By Dan Harris
December 4, 2022
1. Manufacturing Outside China: Apple Likes It and You Should Too
Yesterday, in Apple Makes Plans to Move Production Out of China, the Wall Street Journal wrote how Apple is accelerating its plans to move production outside of China, mostly to India and Vietnam. To grossly summarize the article, Apple has had it with the problems its manufacturing facilities face in China, ranging from factory violence to increasing wages to COVID-zero lockdowns to China’s increasing geopolitical isolation to what will very likely be a massive scrouge of OMICRON soon to rage through China.
The article begins by highlighting how violence and “turmoil” at Apple’s “iPhone City” is propelling Apple’s manufacturing shift. The article then talks about how one of Apple’s production facilities (operated by Foxconn) “was convulsed in late November by violent protests” and how Videos show show Foxconn workers upset “about wages and Covid-19 restrictions” throwing things and shouting “Stand up for your rights!” All this has made Apple uncomfortable with China:
Coming after a year of events that weakened China’s status as a stable manufacturing center, the upheaval means Apple no longer feels comfortable having so much of its business tied up in one place, according to analysts and people in the Apple supply chain.
Apple has instructed its China manufacturing partners “to start trying to do more” outside of China. Needless to say, such a big pivot is not expected to be fast or easy:
Apple and China have spent decades tying themselves together in a relationship that, until now, has mostly been mutually beneficial. Change won’t come overnight. Apple still puts out new iPhone models every year, alongside steady updates of its iPads, laptops and other products. It must keep flying the plane while replacing an engine.
And yet, Apple’s transition away from China is already “under way, driven by two causes that are feeding on each other to threaten China’s historic economic strength”:
Some Chinese youth are no longer eager to work for modest wages assembling electronics for the affluent. They are seething in part because of Beijing’s heavy-handed Covid-19 approach, itself a concern for Apple and many other Western companies. Three years after Covid-19 started circulating, China is still trying to crush outbreaks with measures such as quarantines, as many other countries have returned to prepandemic norms. Protests in Chinese cities over the past week, during which some demonstrators called for the ouster of President Xi Jinping, suggested criticism over Covid-19 restrictions could build into a larger movement against the government. All this comes on top of more than five years of heightened U.S.-China military and economic tensions under the Trump and Biden administrations over China’s rapidly expanding military footprint and U.S. tariffs on Chinese goods, among other disputes.
Much of the rest of the WSJ article focuses on Apple’s ongoing supply chain problems caused by a China that no longer is particularly hospitable to foreign manufacturers.
The monetary, social, political, duty/tariff, and reputational risks that come with manufacturing in China have increased so substantially (and almost certainly will continue to rise) have caused many companies to explore manufacturing outside China.
2. Apple’s China Manufacturing History
Apple has long been at the forefront of international manufacturing. So much so that many companies — particularly electronic product companies — have at least in part based their manufacturing location decisions on what Apple is doing. Apple is widely considered one of the most effective companies at outsourced manufacturing.
Apple shut down its last U.S. manufacturing plant in 2004. By this time, most of Apple’s manufacturing was taking place in China. Apple was one of the trailblazers among multinationals in going nearly all in on China manufacturing. And to describe Apple has having done a great job at fostering the best relationship possible with the Chinese government would be an understatement. See Inside Tim Cook’s Secret $275 Billion Deal with Chinese Authorities.
3. You Should Listen to Apple on China Manufacturing
If a company like Apple, which has succeeded wildly by manufacturing in China, is now throwing in the proverbial towel on manufacturing in China, every company that manufactures in China should consider why Apple wants to speed up its diversifying away from China and consider whether they should be doing likewise.
Many companies are. As one of our international manufacturing lawyers is always saying, “right now is like the old days when manufacturing in China was not an automatic for companies making their international manufacturing decisions.” With China no longer the automatic choice for manufacturing, things have gotten more complicated and more interesting for those of us always thought of ourselves as an international lawyer, not just a China lawyer. Figuring out how to protect a company that will be moving its manufacturing from China to somewhere else halfway across the world is the sort of thing that makes international lawyers want to rush to their offices each day.
4. China’s Big Manufacturing Risks
There are many big risks in manufacturing in China, many of which are rapidly increasing:
a. Anti-Foreign Sentiment.
