Less reliance on China falls short

Despite urging, few companies willing to lose supply chains

Employees work on a car assembly line in April at the Dongfeng Honda Automobile factory in Wuhan, China. (AP/Ng Han Guan)
Employees work on a car assembly line in April at the Dongfeng Honda Automobile factory in Wuhan, China. (AP/Ng Han Guan)

BEIJING -- The United States, Japan and France are prodding their companies to rely less on China to make the world's smartphones, drugs and other products. But even after the coronavirus derailed trade, few want to leave China's skilled workforce and efficient suppliers of raw materials to move to other countries.

Disruptions from the pandemic, on top of the U.S.-Chinese tariff war, fueled warnings that relying too much on China leaves global companies vulnerable to costly breakdowns in the event of disasters or political conflict.

[CORONAVIRUS: Click here for our complete coverage » arkansasonline.com/coronavirus]

Drugmakers stand out as one industry that is trying to reduce reliance on Chinese suppliers by setting up sources of raw materials in the United States and Europe. But makers of consumer electronics and medical devices and other industries are sticking with China.

"I don't know of a single company right now that is moving ahead with any plans to move," said Harley Seyedin, president of the American Chamber of Commerce in South China.

China's explosive rise as the world's low-cost factory helped to hold down consumer prices and increased Western corporate profits. But it has fueled political tension over lost American and European blue-collar jobs. Governments and industry consultants fret that dependence on China can be a threat to supply chains and possibly national security.

SUPPLY CHAIN POWERHOUSE

Chinese factories assemble most of the world's smartphones and consumer electronics and a growing share of medical equipment, industrial robots and other high-tech goods. It is a dominant supplier of vitamin C and ingredients for antibiotics and other medicines. The ruling Communist Party has spent two decades building ports, railways, telecom networks and other facilities that are regarded as among the world's best.

"China still offers an unparalleled supply chain for any industry," said Jit Lim of Alvarez & Marsal, a management consulting firm.

Philip Richardson, who manufactures loudspeakers in Panyu, near Hong Kong, said he has looked at Vietnam and other countries. But he said while their wages might be as low as 60% of China's, the savings will be eaten up by the cost of giving up his network of Chinese suppliers.

"We gave it consideration for about a minute, and it doesn't make sense," said Richardson, who has worked in China for 22 years. "When you buy magnets, now you have to pay for transportation and customs duties into other countries, whereas in China we just buy the magnets and they are shipping to us."

President Donald Trump took office in 2017 promising to "bring back our jobs." The next year's tariff increases on goods from China in a fight over technology and trade prompted some exporters to shift production. But changes were small. Most went to other developing countries.

The pandemic has raised political pressure for companies to move.

PHARMACEUTICAL RAW MATERIALS

The tariff war prompted concern about China's dominance as a supplier of active pharmaceutical ingredients used in antibiotics and vitamins. Some American commentators warned Beijing might retaliate by withholding the ingredients, though there was no sign that happened.

"There will be an increase in the repatriation of national drug supply chains and the re-establishment of national strategic manufacturing capabilities for key drugs," Sakshi Sikka, who follows the industry for Fitch Solutions, said in an email.

In May, the U.S. government awarded a contract worth up to $812 million over 10 years to Phlow Corp., a Virginia company set up to ensure against drug shortages by producing ingredients and generics.

In Europe, French drugmaker Sanofi SA is setting up an active pharmaceutical ingredients supplier to reduce reliance on China. Sanofi says the company will be the No. 2 global producer, with annual sales of $1.1 billions by 2022.

India and Indonesia have announced plans to increase their own production of pharmaceutical raw materials.

Companies including Nike Inc. that used to make shoes, furniture, clothes and other low-margin goods in China have been migrating for a decade to Southeast Asia, Africa and other economies in search of cheaper labor.

DIVERSIFICATION COSTS

For higher-end shoes, however, U.S. import duties would have to rise even further before sites such as Ethiopia or Southeast Asia can compete with experienced Chinese workers and flexible suppliers, said Robert Gwynne, who produces women's shoes for brands including Steve Madden in Dongguan, near Hong Kong.

"All my clients say, we have to diversify," said Gwynne. But when shown costs in other countries, "90% take the China scenario."

Companies also increasingly are tied to China by the appeal of its 1.3 billion consumers at a time when the West's spending growth is anemic.

Makers of automobiles and higher-value goods are spending billions of dollars to expand Chinese production. As the economy reopened, Volkswagen AG said in May that it would spend $2.2 billion to buy control of its Chinese electric-vehicle venture and a controlling stake in a battery producer.

Instead of using China to export, "now a lot of people are producing 'local for local,'" said Lim.

In this May 27, 2020, photo released by Xinhua News Agency, a worker makes plastic toys at a factory in Zhangjiajie, central China's Hunan Province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (Xue Yuge/Xinhua via AP)
In this May 27, 2020, photo released by Xinhua News Agency, a worker makes plastic toys at a factory in Zhangjiajie, central China's Hunan Province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (Xue Yuge/Xinhua via AP)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home.(AP Photo/Ng Han Guan)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home.(AP Photo/Ng Han Guan)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this April 8, 2020, photo, employees work on a car assembly line at the Dongfeng Honda Automobile Co., Ltd factory in Wuhan in central China's Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this Wednesday, May 13, 2020, photo, a worker at SMC China, a Japanese joint venture pneumatic engineering company, assembles products at a factory in Beijing. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this Wednesday, May 13, 2020, photo, a worker at SMC China, a Japanese joint venture pneumatic engineering company, assembles products at a factory in Beijing. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home. (AP Photo/Ng Han Guan)
In this April 12, 2020, photo, workers inspect masks at a mask factory production line of the Wuhan Zonsen Medical Products Co. Ltd. in Wuhan in central China Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home.(AP Photo/Ng Han Guan)
In this April 12, 2020, photo, workers inspect masks at a mask factory production line of the Wuhan Zonsen Medical Products Co. Ltd. in Wuhan in central China Hubei province. The United States, Japan and France are prodding their companies to rely less on China to make the world’s smartphones, drugs and other products. But even after the coronavirus derailed global trade, few are willing to give up access to its skilled workers, vast market and efficient suppliers by moving factories closer to home.(AP Photo/Ng Han Guan)

Upcoming Events