For more than a year we’ve been relentlessly writing about how China has become so much riskier for manufacturing and how so many companies that manufacture in China are desperately looking to move their manufacturing elsewhere. I predict that at least 50 percent of the American and European companies that do all of their manufacturing in China today will have moved at least 50 percent of that manufacturing out of China within the next 2-3 years. As Kenneth Rapoza, Forbes Senior Reporter for Emerging Markets, put it in his recent article, Coronavirus Could Be The End Of China As A Global Manufacturing Hub: “The new coronavirus Covid-19 will end up being the final curtain on China’s nearly 30 year role as the world’s leading manufacturer.”
- Way back in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we lead with this paragraph: “The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, Mexico and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.”
- In October, 2018, in response to questions our international lawyers were getting we wrote the following: “A lot of foreign companies are leaving China now and we see that exodus continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would — at least in theory — would like to cease having their products made in China.
- In March, 2019, in Would the Last Company Manufacturing in China, Part 3, we wrote how foreign companies very much want to move their manufacturing from China, but there “three things” are keeping “a lid on a manufacturing exodus from China”: The capacity of countries other than China; the capabilities of countries other than China; and, three, the knowledge and soft infrastructure of countries other than China.
- In June, 2019, in Has Sourcing Product From China Become TOO Risky? we wrote how about the huge risks companies face from potential tariffs and duties in the United States (and eventually the EU).
- In February, 2020, in Would the Last Company Manufacturing in China Please Turn Off the Lights, Part 4, we laid out what it will take to move manufacturing out of China and talked of how pretty much everyone wants to move their manufacturing out of China, it is just a question of whether and when they can.
And yet, as negative as I am about China as a global manufacturing center, I am nearly equally optimistic about it as a place for foreign companies looking to make money on certain goods and services. And on this I am not the only one as our China lawyers have in the last six months or so been seeing a meaningful uptick in companies looking to go into China. I cannot resist noting however that with the uptick in our China company formation work we are seeing a near corresponding uptick in our work in helping companies in China shut down their operations there. For how to shut down a China company correctly, check out A Guide to Shutting Down Your China WFOE. All of this just goes to show how what to do in business with China truly does so much depend on each company’s specific situation.
With all that China has been going through with the coronavirus, with China’s economy in shatters, with relations between China and the United States and between China and the EU in rapid decline, why are many Western companies moving as fast as they can to go into China?
First off, they uniformly believe that China will eventually recover from the coronavirus and on that I 100% agree. And when China does recover, there will be a lot of pent up demand for goods and services and on that I 100% agree. What goods and services? I keep seeing people on places like Linkedin talk about how this pent up demand and how now is a good time to start preparing to meet that demand, but pretty much every time I try to get these people to be specific, they demur.
The coronavirus is, as we say in the law sui generis, which essentially means of its own kind. Sticking with Latin, it’s terra incognita. We could go back and look at what industries thrived after the Spanish Flu but that was so long ago I’m not sure that would be helpful. So I am going to venture that the industries that will thrive in China after the coronavirus ends will mostly be the industries that were thriving before the coronavirus hit, along with some that will thrive due to the changed perspectives of people who went through the coronavirus situation. People moved online and some good percentage of them will stay there. People have been cooped up in their houses for long stretches without being able to travel. Will this eventually lead to an increase or a decrease in future travel? I don’t know. Construction of buildings other than hospitals has gone way done. Housing sales have plunged. I am guessing both of those things will eventually rebound and then go into overdrive dealing with pent up demand. And with that will come the sale of goods and services like furniture and architectural services, etc. I could go on and on, but you no doubt know much better than I do what drives demand for what your business sells.
Way back in October, 2018 — when many still believed China trade would quickly revert back to the way it had always been — we did a post, Six Key China Business and Law Trends setting out what we were seeing then, which is pretty much what we are seeing now:
Our China lawyers had a team meeting yesterday and as is so often the case at such meetings, much of the meeting involved our talking about what we have been seeing lately. We mostly focused on the following trends:
- Six months ago, we rarely worked with our firm’s international trade lawyers. Sure, we would occasionally call one of them in to help with a sticky customs issue or a client concerned about getting hit with antidumping or countervailing duties, but these days we find ourselves working with them constantly. Companies that are getting hit or will soon be hit with having to pay 25% tariffs are looking for help in figuring out how to have their Made in China products made elsewhere so that they can legally avoid having to pay the tariffs. See China Tariffs and What to do Now.
