China Trade War: No Need for Panic

Op/Ed by Chris Devonshire-Ellis

The ongoing trade spat between China and the United States has generated a great deal of alarmist publicity. This has come from both economists worried about a slowdown’s impact on global growth, and from consultants concerned about their American clients’ ability to survive in China. Lurid headlines such as “Will The Last Manufacturing Company in China Please Turn Out The Lights” and more recently allusions to, of all things, the Cold War have helped fuel an unnecessary grim view of FDI and the ability of US companies in particular to sustain their business in China.

With such negative stories dominating the media landscape, what is the real deal with the US-China trade war?

I did address the issue a couple of weeks ago in this article: Are American Manufacturers Really Exiting China?, while Dezan Shira & Associates are currently meeting in Malta to discuss Asian operations and tweak a few issues. For those of you unfamiliar with our practice, our firm is now in its 26th year of on-the-ground, operational China experience, and with partners also well into their second and even third decade in China. Why Malta? Because I have a very nice house there and it gets us all away from the office for a few days while we take a long hard look at our Asian operations.

Dezan Shira & Associates Partners at dinner in Malta last night. L-R: Sabrina Zhang, Adam Livermore, Chris Devonshire-Ellis, Alberto Vettoretti. 

Obviously, the current state of the market in China came up, given that our firm has invested over US$5 billion of American clients’ money in China over the past 25 years. We have a sizeable portfolio of US manufacturers based in China and have had for decades. It’s a portfolio that continues to grow in China. So how are they getting on?

Firstly, this is not the first time China and the US have had tariff issues. Neither is it the first time that large swathes of foreign-invested manufacturers in China have felt economic pressures.

In terms of our clients, many have been forewarned about these economic pressures for over a decade now. It’s why we declared, in our very first issue of Vietnam Briefing magazine in 2008, that “Global Manufacturing Is Moving to Vietnam”. That initial move to Vietnam and Southeast Asia was partly kicked into play at the time by the Chinese themselves, who through a series of tax and “disincentives” managed to force low margin manufacturers out of South China – where at the time much of the light manufacturing industry was based – and elsewhere.

These policies were put into place because China needed to move upstream and attract better quality and more high-tech businesses into the country. Plastic bucket manufacturers and Christmas decoration producers found themselves unwelcome. (At one stage Dongguan had proudly proclaimed itself the “Christmas Tree Capital” of the world). All those low-end, low margin, export-driven manufacturers relocated, either wholly or partially, to countries such as Vietnam.

The low-end US, export-driven manufacturers left China to other climes years ago. Vietnam has been a popular destination and is now chock-a-block with foreign manufacturers. Now, it is coastal cities such as Da Nang, rather than Ho Chi Minh, that represent better production value and is where foreign manufacturers are heading. And if they’re not going there, they’re mainly heading for Indonesia or the Philippines.

Of the US manufacturers that stayed in China, there are two camps. There are businesses that shifted parts of their production overseas, but kept parts in China to service other, non-US markets, including China itself. They will not be affected by any US-China trade battle because they have already adapted. Then, there are a handful of remaining, outdated, and frankly miserable US export-driven manufacturers that stayed put in China and they will suffer. A quick poll of hands among our Partners demonstrated that none of these are clients of ours, and anyway we believe them to be few in number.

So, in practical China terms, very few American, export-driven manufacturers are going to be damaged by any trade war as they have long since adapted their businesses to deal with bumps along the way. And what bumps there have been!

Real China trade problems

Asian Financial Crisis – 1997 

Asian currencies devalued across the board. FDI into China dried up as everyone expected Beijing to devalue the RMB. They didn’t.

SARS – 2003 

A highly contagious and often fatal disease that spread from China. It took a year to bring it under control.

Global Financial Crisis – 2007

Stocks tanked and businesses went bust after toxic US loans went bad and impacted their global investors. Three years of lower growth.

Simply put, in terms of China, the US-China trade war is a storm in a tea cup. Will it slow growth in China? Yes, and the IMF reckons it will shave 1.5 percent off China’s GDP growth for 2019. My apologies, but those figures don’t get me excited much, and certainly not in terms of pushing the panic button.

China will be fine; there are a great deal of other markets it can sell to, and is. For example, China-Russia bilateral trade is set to grow from US$100 billion to US$200 billion over the next five years, averaging 20 percent growth returns per annum. GDP growth is high in other regions across Asia, including India and the ASEAN region. And to hoover up the US-China trade war shortfall, what has China done? Tripled its investments into emerging Asia.

So, the message is, don’t worry. As for some practical advice about alternatives in Asia, here are some pointers. As a firm, we have our own offices in each of these locations and have had for several years:

Vietnam 

It is getting hard to find good quality manufacturing locations now in Ho Chi Minh City, as the city’s industrial and export processing zones are almost full. There is capacity around Hanoi, while Da Nang half-way down the east coast is the next spot, with industrial parks being build, and capacity put in place. (Da Nang also has an excellent golf course). Details? Contact: vietnam@dezshira.com.

Indonesia    

There is plenty of manufacturing capacity around Java (not Jakarta). Surabaya, for example, is an excellent manufacturing location with plenty of existing infrastructure. Improved road and rail links are transforming the ability to get things done. Contact: indonesia@dezshira.com.

Philippines 

Can be chaotic but there are other advantages, good US ties, and English is widely spoken. Infrastructure is improving. Contact: philippines@dezshira.com.

India 

India should be considered both as an export manufacturing driven market, as well, like China, a market in its own right. It is also currently having issues with President Trump. However, its position as global manufacturer is now fast taking shape. If you’re not there now, you will need to be in the coming decade. Contact: india@dezshira.com.    

Final words of advice? Don’t panic. The US-China trade war is a blip, and anyway China is already reacting to it. Emerging Asia is the place to be and the good news is there are plenty of options. All you have to do is choose and develop a business plan to suit. And if you need advice, just ask info@dezshira.com.

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