China's Major Manufacturing Crisis - Why Companies Are Fleeing the CCP?

As a senior consultant, I have been closely following the developments in China and how they affect the global economy. China has the second largest economy in the world, but with foreign and Chinese businesses fleeing their borders every day, it may only be a matter of time before everything falls apart. What is causing this? Where's everyone going? And will China be able to recover from this mass business exodus?

There are some very good reasons that companies are racing to escape China and the stranglehold of Beijing's leadership, which can be placed into four broad categories:

1. An unpredictable and unreliable government when it comes to maintaining production and manufacturing within its borders.

2. Rising labor costs as a result of rapid economic growth.

3. The Chinese government's use of power and influence to extort businesses that rely on its labor force and facilities.

4. The very real geopolitical threat China poses that could threaten the ability of companies to do business.

So let's dive deeper into the specifics of why each of these things is causing companies to flee the People's Republic of China. But first, we need to understand how the nation became a powerhouse of manufacturing and economic growth.

There's no denying that China has unparalleled success in developing its economy over the last several decades. And although the United States still has the largest economy in the world with a GDP of $23.32 trillion, even American companies rely heavily on Chinese manufacturing. It's China's rise to economic dominance in Asia that led it to becoming so influential and powerful on the world stage.

So how did we get here?

In 1949, the People's Republic of China under the leadership of Mao Zedong and the Chinese Communist Party was established. Soon after, the regime implemented the Great Leap Forward, which is viewed by many historians as one of the greatest human disasters of the 20th century. The thought behind the Great Leap Forward was that China could rapidly become industrialized and China's peasant economy would become a workforce of modern and skilled laborers that can manufacture Chinese goods.

The plan took a heavy toll on the Chinese population, though, and it's estimated between 10 and 40 million people died between 1959 and 1961 as a result of Mao Zedong's policies and a famine that swept through the nation.

Then in 1976, after Mao died and Deng Xiaoping gained control of the country, a new series of reforms were implemented to jumpstart the Chinese economy. Rather than adhere to the strict rules of Mao's brand of communism, farmers and peasants were granted the right to farm their own land, which led to fewer food shortages and a healthier population.

In 1979, Beijing decided to open up China to foreign investors. The United States and China reestablished diplomatic ties that had been cut off when the Chinese Communist Party first took over and Mao isolated China from the rest of the world. Businesses in the US and around the world realized that the massive and cheap labor in China was a game-changer and money began to pour into the country.

Now, companies could manufacture their products for a fraction of the cost and make huge profits. It was at this point that the Chinese economy began to grow at a tremendous rate.

Two decades passed and China continued to skyrocket. Then in 2001, China joined the World Trade Organization and an explosion of new investments, businesses, and money flowed into the country. When the nation joined the WTO, it removed many barriers such as tariffs that had been holding back the spread of Chinese exports. This allowed Chinese goods to reach far and wide. The words "Made in China" were printed on consumer goods in practically every household.

Just to put China's incredible economic growth into perspective, in 1978 Chinese exports totaled $9.8 billion. By 2018, they had grown to $2.5 trillion. That's an increase of more than 25,000%!

But despite this impressive achievement, things are not looking so good for China right now. In fact, many experts believe that China is on the verge of collapse.

Why?

Well, there are four main reasons why companies are leaving China in droves:

1. An unpredictable and unreliable government

One of the biggest challenges for doing business in China is dealing with its authoritarian government. The Chinese Communist Party has absolute control over every aspect of life in China, including its economy. This means that businesses have to follow whatever rules and regulations Beijing imposes on them, which can change at any time without warning or explanation.

For example, in 2020, China passed a new national security law for Hong Kong that gave Beijing more power to crack down on dissent and protests in the former British colony. This sparked international outrage and concern for Hong Kong's autonomy and freedoms. Many businesses that had operations or headquarters in Hong Kong decided to relocate or scale back their presence there due to fears of political instability and interference from Beijing.

Another example is the recent crackdown on China's tech giants, such as Alibaba, Tencent, and Didi. These companies have been accused of violating antitrust laws, abusing consumer data, and posing national security risks. As a result, they have faced fines, investigations, and bans from operating in certain markets. Some of them have also been forced to delist from US stock exchanges or cancel their IPO plans.

