Shifting Tech Manufacturing Out Of China -A Critical Imperative For Tech
My last trip to China was in November of 2019, just before the news broke that the coronavirus was discovered a month earlier. I was in a set of meetings where it was suggested that more manufacturing move out of China due to political tensions. My contacts inside the Chinese tech manufacturing world said that they feared new Chinese policies formed at that time were pointing in this direction. They suggested I discuss this concern with some major U.S. tech companies.
I became aware of this idea during a meeting in Taiwan in the late 1980s when the first seeds of tech manufacturing expanding into China were being sown. I can’t name the company or people who would break the ice on this idea. Still, I can say that it started with key tech leaders in Taiwan who went against the strict norms of the time and covertly began planning to put some of their new manufacturing facilities in China. All discussions between Taiwan and China were off-limits at this time in history.
During this period in China they were moving out of a highly restricted communist regime and becoming more focused on advancing their country’s economic fortunes.
Until then, China was primarily an agriculturally driven nation, but there was great unrest in the countryside. The effect of Mao Zedong’s rule, in which he dispersed many to work in the fields instead of industry, had a highly negative impact on China during his reign. After Mao’s death, a series of new Chinese leaders began to look at ways to reform China’s economy but still keep a rigid grip on its Communist rule of law.
One way they did this was to create special trade zones where they could allow for new forms of trade and manufacturing services and made Shenzen, a city about 20 miles from Hong Kong, a new place to build new industries. I had visited Shenzen before its transformation into a world-class manufacturing center, and back in the mid-1980s, it remained tied to agricultural processing and distribution.
But once it became an established center for building manufacturing with an emphasis on making tech-related products, Shenzen’s fortunes began to rise.
What is most important about this is that it gave young people whose only means of employment back then was working in the fields of local farms a way out of that life. That meant the government would recruit them to work in the tech factories that were built in this area and triple the amount of money made by working on the farms.
One example is that the wage for these young people working in the fields was less than $30 a month. But when recruited to work in the tech manufacturing facilities, they could make at least $100 or more a month, and because they lived for free in company dorms, they had money to spend on items they coveted. In addition, these workers could also send some of that money back to their parents to help them. While these earnings are low by western standards, the cost of living, food, and clothing was relatively low because of government subsidies.
This hiring strategy worked so well to get youth out of farming and provided a way to make a better living. China began to replicate this model all over the country. New manufacturing centers sprung up all over China, giving more youth new opportunities for financial growth.
Over time this strategy birthed what has become a more prosperous economic scene in China and grew a middle class inside this country.
All major tech companies worldwide, especially in the U.S., took advantage of this shift in China to deliver low-cost tech-manufactured products. By the mid 1990s, the transformation began to produce the majority of tech-related components and computer products at Chinese-based manufacturing facilities.
Chinese manufacturing of tech products has become a two-edged sword for U.S. tech companies. The current Chinese leadership is driving China to become more restrictive on all aspects of manufacturing inside China. These restrictions make it more difficult for U.S., E.U., and even some Asian tech companies to continue to make their products inside China. These restraints and the potential current Chinese leadership’s move to enforce its One China policy could force most manufacturers to only make products for the Chinese market. This policy has big tech companies scrambling to move as much of their manufacturing out of China today.
For big tech companies, it’s become imperative to move their manufacturing still being done in China – out of China.
Some U.S. and E.U. companies foresaw a more restrictive Chinese approach to taking more control of their manufacturing facilities. They have begun to relocate most, if not all, of their manufacturing to countries like Viet Nam, Malaysia, India, Mexico, and other countries where their governments are more accommodating to foreign companies. Dell has the most significant lead: they began moving most of their manufacturing out of China over four years ago, and almost all other major tech companies have followed their lead.
China’s serious threat will become more apparent after China holds a major communist party enclave in the next month. This development could cement China’s current hard-line president XI Jinping’s rule for life and who has committed to enforcing the One China policy across all business sectors in the country.
For the first time in my 40 years of covering tech companies, I am seeing many of them create “war rooms” that look at many aspects and threats coming from China, especially the possibility of China invading Taiwan. All see China’s threat to their tech future as a big deal and are war gaming many what-if scenarios to be more prepared for whatever move China makes that could impact their future.
Undoubtedly, China’s more restrictive policies will impact tech companies in the near future and into the next decade. They can no longer sit on the sidelines and not be preparing to leave China’s manufacturing advantages of the past behind.
Barring any positive change of direction coming out of the Communist National Congress this fall, tech companies must be prepared to move on and move faster to thwart any downsides of China’s continuing tightening policies tied to their One China strategy.