American businesses are left in limbo as they lack government support from Washington and are under siege in China.
Aside from adapting to changing consumer demands, the multinational enterprises that stayed in China had to deal with an increasingly hostile business environment.
Instead of solely focusing on Chinese reforms, foreign brands should pay more attention to their challenges in the Chinese economy.
Beijing has come under fire for its policy shifts over recent months, with its new approach towards “Big Tech” and its harsh education and gaming reforms dumbfounding the international business community. Some global players have adjusted to the changing environment, while others didn’t respond well to the new challenges. As such, those businesses were forced to scale back their China operations or even move out of the country altogether.
Some US multinational enterprises (MNEs) have started looking for alternate sourcing sites in emerging markets, specifically Asia-Pacific and Latin America, while others moved factory production completely out of China. This shift, however, was provoked by the ongoing trade war and rising labor costs in China, and having less to do with policy changes.
Already in 2019, CNBC noted “an eight-fold rise in average blue-collar wages since 2004” has pushed toy-makers, shoe manufacturers, and apparel producers to look for alternatives to Chinese manufacturing. Just to put things into perspective, the average hourly wages for China’s manufacturing workers sit at $4.12, according to Barclays research, versus $1.59 in India.
However, CNBC and The Wall Street Journal also highlight the complexity of replacing China with emerging Asia-Pacific economies, as labor shortages, product quality problems, and a lack of specialized supply chains complicate the process.
In 2019, quality issues were on the rise in the South Asian manufacturing sector. According to Qima, India and Pakistan registered inspection failure rates of over 33 and 37 percent, respectively.
Meanwhile, over 40 percent of all inspected goods in Cambodia during Q2 2019 were rated outside the acceptable quality level.
The MNEs that stayed in China not only were forced to adapt to changing consumer demands but also to an increasingly hostile business environment. Therefore, they had to lobby their governments for better trade and working relations with China. So far, European companies seem to have gotten a better deal than their American counterparts. And the signing of the EU-China Comprehensive Agreement on Investment (CAI) shows that the European Union is ready to strengthen economic ties with China even though Washington has embraced a tougher stance against the country.
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