Midstream firms to exit China but Germany invests more

Some global midstream technology hardware firms have started moving out of China or adding new capacity elsewhere, following in the footsteps of their customers, according to an S&P report. 

In phase one of the relocation, many downstream electronic manufacturing services (EMS) firms, including Taiwan’s Foxconn Industrial Internet, had moved to diversify their investment from China to other countries such as Vietnam and India. This phase has been largely completed. 

Phase two of the exodus, which refers to the shift-out of midstream capacity from China, will involve more spending and higher ongoing operational costs and the possibility of botched executions.

“Technology firms will continue to diversify supply chains away from China over the next two to three years, with the focus shifting to the midstream of the technology value chain,” Clifford Kurtz, a primary credit analyst at S&P, says in the report.

“A more geographically distributed production footprint would help tech firms manage geopolitical risks, including the loss of key supply lines, the emergence of punitive tariffs or any other events stemming from US-China tensions,” he says. 

He adds that the phase two relocation will be hard to reverse as it involves heavy investment in plants and equipment that are difficult to move. 

The S&P report says technology hardware producers that are likely to speed up investment outside of China in 2024 to 2026 are suppliers of passive components, power electronics and motors, connectors and sensors, printed circuit boards and outsourced semiconductor assembly and test services. 

S&P has found that the exposure of 14 midstream technology firms it tracks by fixed-assets dropped to 26% in 2023 from a peak of 30% in 2021. Over half of these firms’ new investment in the past two years was spread across the Americas, the European Union or Asian geographies such as Taiwan, Thailand, Malaysia and India. 

The report says Foxconn is expected to boost its annual capex to 13 billion yuan over the next two years. Much of this will be spent on building factories outside of China. 

Another case is Vishay Intertechnology, an American semiconductor maker, which is going to spend more than US$1 billion in total to expand production in Mexico, Taiwan and Europe over the next two years. The company’s capex was US$300 million last year. 

Vishay currently has seven factories in Chinese cities including Beijing, Tianjin, Shanghai, Huizhou and Xi’an.

The S&P report says that – despite extra costs, operational disruptions and lower efficiency – global technology hardware firms will keep moving out of China due to some push and pull factors.

The push factors include Washington’s restrictions on technology items imported from China and export controls on high-end semiconductors and artificial intelligence technologies. The pull factors include foreign governments’ new incentives to boost their technology sectors. 

China has seen its share of US technology hardware imports decline in favor of Mexico and ASEAN countries since the US-China trade war broke out in 2018. 

China’s share of US imports of electronic computers fell to 44% last year from 66% in 2017. China’s share of US imports of other electronic components decreased to 16% from 61% for the same period. 

FDI and unemployment 

On August 17, China’s Ministry of Commerce said the country’s foreign direct investment fell 29.6% to 539.5 billion yuan ($76.11 billion) from a year earlier. Without providing a full geographical breakdown, it said FDI from Germany and Singapore increased 26.4% and 11% year-on-year, respectively. 

Chinese factory workers have said that it’s very difficult to find a job in Guangdong now that many foreign manufacturers have left. Some said they are now offered a monthly salary of about 3000 to 4,000 yuan, compared with 8,000 to 10,000 yuan per month in the past. 

According to the National Bureau of Statistics (NBS), China’s youth unemployment rate increased to 17.1% in July, the highest level since the new system of record-keeping began last December. In June this year, the figure was only 13.2%. 

In the first seven months of this year, the overall unemployment rate in urban areas was 5.1%. Economists said these figures may have underestimated the unemployment situation in China as a person who works more than one hour per week is not considered jobless.

“Goodbye, Guangdong!” has recently become the most searched key phrase on the Internet in China as thousands of skilled workers decided to depart for their homes in Hunan, Hubei, Guangxi and Sichuan provinces because they could not find jobs or make ends meet in Guangdong. 

Typically those workers, who had worked in Guangdong for more than a decade, only went home once a year during the Lunar New Year holiday in January or February. Some of them had endured homelessness for months as they could not pay rent. 

Chinese media reported in 2022 that many manufacturers of electronic devices and parts in Shenzhen and Dongguan in Guangdong were shut down due to insufficient orders. 

R&D investment: the German factor

While many American, Japanese and Taiwanese firms are diversifying their supply chains outside China, some German firms are boosting their research and development (R&D) investment in mainland China.  

Germany’s FDI in China grew 12.3% to 7.3 billion euros (US$8.1 billion) in the first half of this year from 6.5 billion euros in the same period of last year, the Financial Times reported, citing the Bundesbank, Germany’s central bank. 

The investment growth was mainly driven by big German carmakers, according to the report. Experts said German firms made about 19 billion euros in profits in China last year and decided to reinvest more than half of it domestically.

Germany’s FDI into China represented about 11.5% of China’s total FDI of 498.9 billion yuan in the first half of this year, assuming both figures are calculated with similar methods. 

“German companies are investing in local innovation and strategic partnerships with Chinese customers and suppliers to stay competitive in an intense and dynamic market environment,” Martin Klose, executive director and board member of the German Chamber of Commerce in South & Southwest China, said in a press release on Monday. 

The German Chamber of Commerce in China, in cooperation with BearingPoint, conducted the Innovation Survey 2024 from February 19 to March 13 this year, with 324 German Chamber member companies participating. 

About 31% of the surveyed firms are machinery and industrial equipment makers while 19% are auto firms. The remaining are engaged in services (12%), electronics (8%) and chemicals (5%) businesses. 

The survey report published on Monday, showed that 63% of respondents say they conduct research in China, up 6 percentage points from 2022. About 69% say they do development in China, up 4 percentage points from 2022.  

The report also said 29% of German companies conduct research in China for global markets, compared with 25% two years ago, indicating China’s rise as a global innovation hub. 

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