The CCP is in trouble. How much trouble, nobody knows, but the widespread and ongoing protests in China have put the CCP’s back against a wall. And, not surprisingly, the CCP is responding to these problems like it always does; by blaming foreign influence and ramping up its oppression. See China Blames Foreigners for Inciting Protests. China’s rising xenophobia puts both your foreign employees in China and your business operations in China at great risk. Whenever nationalism/xenophobia rises in China, the risks of your Chinese counterparty stealing your IP or not abiding by your contract goes up. I say this based on having seen this over the last two decades and on my law firm has seen disputes and litigation between our clients and their Chinese counterparties shoot through the roof in the last few years, and even more so in the last few months.
b. China’s Economy is Faltering. Badly.
Zero-COVID, coupled with China’s ongoing decoupling from so many of the wealthier countries, has decimated China’s economy. Just a few months ago, in China’s Slowing Economy and YOUR Business, I explained how a faltereing Chinese economy invariably impacts foreign companies that do business in or with China:
In 2012, I wrote China’s Slowdown and American Business for The Wall Street Journal. There was a slowdown happening in China and the China lawyers at my law firm were “feeling it” from the emails and phone calls we were getting from foreign companies doing business in or with China. My WSJ article sought to address the issues facing companies doing business with China. China (like every country) has always gone through intermittent slowdowns and during each of those we see pretty much the same issues.
Because China is again going through an economic slowdown — due to massive COVID lockdowns, its decision to support Russia’s war against Ukraine, its rapidly sinking real estate sector, and a government at war with private enterprises, now is a good time to reprise that article, update it, and write again on how to handle a China economic slowdown.
The Wall Street Journal’s subheading for my 2012 article was: “Hardly a week goes by without complaints about payment problems or bankrupt debtors.” If I were to choose a subheading for this post today, it would be “Hardly a day goes by without complaints about getting bad product (or no products at all) from a Chinese manufacturer and hardly a week goes by without someone asking what will be required for them to shut down their China WFOE or move their manufacturing out of China.” I would then add that hardly a day goes by without a company asking our international lawyers whether and/or how they should reduce their China footprint or whether and/or how they can move their manufacturing elsewhere. See Manufacturing Outside China: Nike Likes It And You Should Too.
Lately, and even more troubling, in just the last few months my law firm. has gotten by far the most contacts ever from companies being hounded by Sinosure for debts owed (and allegedly owed) to Chinese factories. See Navigating Sinosure Claims Just Got Tougher. The following are the key points from my Wall Street Journal article. Though I wrote this article in 2012, these points apply with at least equal force today:
Regulation. Assume the Chinese government will respond to the slowdown by attempting to minimize/repress citizen discontent so as to keep its hold on power. This will mean favoring domestic companies even more over foreign companies.
Sourcing Problems. Hardly a week goes by without one of the international manufacturing lawyers at my law firm getting a call from a company experiencing problems with its China suppliers. Sometimes the company has paid for a product and the Chinese company it paid no longer exists. Sometimes the Chinese supplier company still exists but it needs “more money” from the company to buy raw materials for the product it already promised to produce.
The key is to be proactive: If you find yourself in a bad situation with a Chinese company going under, there is usually no remedy after the fact. Foreign companies that source their products from Chna need to go back to basics by making sure they have all reasonable IP and compliance and by renewing your focus on due diligence at a company-to-company level. In How to Avoid Getting Scammed When Buying Product Overseas (Including from Alibaba) we just last week wrote about the increase in scams and how best to avoid being the scamee.
Chinese companies see how sanctions have decimated Russia’s economy and they figure that the West/Japan/Australia inevitably will increase sanctions against China. In the West, the analysis is essentially that if China is viewed as aiding Russia any more than it is already doing, sanctions will increase against China. But in China, where the CCP has been pushing the mantra that the West/Japan/Australia will do anything to “stop China’s rise”, there is a ready “market” of Chinese companies that believe China’s decoupling from the West/Japan/Australia is a done deal. Chinese companies believe they need to do something different to survive. That “something different” is to compete with and/or steal from their own customers. None of what we are seeing coming out of China over the last few weeks has been a surprise because these things have always become more common when China’s economy is hurting.
Above all, no Western company doing business in China should blithely assume it will be unaffected by China’s economic slowdown.
The biggest difference between today and 2012 (when I wrote the Wall Street Journal article) is the massive increase in Chinese companies willing to risk their relationships with the foreign companies with which they are doing business. See Your China Factory as your Toughest Competitor. I often tell clients “since you will essentially be educating your Chinese party in how to compete with you, you need contracts that will limit what they can do when they do so.”
