This is an edited excerpt of an article by Tan Haojun, a financial commentator, published in Securities Times
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