Decoupling blues
Yvonne Gill monitors the painful costs to the Chinese economy – and the country’s massive workforce – as global corporations begin to slacken their ties with China
Pangs of decoupling are being felt across China. The impact is at its starkest for migrant workers who travelled from their far-off towns and villages to work in modern manufacturing facilities located in industrial hubs, producing electronics, consumer durables and capital goods for export. Yet now they are facing the prospect of pay cuts, partial lay-offs and even losing their jobs as foreign companies implement plans to reduce their supply chain dependence on China. The export-led, runaway growth story of China, known as the ‘factory of the world’, is a very different narrative today, and difficult chapters lie ahead.
Orders for electronic, mechanical and electrical products from Europe and the United States have lately shown a sharp decline. Many of China’s small and medium export-oriented units have either gone bankrupt or have fired large numbers of workers to tide them over the crisis. Large conglomerates are also laying off employees.
The Guangdong Province, China’s foreign trade hub, was hit by a 12.4% decline in foreign trade during the first two months of this year, compared with the same period last year. Official figures reveal a 10.4% decline in exports. Those to the US fell by 24.1%. Mobile phone exports came down by 14.9%, while apparels and accessories exports plummeted by 30.3%. Although weak demand is one reason, many industries are also moving overseas in view of the decoupling process and sanctions initiated by the US and other developed countries.
Multinational brands, the engines of China’s growth, are growing wary of relying on China-based companies to source their supplies. They are gradually shifting their production lines to countries such as India, Vietnam, Malaysia and other Southeast Asian nations, to avoid the impact of sanctions. A classic case is the diversification of production facilities from China to other countries by Apple’s contract manufacturers, including Foxconn, a Taiwanese electronics giant. This has adversely affected a large number of upstream and downstream companies that are part of a very complex and efficient supply chain that exists in China.
Distressing reports have come from the city of Zhengzhou in Henan province, where the sprawling Foxconn production lines produce over 50% of the world’s iPhones. In October last year, thousands of employees stopped work and staged protests against the lack of anti-epidemic measures in the factory and concerns about being infected with Covid-19. Foxconn has 90 production facilities, employing well over 300,000 people in Zhengzhou, and is an important source of the city’s tax revenue. Besides, the company accounts for 80% of Zhengzhou’s foreign trade, which makes up 60 per cent of that of the entire Henan province.
India is becoming an important destination for contract manufacturers of Apple products
If Foxconn contributed to Zhengzhou’s prosperity, it is now a major cause of local people’s distress as it scales down its operations. Following last year’s Covid crisis and workers’ protests, the management have stopped hiring new hands and sacked well over 10,000 employees. Parts of the city wear a deserted look as many of the jobless workers and their families have moved to other places in search of new avenues of employment.
Other than Zhengzhou, Foxconn has production facilities in Chengdu, Foshan and Shenzhen, providing employment to more than 800,000 people throughout China. The Longhua Foxconn factory in Shenzhen is also reported to have slowed down production due to cancellation of orders by Apple. The company has been sending employees on long unpaid vacations to reduce its wage bills.
Collective punishment is used to silence dissent
Designated as a ‘developing country’ by the UN, China enjoys preferential market access, aid and special technical assistance
Changshuo Technology is the second-largest Apple supplier factory after Foxconn in Shanghai, which at its peak employed 80,000 workers. Today fewer than 70,000 work there. Changshuo’s parent company, Pegatron, is setting up its second plant in India. Apple’s supply chain network in China includes thousands of companies employing millions of workers who produce both components and finished products for Apple alone. But it is not that Apple is reliant on China; rather, the Chinese are reliant on Apple for jobs and prosperity.
India, meanwhile, is steadily becoming an important destination for contract manufacturers of Apple products. The value of iPhones assembled in India in 2022-23 was $7 billion, three times compared to the turnover a year ago. Foxconn Technology Group and Pegatron Corp are expanding their production lines in India. While India accounted for just 1% of all iPhones produced in 2021, it is estimated that a quarter of these phones will be made in India by 2025.
Foxconn has also announced that it is setting up a new factory in Vietnam and will invest $300 million to expand its current manufacturing facilities in the country. The factory will be built on 111 acres of land on the outskirts of Saigon, for which the company has signed a 35-year lease. Foxconn will make Macbooks at the plant. It already produces AirPods, Apple Watches, and iPads in Vietnam.
Keeping up the heat on China, the US House of Representatives unanimously passed the ‘PRC is Not a Developing Country Act’ on March 27 this year. The bill mandates the State Department to exert its influence on international organisations to classify China as a ‘developed country’. At present, being designated as a ‘developing country’ by the UN, China enjoys preferential market access, aid and special technical assistance.
Earlier, on March 21, Republican Senator Josh Hawley introduced a bill named ‘Ending Normal Trade Relations with China Act’. Hawley says that China’s most-favoured-nation status should be revoked. It may be recalled that on October 10, 2000, the then US President Bill Clinton signed into law the Permanent Normal Trade Relations with China Act. The law gave China ‘most-favoured-nation’ status, allowing it preferential treatment in trade such as technology transfer, foreign trade structure reform, intellectual property protection and market access. Hawley maintains that China being accorded this status has resulted in a loss of 3.7 million manufacturing jobs in the US and irrevocable damage to local economies. The US has also blamed China for IPR theft and clandestinely subsidising its exports to stifle competition.
With the expansion of US sanctions on exporting high-tech microprocessors manufacturing equipment and advanced chip-making technology to China, and Europe and Japan following suit, things are going to be really tough for China. Already the country is facing rising unemployment, dropping household incomes and low internal consumption, not to speak of the massive real estate-driven debt crisis. We will have to wait and see how things pan out and what strategy Beijing adopts to keep its economy afloat and growing in the near and more long-term future.
Yvonne Gill is a freelance journalist based in London