Chinese companies on the verge of going under feel they have no choice but to risk losing existing customers by competing against them. Our lawyers are increasingly hearing companies complain that their Chinese “partners” have (sometimes even somewhat apologetically) told them that they had kept their money because they needed it to pay their China employees. China’s COVID lockdowns have crushed many of Chinese companies and those Chinese companies that have been crushed are warning signs to other Chinese companies as to what could happen to them. China’s lockdowns are scaring the hell out of China businesses everywhere and leading to an increasing number of them acting desperately.
It is possible China’s zero-COVID policy will truly change, but I have serious doubts about that. But even if the policy changes, there is a little to no chance China’s economy will improve within the next 6-12 months. The damage has already been done and moving away from zer0-COVID could actually make things far worse for a China that is unprepared to deal with COVID other than with lockdowns.
c. China’s Geopolitical Standing is Declining. Quickly.
The below headlines (all of which are VERY current) highlight how China’s worldwide standing is declining:
1. Biden administration supports zero-Covid protesters in China (two hours ago)
2. U.S. doubles down on Biden plan to restrict American companies, and citizens, from helping China make semiconductor chips
3. Japan manufacturers to reduce reliance on China suppliers
4. Rishi Sunak: Golden era of UK-China relations is over
5. Manufacturing orders from China down 40% (two hours ago)
6. With China a mutual concern, investment accelerates between Australia and Taiwan
7. China-dependent firms do not have Germany’s best interests, says Germany’s foreign minister
As much of the world lines up against China, we should expect increasing governmental restrictions on buying goods from China and selling goods to China. We shoudl also expect tariffs and duties on Chinese goods to remain in place or rise. Equally importantly, China’s standing among consumders will continue worsening and the reputational risks for companies that do business with China will continue rising. See Doing Business with China and Your Reputation Risks.
We have seen how distates for Russia has pumelled Russia’s economy and international trade, and though I am not predicting the equivalent will happen to China, I do see China’s increasing unpopularity harming many companies that do business with or in China, both within China and within their domestic and other markets. See As Xi Cracks Down on China’s Protesters, Demonstrators Around the World Show Solidarity. See also Russia’s War Will Impact Your China Business.
5. Where to Move Your China Manufacturing
Nobody has made manufacturing easier than China — especially for contract manufacturing and for SMEs (small and medium-sized enterprises). China has great “soft infrastructure” for manufacturing, and most other countries are just not very helpful. Leaving China is complicated and finding “a new China” is incredibly complicated. I often suggest to clients that a good place to start is by reviewing what the big multinationals in their industry have done to reduce their dependency on China. Heck, that is the core point of why I am highlighting Apple leaving China in this post. Some of these big multinationals are incredibly transparent in listing where they manufacture their products. Nike and Patagonia are especially good at this and so if you make shoes or clothing, there is a lot you can learn from Nike and Patagonia.
But what if you make toaster ovens or tablets? What can you learn from what Nike are Patagonia doing? You can learn that there are plenty of countries other than China that manufacture quality items at a price that makes sense for highly sophisticated international companies like Nike and Patagonia and this alone should open your eyes to the manufacturing world outside China.
But, what is good for Nike or Patagonia or Apple may not be good for you and, quite frankly, there are countries in which Nike and/or Patagonia have their products made that I would write off as too dangerous, too corrupt, too risky, too lawless or just too difficult for the average company.
When looking to where your company should move (or start) its manufacturing, you should consider the following factors, among others:
Political climate: Consider the domestic and geopolitical conditions of the country.
Legal climate: Consider the legal climate of the country. It is particularly helpful to know its employment, environmental, and IP laws and enforcement.
Labor: Consider the wages and benefits you will need to pay and the availability of the sorts of workers you will need to be able to produce quality products in the country.
Shipping: Be sure to calculate the estimated time and costs associated with shipping from the country to which you are considering moving your manufacturing.
Taxes, duties, and tariffs: Different countries have very different taxes. Your business will benefit from knowing the relevant taxes you’ll need to pay in the country you are interested and the tariffs and duties your company will need to pay to the country to which your products will be going.
One last thing. The actual act of moving some or all of your manufacturing out of China is itself very risky there are certain basic things you should do to protect your company from this. See How to Move Your Manufacturing Out of China Safely.
Is your company looking to leave China?