German Firms Abandon China, US Firms Should Do the Same
Nearly a quarter of German firms have given up on China. US firms ought to pay attention.
The annual survey of 526 member firms in China found that 23% of them have either already decided to withdraw production capacity from the country or are considering it. A third of those companies have planned to leave China entirely. The rest say they will transfer part of their business and production overseas, largely to lower-cost countries in Asia.
Of the 104 companies that have decided to leave or are considering doing so, 71% cite the rise in production costs — particularly for labor.
The survey participants also said they have a "gloomy" business outlook, attributing their pessimism to the slowdown of the Chinese economy and ongoing trade tensions between Beijing and Washington. The US-China trade war either directly or indirectly affected 83% of respondents.
German companies say their main challenges in China are related to market access barriers, legal uncertainties and technology transfer requirements. Over a third of the respondents in the survey said Beijing's efforts to "level the playing field" for foreign companies are "insufficient."
Level Playing Field
Of Trump's main complaints against China, lack of a level playing field and technology theft are at least accurate.
But don't expect any results from a trade deal in pieces.
The China Law Blog discusses How to Conduct Business with Chinese Companies That See a Dark Future by Dan Harris.
It's the best article on the subject I have ever seen.
Harris says "China today is feeling a lot like Russia in the 1990s. My clients would set up long term deals with these Russian companies which nearly always went bad quickly because the Russian company would grab whatever money there was and walk away," said harris.
The same is happening in China today.
"I am getting the sense that many Chinese companies are pessimistic about their futures and they are acting accordingly. Our China lawyers are seeing evidence of this everywhere," said Harris.
Practically every week one of our China lawyers will get an email or a phone call from someone who bought product from China and received nothing in return or nothing even approaching what they actually ordered. This sending of “junk” instead of real product has spread to pretty much every industry in China and ordering your products from allegedly reputable online sites provides little to no protection.
- These things often happen with Chinese companies that want to make a few final overseas sales before they shut down and disappear. Just imagine the profits to be made from three $350,000 sales for which laughably bad or no product is ever provided. Now just imagine the incentive Chinese manufacturing companies have to sell and not supply foreign companies right before (or sometimes even right after) they shut their doors for good.
- Oftentimes the Chinese company that committed the fraud does not exist. It is not registered anywhere in China or if it is registered as a real company in China it is registered for something like kitchen repairs, not for manufacturing whatever product it is they sold you.
- These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they initially say they will remedy the problems and why they often continue making that claim. Sending even really bad product is less likely to lead to criminal charges than sending no product at all. They can tell the police that they sent you the product you ordered and it’s not their fault those Americans/Europeans/Australians are so picky.
Take the Money and Run
It makes sense if it was a scam all along.
It also make sense if these Chinese corporations think they are ultimately going to lose the business to some other country. They may as well steal what that can from the last deal.
Harris also discusses trademark scams.
Chinese companies will take your product and trademark your brand name in China if you don't do it first. Then they will sue you for using it.
"If your Chinese factory is not convinced it will be making your widgets for another three years, it knows it can make more money by making 'your widgets' for itself and then selling them wherever it can. In the last year, more foreign companies have come to us after their Chinese manufacturer 'stole' their product (and its IP) without ever having made a single one for the foreign company than in the last five years combined," says Harris.
Tariffs Will Not Fix the Problem
Tariffs will not fix the problem.
If anything, the the above paragraphs explain why tariffs made matters worse.
And don't expect a trade deal in pieces to do anything about IP theft either.
What to Do?
For well over a year, a friend kept asking, what would you do about it?
My answer was then and remains now "nothing".
This is not a matter for Trump to solve. Businesses need to decide for themselves whether or not it is worth it to do business in China.
Some of the larger companies like Boeing and Apple do not build any critical technology in China. Others that have tried, may have huge regrets.
A piece of paper signed by China and Trump won't do a damn thing.
Vote With Your Feet
German corporations have decided to throw in the towel.
That is the only way to fix the problem because it is the only way to force China to change.
If China wants business from the US and Germany it will mend its ways. And if it doesn't, then companies need to decide at an individual level if the risks are worth it.
Meanwhile, Trump's tariffs have been a total disaster.
US exports to China have fallen far more than imports from China. In particular, US farmers have been clobbered.
Not even US steel corporations have benefitted. For discussion, please see Trump Tariffs Help Sink US Steel: Investigating a Trump "Big Win".
A Global Manufacturing Recession Started and as with the Smoot-Hawley tariffs in the Great Depression (only on a much smaller scale) Trump's China tariffs made matters worse.
All Pain No Gain
Trump's policies have been all pain, no gain.
The fact remains, tariffs are a tax on consumers and businesses that need imports.
Understanding the Trade Deficit
Many problems today including deficit spending, trade deficits, and income inequality have their roots in 1971.
For the knitty gritty on why tariffs cannot possibly fix the trade deficit or any other problems, please see Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis.
Mike "Mish" Shedlock