Moving Out of China? Not Really

Yossi Sheffi
Jul 7, 2020 · 6 min read
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There is a lot of talk about China losing favor in the business world. For example, CNBC recently argued that they see a significant number of companies moving operations out of China. One commentator claimed that the production of toys and cameras is going to Mexico, the manufacture of personal computers is moving to Taiwan, and automotive manufacturing is finding new locations in Thailand, Vietnam, and India. According to Forbes, “new data shows US companies are definitely leaving China.”

Much of the blame for this change in sentiment is laid at the door of the COVID-19 pandemic. For instance, a Forbes commentator suggests that in the post-pandemic world, China will be less enticing as a business destination.

Are these assertions true? As is often the case, the reality is more nuanced. My research suggests that the number of businesses fleeing China is relatively small, and the rationale for many of these moves predates the COVID-19 pandemic.

A complicated picture

There are many factors in play regarding the question of doing business in China. The first one is increasing labor costs. Between 2011 and 2016, labor costs in China increased by 64%. They climbed again by 30% from 2016 to 2020. Even before the US imposed tariffs on imports from China, labor-dependent companies were leaving the country. In particular, apparel manufacturers were moving in substantial numbers to countries like Sri Lanka and Bangladesh, where the labor costs are one-seventh of those in China.

Also, apparel manufacturing is labor-intensive, but the skills and worker training it requires are relatively basic. In addition, apparel is less capital-intensive than in other industries. Consequently, setting up shop outside of China is neither complicated nor expensive for apparel businesses. In fact, many Chinese apparel companies have moved operations to other Asian countries, a trend evident since at least 2010. Many of the clothes made in these relocated factories are exported back to China, in addition to the rest of the world.

Some companies in other industries have reacted to souring trade relations between the US and China by relocating operations beyond China. The trend gained some momentum during the 2018–19 trade war between the two countries, as companies looked for ways to avoid higher tariffs and the risks of further trade disruptions.

Multiple incentives to stay

However, even in the face of a disruptive trade war, a significant number of businesses have remained in China and established relatively small-scale operations elsewhere as a hedge against total dependency on Chinese manufacturing. This is sometimes referred to as the “China +1” strategy.

Also, most companies — especially those in relatively sophisticated industries such as high-tech, automotive, and related sectors — are not likely to leave China or stop procuring parts from Chinese companies any time soon. For example, more than 70% of companies surveyed by the American Chamber of Commerce in China in March 2020 said they have no plans to relocate manufacturing, their supply chains, or sourcing out of China due to the pandemic.

There are several reasons for not leaving China or for pursuing the “China +1” strategy:

  • China in 2020 accounts for 20% of global GDP, a share that is expected to rise in the future. Manufacturing and the provision of services in China are easier when an enterprise has operations in the country. This reality is not only due to the trade tensions with the US and other Western countries. It is also the result of inherent Chinese nationalism and government propaganda (similar to “made in the US”), which engender a preference for products made in China.
  • As evidenced by the quick recovery of Chinese manufacturing from the shutdown imposed to quell the coronavirus pandemic, many Chinese companies are nimble and fast. Western multinationals in the high end of manufacturing (such as automobile parts, high-tech components, avionics) are now in China because of the high quality and sophistication of Chinese manufacturing and the local availability of skilled labor. The combination of capabilities and cost is hard to match anywhere in the world.
  • Many Western companies have spent decades building sprawling supply chains in China. Not only do they manufacture in China, but these factories use Chinese suppliers, who, in turn, use other Chinese suppliers. Thus, getting out of China means moving entire manufacturing and service ecosystems out of the country. Such an effort can take decades and untold sums of money. Even companies that base their manufacturing outside China are still dependent on Chinese parts and raw materials. Thus, manufacturers worldwide still rely on Chinese intermediate goods, such as electrical wiring for cars made in Europe and electronic components for mobile phones made in Brazil. One example of this dependency is apparel manufacturing, which, as mentioned above, has been moving out of China for some time. Apparel manufacturers in Vietnam, Pakistan, and Bangladesh import the majority of their fabrics from China while focusing on the labor-intensive processes of cutting and sewing. As a result, China’s share of clothing exports went down from 37% in 2010 to 31% in 2018. Yet over the same period, China’s share of global exports of textiles — which is made into apparel — rose from 30% to 38%.

