As the US and its allies increasingly come to view China as a threat, businesses have increasingly been advised by these governments to “quit China”. Yet such a request is easier said than done — with China still one of the largest consumer markets in the world, business owners are loath to leave China. These are likely to double down on production in China in order to continue producing for the growing consumer market there.
For many of these firms, due to the sheer nature of the business they are in, it simply does not make sense to produce back in the US and then sell to China. For example, US-based heavy machinery Caterpillar operates more than 30 plants in China, producing for the local market.
“Given the high costs of shipping relative to value, it is not feasible to make excavators, front-end loaders, and similar products in the United States and then export them to China,” says Nicholas R Lardy, Anthony M Solomon Fellow at the Peterson Institute for International Economics.
One of these businesses is The Dow Chemical Co, represented by Asia Pacific president Jon Penrice, a panellist at the EIU webinar. While Dow does consider free trade to be the ideal situation for business, Penrice has no qualms about further “ringfencing” supply chains by producing “in China for China”, should shrinking global trade become still less open.
Such a plan is in fact Dow’s “Plan A”, since having to ship less around the world allows chemical firms to become more agile to customers, though it would mean having to spend a bit more on raw materials and labour.
“I think the thing that is changing ... is the pivot from China as an export threat to China as a consumption opportunity,” he remarks, noting that the sheer size of the Chinese market requires Chinese firms to increasingly produce for the domestic market, causing it to become less of a disruptive force in terms of exports vis-a-vis the heyday of “Made in China” in the past two decades.
Having had a positive experience vis-avis intellectual property and innovation in China over Dow’s four decades in the country, Penrice hopes to tap world-leading opportunities in 5G, protocol technologies and electric vehicles in China.
Manufacturing industry standards are of particular concern to chemical manufacturing firms like Dow, since these would significantly affect how firms manufacture products around the world. China has established the China Standards 2035 scheme, which seeks to make the Chinese government as well as Chinese tech firms “regulation setters” for global markets. As China takes the lead in technological innovation, there is a distinct possibility that Chinese firms will be able to set industry standards for the rest of the world in pioneering technologies.
“A major benefit of leading standards is being able to influence them in a way that benefits one’s own strengths and ambitions. In this way, if China were to lead a standard setting, they may be used to privilege domestic companies, such as the telecommunications giant Huawei,” says Dezan Shira analyst Alexander Chipman Koty. Establishing its standards as a global norm, moreover, would allow China to profit off licensing fees; it is currently the second largest payer of licence fees worldwide due to its large manufacturing industry.
Western countries are unlikely to give up these benefits easily — especially to a perceived adversary like China. This could lead to a bifurcation of standards worldwide as both China and the West seek to establish their own standards as pre-eminent in their particular spheres of influence. A “balkanisation” of standards in this way is likely to lead to economically inefficient outcomes by imposing further compliance costs on firms, leading to Control Risks’ Alan Chamorro arguing that Beijing’s China Standards 2035 scheme is actually more concerning for the West than “Made in China 2025”.
For now, Dow Asia Pacific is looking to develop a more local workforce in their China operations in order to better understand the business landscape they are inhabiting. “The easy answer [to political risk] is to have good local people in China. We tend to employ local people and ... we do get that informal purchase by having a pretty vibrant local organisation,” says Penrice, who estimates that 98% of his workforce comprises local Chinese workers. This local workforce allows Dow to have a stronger local understanding of China’s market and political landscape.
“Foreign firms in China operate in an uncertain, politically influenced investment climate. Local Chinese competitors are often better able to navigate the country’s labyrinthine business environment,” say Eurasia Group founder Ian Bremmer and political observer Fareed Zakaria in the Harvard Business Review.
China’s business environment is perceived as difficult for foreign companies to operate in without a strong local team; in the same vein, with the New Cold War between China and the US, it is going to be a tough environment for everyone else too.