- Six months ago, about 90% of the international contracts we drafted involved China or the EU. That number is now nearing 60% as our existing and new clients are diversifying outside China.
- International litigation is on the rise. We are reading about this and we are seeing it. This is happening because of the uncertainty and the disruptions stemming from the tariffs. With disruptions and uncertainty comes disputes.
- China is more open to foreign businesses than it has been in years. Forming a WFOE is a bit faster, cheaper and easier than it was just a few years ago, especially if your WFOE will be operating fully legally. Check out The NEW Steps for Forming a China WFOE. UPDATE: China’s new company law has made forming a company in China even easier. See How China’s New Foreign Investment Law Affects You (Or Not).
- Chinese factories are copying and selling their foreign customers’ products faster than ever before. Almost every week we hear of a Chinese factory that sold its foreign customer’s product before or right after shipping out the foreign customer’s first order. The tariffs are causing Chinese factories to question the viability of a long-term relationship with their foreign buyers and they are simply calculating that they can make more by selling their customers’ products online themselves. In the past, our lawyers did not push back when start-up companies wanted to test their product in the marketplace before spending for a contract to protect against their Chinese manufacturer competing with them. Now though we make very clear that this a very bad idea because by the time market strength has been determined, there may no longer be a product to sell. See China Trademark Theft. It’s Baaaaaack in a Big Way, China and the First to Market Fallacy, and Protecting Your Product From China: The 101.
- Following the law makes sense if you are going to be doing business in China. The number of companies coming to us with big China legal problems has gone way down but the number of companies coming to us to proactively present big and small China legal problems has gone way up. This is a good thing because it means foreign companies have come to realize China has gotten both serious and effective at enforcing its laws as against foreigners. See Doing Business in China Without a WFOE: Will the Defendant Please Rise for a good example of where China has really cracked down against foreign companies and see China Employer Audits: The FAQs for a good example of the sort of thing foreign companies are doing in China to avoid future legal problems.
For all its protestations to the world how well it is doing, the Chinese government knows its economy is in tatters and it knows its manufacturing industries will not just bounce back and it is doing and will continue to do whatever it can to bring its economy back. With respect to how it treats foreign companies, China can essentially go one of three ways on this:
- It can turn even more inward and make it as tough as possible on foreign companies. It can enact new laws to accomplish this. This would hurt China’s economy.
- It can stay the same, with the same being “fairly encouraging” of foreign direct investment by foreign companies that follow Chinese law.
- It can open up further to foreign investment to benefit its economy and to garner allies for reinvigorating China’s trade relations with the West
So far, China has consistently taken the third way and gone out of its way to try to help Western businesses that are in China and to assure them of their economic security. On top of this, China has enacted new laws designed to make it easier for foreign companies to do business in China. It has also been providing foreign companies with subsidies and tax vacations and dispensations that allow them to skirt existing employment laws like we have not seen for over a decade. In simple terms, China is and almost certainly will for a long time be pulling out all stops to encourage and assist foreign businesses.
And as so many of our clients that are going into China or increasing their China footprint by adding branch offices and employees there know well, “being in China is good for our China business.” Chinese consumers and Chinese companies prefer buying from foreign companies that have boots on the ground in China. This has always been true and it very likely always will be true. Foreign companies with boots on the ground in China are perceived as being both more committed to China (because they are) and as being better able to stand behind their products and/or services (again, because they are). Or as one of our clients told us, they believe that by making a strong commitment to bolstering their China presence now, they will be greatly rewarded by their customers who will view them differently from their competitors that are either not there at all or are looking to leave or to reduce their presence there.
This attitude is very much reflected on social media where many in China are talking about who their friends are and are not, who is loyal to China and who is not, and who will be rewarded or penalized after the coronavirus is gone for what they are doing vis a vis China now.
What makes sense for your business will depend on your business and your industry but for many businesses now is the time to move into China or ramp up your existing presence there. For many, doing business with China without actually being in China will be the better way to go. In a future post we will talk about the factors our China business lawyers look at in determining what makes the best sense
What are you seeing out there?