Giving up on China isn't an option for American businesses

Note: The following article is taken from the Chinese-language "Commentaries on International Affairs".

Business circles in the United States have voiced their strong opposition to the order from the White House that they stop doing business with China. China's market is too important for American companies, both for its vast market and its advantages as the world's factory. No business person in their right mind would just give it up.

Among China's 1.4 billion consumers are 400 million in the middle-income group, and this cohort is rapidly expanding. Their increasing demand and huge market potential are a big part of China's purchasing power. The U.S. National Retail Federation has pointed out that it is "unrealistic for American retailers to move out of the world's second-largest economy", which helps to explain why foreign investment in China keeps rising against the backdrop of a general slowdown in global foreign direct investment.

Costco was forced to close early due to the wild buying spree on the opening day of its first store in the Chinese mainland in Shanghai, Tuesday, August 27, 2019. [Photo: VCG]

In the first seven months of this year, the number of newly-established foreign-funded firms in China surpassed 24,000, and the actual use of foreign investment exceeded 530 billion yuan (around 74 billion U.S. dollars), up 7.3 percent on the same time last year. According to the U.S.-based research provider Rhodium Group, in the first six months, American investment in China reached 6.8 billion U.S. dollars – up 1.5 percent on the average for the first half of the year for the past two years. Major investors include Tesla, which is building its Gigafactory in Shanghai, and Bain Capital, which agreed to invest 570 million U.S. dollars in the Beijing-based data center developer Chindata.

A major reason why these American companies are investing further in China is that it's the only country in the world capable of providing complete industrial and supply chains, which significantly cuts down operational costs for a company. And its well-established logistics network of ports, highways, and railroads allows multinational companies to conveniently link together their networks of factories, suppliers, and global customers. That's a major appeal for foreign investors.

After all, it's not by chance that around half of the 800 suppliers for Apple are based in China. Last month, this icon of the American tech sector asked the Trump administration for a waiver for the 15 China-made components used in Apple's products due to be hit by an additional 25 percent import tariff. The reason for their request was simple: Apple can't find suppliers for these goods outside of China.

Each year, eight million college graduates join China's 900 million-strong workforce. This makes China the world leader in terms of the number of people going into the workforce with a higher education, which helps to explain why the country was ranked the 14th in the world in terms of its capacity to innovate.

Some of the companies that have tried to move out of China have quickly learned that it's not just a matter of packing up and relocating their production lines. A study by McKinsey found that China's workers are five times more productive than their counterparts in India. And a report in Wall Street Journal says some manufacturers moved back to China after encountering problems including a lack of skilled technicians, low productivity, substandard products, and delayed deliveries in countries such as Vietnam and India.

The world's factory wasn't built in a day. It's wishful thinking to say that American companies that are well established in China can quickly move to a new location. This goes against the law of markets, and is a major disruption to the normal operation of a business. For a business, it's a recipe for chaos, and for the American economy, it's a dampener on growth.