China’s high-end ambitions

China is focusing on retaining its global share of consumers’ expenditure by investing in technology and moving up the value chain. Chinese companies are developing and making more high-value goods. This trend is over a decade old, as Chinese companies have gained market share in markets for complex products such as telecommunications network equipment, cranes, construction equipment, and renewable energy products. In general, over the last decade, Chinese exports of machines that make products have been growing faster than exports of the products made by the machines.

This trend of making and exporting more complex products is fueled by massive investments in technology and local know-how.

Nowhere is this more evident than in the country’s investment in robotics. More than one-third of the global installation of robots are in China, supported by the government’s subsidies for implementing robotics automation. This effort is spearheaded by the government’s MIC 2025 program (Made in China by 2025), which focuses on robotics in key industries such as automotive, electronics, electrical appliances, and logistics (both warehouse automation and autonomous vehicles). Naturally, such investment is coupled with developments in artificial intelligence and sensor technology, both enablers of robotics and sophisticated automation.

Additional growth drivers

Two other factors in China’s rise as a global trading power are the country’s shift away from manufacturing and toward services, as well as the fallout from the COVID-19 pandemic.

By 2019, services accounted for more than half of China’s GDP (up from one-third in 2015). The contribution of the Chinese service sector to GDP, at 52%, is smaller than the world’s average at 65% and that of advanced economies at 70%. However, the service sector is one of the future engines of growth and employment as the share of manufacturing employment shrinks with automation and the country’s higher position along the value chain.

While I do not see a substantial move of manufacturing out of China, there is one industry where some changes may take place. Western countries hit by the pandemic were shocked when they discovered the extent of their dependence on Chinese (and other Asian) suppliers of health care products ranging from personal protective equipment to pharmaceuticals and some ingredients of certain therapeutics. This revelation will cause the health care supply chain to change. Some of this change will involve local manufacturing. For example, Sanofi, the French pharmaceutical giant, announced the building of a standalone company in France that will be committed to producing active pharmaceutical ingredients. These ingredients are the essential building blocks of many drugs.

Other countries may prepare themselves for future emergencies by developing national reserves of vital medical equipment and drugs to enable them to withstand pandemics without reliance on China or India (the latter country also is a center for health care manufacturing).

Still, these changes do not represent a large-scale migration away from China. While some branded drug manufacturing may be re-shored, this will certainly not affect the vast segment of generic drug making, which is driven by low cost rather than value and brand.

Flawed forecasts of a decline

Aside from some restructuring of healthcare industry supply chains and the continuing flow of low -value manufacturing out of China, the coronavirus is not going to dislodge China from its perch atop the manufacturing peak. There will be some “eye candy” projects in the healthcare industry — some brand companies may set up manufacturing in the West — to pacify politicians. However, the main effect will be to accelerate China’s move up the value chain, building on the country’s vast manufacturing ecosystems.

Predictions that China’s manufacturing might is on the wane as companies abandon the country are misguided — or perhaps based on wishful thinking.


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Yossi Sheffi

Written by

Dr. Yossi Sheffi is a professor at the Massachusetts Institute of Technology, where he serves as Director of the Center for Transportation & Logistics.


MIT Supply Chain is a world leader in supply chain management education, research, and thought leadership.

Yossi Sheffi

Written by

Dr. Yossi Sheffi is a professor at the Massachusetts Institute of Technology, where he serves as Director of the Center for Transportation & Logistics.


MIT Supply Chain is a world leader in supply chain management education, research, and thought leadership.

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