by HIGH POINT — In January, China’s top economic adviser told the world’s business community that his country is once again open for business following three years of functional hibernation due to the global pandemic, the result of that country’s “zero tolerance” policy regarding Covid.
In practice, however, whether China can return to whatever normal might look like these days depends on a daunting list of variables. These include the country’s saber-rattling vis-à-vis Taiwan, its war of words with Washington, its potential role as a peace broker in Russia’s unprovoked war with Ukraine, and residual concerns about the Chinese government’s crackdown on big business at home during the pandemic. This crackdown continues, despite the farrago of flowery rhetoric coming out of Beijing.
What are the risks of returning to China? Of reengineering supply chains yet again to take advantage of what remains the world’s best overall manufacturing option, bracketing the geopolitical complexities? Even of including Chinese sourcing in supply chain contingency plans?
After all, freight rates are reasonable again — even more than reasonable. China’s labor force is difficult and perhaps even foolish to ignore. And while simply stating that the country is open for business and meaningfully incenting foreign investment (again) are two very different things, there is a potentially huge opportunity cost. If China’s economy does roar again, and most experts believe that it will, those businesses that do return now will enjoy sizable competitive advantages, just as those who helped pioneer the Chinese furniture export business in the Guangzhou-Shenzhen region did a quarter century ago.
The rhetoric coming from China’s economic policymakers certainly describes a red carpet. But carpets can be rolled right back up just as easily as they were unfurled, and anyone who watches crime mysteries knows that one of the best ways to transport a dead body is to roll it up in a carpet.
Whiteboarding
No small part of writing columns like this one is imagining myself the CEO of a company facing the scenario I happen to be writing about, from developing and implementing social media strategies to working with product designers and licensors to, in this case, mapping out supply chains and doing risk assessments.
Were I a CEO at the High Point Market right now, the question of whether to meaningfully reengage with Chinese sourcing would be at the very top of my list of discussion items for the showrooms on my visit list, regardless of whether I were a retailer, manufacturer, importer or supplier.
So, back to China’s elevator pitch: The country’s new premier as of March, Li Qiang, said unequivocally that China would remain open “no matter what happens.” Can we believe him? The new commerce secretary, Wang Wentao, said foreign companies in China are “family.” Really? No, that’s a fantasy, but it does underline how emphatic the new government’s charm offensive has been so far.
Let’s also note that despite repeated pledges to reform and to open up, China has for the most part rolled back reforms and with a very heavy hand locked down its markets. Heck, even China’s domestics are wondering if the new government’s rhetoric can be believed, having just witnessed a two-year regulatory crackdown on the private sector and seeing scant little meaningful evidence that it is easing.
The rhetoric is certainly impassioned, especially by Chinese standards. And it is coordinated, coming in a chorus from the entire pantheon of policymakers and economic advisers. The pledges, therefore, have to be taken seriously.
There is great incentive for these policymakers, as well. Last year, China’s GDP sagged at 3%. This chorus’ repeated goal for this year is a respectable, even ambitious, 5%. Oh, and unemployment among China’s young? Double digits.
There is also great risk, even from a law-and-order perspective. Remember that the CEO of China Renaissance Holdings, Bao Fan, a rock star in big tech, has been missing since February, or just after his company said that Fan was helping the Chinese government in a high-level “probe.” Poof! Gone.
What would Apple do?
When I whiteboard ethics dilemmas in a journalistic context, I often ask myself and my students to consider WWNYTD: What would The New York Times do? The Old Gray Lady is a paradigm of journalistic excellence and of ethical, transparent decision-making, making it the go-to for in-class discussions about ethical quandaries and dilemmas.
For the question of China, I might ask WWAD: What would Apple do?
Like a lot of leading furniture companies, Apple has been busy diversifying its supply chains to reduce its dependence on China, where all of our iPhones historically have been assembled. Also like furniture concerns, Apple has moved production to Vietnam and also to Thailand. Unlike a lot of leading furniture companies doing business in the U.S., however, Apple sells into the Chinese market.
Though Apple’s ethos is secrecy when it comes to trade practices, we do know that the company is hedging its bets in China as it diversifies its supply chains. This would matter to me as that hypothetical CEO. Covid-related troubles late last year at a major iPhone supplier, Foxconn in Zhenzhou, hammered Apple sales and delivery times. The delays and stoppages are predicted to cut into iPhone sales by as much as 30%.
But here’s the rub: At Foxconn, 300,000 Chinese churned out Apple products. To mitigate the Covid delays in China, Apple needed a far-flung constellation of 31 companies in Vietnam even to aggregate just over half that Foxconn labor force. That’s 31 different management teams and employee cohorts that will take years to train up.
So, keep an eye on Tim Cook and Apple. Oh, and keep an eye on Foxconn, because that manufacturer also moved a big chunk of its own production to Vietnam. If China’s rhetoric is to be believed, companies like Foxconn will be among the very first to return significant investment to the homeland.
What shouldn’t be underestimated, however, are those massive geopolitical dark clouds gathering on the horizon. China is soberingly serious about bringing Taiwan back into the proverbial fold, and it will continue to bully its erstwhile little brother. That’s who China genuinely considers “family,” in a Prodigal Son sense.
And China is serious about its dialogue with Russia, mostly as a larger play to reengage with Europe’s power players. Ukraine just might be the real wild card in this high-stakes political poker game. Who has an ace up their sleeve if that conflict escalates, which is a likelihood after a series of high-level intelligence leaks from the Pentagon this month revealed the nuances of U.S. support of Ukraine. Or, fingers and toes crossed, what happens if China can be proven effective in persuading Putin to de-escalate, even to seek a resolution?
Whew! I’m glad I’m just a tweed-wearing, pipe-smoking college professor with a stack of papers that desperately needs grading and not actually a CEO of a multinational. (I teach for free; they pay me to grade!)
I hope your showroom conversations prove revealing, generating enough lambent light to chase those dark clouds away. And don’t forget to try the lo mein at Huang’s Kitchen on North Main. Delicious!
