German Firms Abandon China, US Firms Should Do the Same

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A survey of German firms found that 23% will withdraw production capacity from China or are thinking about doing so.

Nearly a quarter of German firms have given up on China. US firms ought to pay attention.

DW reports German Firms in China: A Quarter are 'Planning to Leave'.

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.

Dark Future

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.

Makes Sense

  • 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.

Trademark Scams

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.

Tariff Disaster

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

Comments (31)
FloydVanPeter
FloydVanPeter

Mish, you keep using the term Dollar Crisis. Could you please explain what it practically means?

Maximus_Minimus
Maximus_Minimus

Germany has an industrial base, the USA doesn't (off-shored for quick buck). Different situation, different options.

Tony Bennett
Tony Bennett

"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."

...

Thanks for the thumbnail, Mish ... can you forward me the complete business plan? ... asking for a friend ...

Carl_R
Carl_R

The one thing Trump's tariffs have accomplished is that it has brought this situation to a head. His tariffs have accelerated the perspective of dark days ahead. Will China reform in response, or will they become even more repressive? Will it precipitate a world-wide depression? Will anything good come from it in the end? I have no idea. Two things seem clear, however:

  1. China may claim there is no pain, but clearly, the tariffs are affecting them.
  2. In response, due to short term thinking, Chinese businesses are making some exceptionally poor decisions that may harm the country severely in the longer term.
Ted R
Ted R

What is happening in Hong Kong speaks volumes about the problems China is facing. Factor into the equation enormous debt and there you go.

LB412
LB412

"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."

This is fairly common

Maximus_Minimus
Maximus_Minimus

I would hate to link ZeroHedge, but the comment section sometimes contains gold. Go straight to the top of the comment section in the following link.

Sechel
Sechel

Chinese wages were already rising. Vietnam , Camdodia, Indonesia and other Asian nations are good alternatives if one is seeking the lowest costs. Tarriffs simply speed that up. If the investment was to gain access to the local Chinese market, that doesn't change. Germany already built a fully automated plant for sneakers in Germany. Technology will kill all low tech jobs eventually

abend237-04
abend237-04

For decades, beginning in 1979 when Deng declared victory for Maoism and switched to mercantilism, the predictable, reliable mantra of every mediocre product sales manager was, "We absolutely must enter the vast, untapped Chinese market, whatever it takes." We did, and what it took was agreeing to include IP rights in virtually every deal. The stupid short sightedness of that original China strategy has now become apparent. Trump has merely shined a light on it. We, the west, trained China to do what they've been doing. It's a hard sell to convince a sales slick with no R&D background, interest or experience that hundreds of millions and many years' efforts by thousands can be squandered in a single, seemingly simple file transfer.

Sechel
Sechel

U.S. should still embrace TPP , bypass China and seek favorable trade deals with her neighbors. This would do more to keep China in check than any tariff. U.S. strength is technology, educated work force, good design and marketing. we should leverage off of Asia's low wage work force to compete better against China

JMOD46
JMOD46

I believe Trump understands how trade works. He went to the Wharton School of Business and actually said at one of the economic summits "maybe we should just eliminate all tariffs and subsidies" or words to that effect. That went right over the head of everybody. His real goal is to weaken China with respect to its power and influence and prevent it from attaining economic, military, and diplomatic hegemony by way of a trade war. Explaining to the great swath of voters to "buy American" and "bring jobs back to the USA" works better than talking about great power geopolitics. Sell the sizzle and not the steak.

If he is successful there will be many long-term benefits for this country. If it doesn't work, then there will be hell to pay. The guy has a brass set or he is crazy or both. On the other hand, it is a mistake to underestimate this guy.

stillCJ
stillCJ

Editor

Agree with you JMOD, except for the "then there will be hell to pay." part. The upside benefit is much larger than the downside risk. Most of the risk is for China which will really be hurting if they don't get normal trade going again. The problems in that country are already being seen, although the dictators there can let the population suffer and baffle them with propaganda, while they stall & hope that Trump doesn't get re-elected and a "nicer to China" someone takes his place. BTW American consumers are not hurting from the trade war, there is almost no inflation while the economy just keeps chugging along. The US did just fine when China was isolated years ago and it can still get along just fine without China trade, in fact maybe better without their crap. China needs the US much more than the US needs China. Thank god we have a president who knows that.

stillCJ
stillCJ

Editor

Mish I do not agree with you that the best approach is to do nothing. That is what US policy was before and it was a disaster. Just making it easy for dumb capitalists to grab some short term profit there and hoping they will wise up reminds me of the famous quote from V. Lenin: "When we are ready to hang the capitalists, they will sell us the rope". Anyway Mish, I'm glad you highlighted that article; a friend of mine confirmed that his daughter got screwed by a Chinese company exactly as described.

Six000mileyear
Six000mileyear

China is a manufacturing monopoly. No 3rd world country has the infrastructure or educated workforce for manufacturing the scale of China. Many regions are politically unstable. I just don't see how western companies can fit all those new manufacturing plants in the remaining 3rd world countries.

Sechel
Sechel

The fears that China will overtake the U.S. this century will probably be proven wrong. China has already plucked the low hanging fruit of gaining exports due to cheap labor. The economy is so large right now that its going to be harder and harder to direct that ship from the vantage point of a few smart policygeeks. They need to make their economy more market oriented and yes they need to write down and recognize bad bank debt. The U.S. went down this road after 2008 and failed to do the same, the result was that banks were capital constrained for a decade and even today there are signs that the balance sheet isn't really that they and the Fed claim it to be. Chinese wages are also rising which independent of tariffs pushes those cheap jobs to near-by countries such as Vietnam. And not only must China embrace a freer market they must also make it more consumer driven. Every time China tries to do a stimulus they make their consumers poorer as the consumer is actually subsidizing those troubled large banks and state owned enterprises

Bella Krinkle
Bella Krinkle

Mish, from my perspective, the only realistic play IS to do nothing because the US and China are worlds apart, each having opposite viewpoints. Until both sides recognize that cooperation is the only way forward, we will remain in gridlock, as we have the last two years. Both the USA and China need to mature and change their mutual exclusiveness; such growth takes infinite amounts of time. All that you stated is true, with the underlying message being that it will be sorted out by China and the US and the EU Business Communities. Germany is already leading/pointing to options for changes in directions. Myself, I can only stand aside, watch and wait. Will REAL communication occur in this decade, this Generation? I'm not hopeful - I know from personal experience how slowly Transformational change occurs: often much of a lifetime and even that is rare. Sadly, people are too optimistic, being misled by World Leaders, for further gains of power, profit, and control.