These actions have sent a chilling message to foreign and domestic investors alike: that no matter how successful or innovative a company is, it can always be brought down by the whims of the Chinese government. This creates a lot of uncertainty and risk for doing business in China, which many companies are not willing to tolerate.

2. Rising labor costs

Another reason why companies are leaving China is because of the rising costs of labor. China's economic growth has lifted millions of people out of poverty and improved their living standards. This is a good thing, of course, but it also means that workers have become more demanding and expensive.

According to the World Bank, the average annual wage in China increased from $1,857 in 2008 to $10,410 in 2019. That's a 461% increase in just over a decade! While this is still lower than the average wage in developed countries, it is much higher than in other developing countries that offer similar or better quality of labor.

For example, the average annual wage in Vietnam was $2,740 in 2019, which is less than a third of China's. Vietnam also has a young and educated workforce that can produce high-quality goods and services. Many companies have recognized this and have shifted their production and sourcing from China to Vietnam or other Southeast Asian countries.

Some examples of companies that have moved or are planning to move some of their operations from China to Vietnam include Apple, Samsung, Nike, Adidas, and Intel. These companies are not only looking for cheaper labor, but also for more diversified and resilient supply chains that can withstand disruptions such as trade wars, pandemics, or natural disasters.

3. The Chinese government's use of power and influence to extort businesses

A third reason why companies are leaving China is because of the Chinese government's use of power and influence to extort businesses that rely on its labor force and facilities. The Chinese government has a history of using its leverage over foreign companies to advance its political and economic interests.

For example, in 2010, China restricted the export of rare earth metals, which are essential for making many high-tech products such as smartphones, electric vehicles, and military equipment. This was seen as a retaliation against Japan for arresting a Chinese fishing boat captain near disputed islands in the East China Sea. China controls about 80% of the global supply of rare earth metals, so this move caused a major disruption and price spike for many industries that depend on them.

Another example is the recent boycott of Western brands that have expressed concern over human rights abuses in Xinjiang, where China has been accused of detaining and oppressing millions of Uyghurs and other ethnic minorities. Brands such as H&M, Nike, Adidas, Burberry, and Zara have faced backlash from Chinese consumers, celebrities, and state media for refusing to use cotton sourced from Xinjiang. Some of them have also been removed from Chinese e-commerce platforms or had their stores vandalized or closed down.

These examples show that doing business in China comes with a lot of strings attached. Companies have to comply with the Chinese government's demands or face the consequences. This can compromise their values, reputation, and profitability.

4. The very real geopolitical threat China poses

The fourth and final reason why companies are leaving China is because of the very real geopolitical threat China poses that could threaten the ability of companies to do business. China has become more assertive and aggressive in its foreign policy in recent years, especially under the leadership of Xi Jinping. China has been involved in territorial disputes with several of its neighbors, such as India, Japan, Taiwan, Vietnam, and the Philippines. China has also been expanding its military presence and influence in regions such as the South China Sea, the Indian Ocean, Africa, and Latin America.

These actions have raised tensions and concerns among many countries that see China as a rival or a threat. The United States, in particular, has been engaged in a strategic competition with China over trade, technology, security, and human rights. The US has imposed tariffs on billions of dollars worth of Chinese goods and banned or restricted several Chinese companies from accessing US markets or technology. The US has also increased its support for allies and partners that are facing pressure from China.

These developments have created a lot of uncertainty and instability in the global order. Companies that do business in China or with Chinese partners have to navigate a complex and volatile environment that could change at any moment.

They also have to deal with the possibility of a military conflict or a cyberattack that could disrupt their operations or damage their assets.

These are the four main reasons why companies are leaving China and moving their manufacturing to other countries. China has the second largest economy in the world, but with foreign and Chinese businesses fleeing their borders every day, it may only be a matter of time before everything falls apart.

What do you think? Do you agree or disagree with these reasons? Do you think China will be able to recover from this mass business exodus? Let me know your thoughts in the comments below.

Thank you for reading my article. If you found it interesting and informative, please like and share it with your network. And don't forget to follow me for more insights and analysis on the latest trends and developments in the global ec onomy.