Confidence about manufacturing in China has plummeted to a new low. Almost twice as many U.S. companies cut their investment in China in 2022 (19%) versus 2021 (10%). “Confidence has been shaken,” according to the 2022 China Business Report conducted by the American Chamber of Commerce in Shanghai (AmCham Shanghai) and PwC.
The report concluded that the impact of supply-chain disruptions amid strained U.S./China relations and macroeconomic pressures eroded business confidence, leading to lower investment. As investment drops, Chinese growth will slow further, making the country a less attractive market. Investment will drop further.
Record-Low China Optimism
Respondents of the AmCham Shanghai 2022 China Business Report also said that their headquarters’ confidence in China’s economic management worsened over the last year (52%). Only 18% of companies ranked China as their top choice for global investment plans, down from 27% in 2021. In addition, 56% reported that China’s government policy shows favoritism to local companies, up 5% versus 2021 and the highest level since 2017.
The 2023 China Business Climate Survey conducted by AmCham China in Beijing revealed continued concern about challenges stemming from U.S.-China tensions, COVID-19 era restrictions, and the regulatory and policy climate for 2023 business outlooks. Respondents were negative when it came to U.S.-China relations improving, with 46% stating that they would deteriorate in 2023.
Michael Hart, president of AmCham China in Beijing, said this about the 2023 survey, “A year ago, 60% of companies said China was the top or a top-three investment priority. This year, that’s fallen to 45%. China is falling in the rankings as a place for people to invest globally.”
Anywhere but China
Houston-based MacroFab is helping U.S. companies reshore as China business confidence fades. CEO Misha Govshteyn said in an interview, “Things have changed pretty dramatically post-pandemic. China used to be the default for manufacturing electronics, but the answer now is, anywhere but China.”
France-based Schneider Electric, a manufacturer of energy-management and automation equipment, chose El Paso, Texas, for a new manufacturing facility to boost domestic capacity. “The supply-chain challenges of the past year have demonstrated the importance of increasing our domestic manufacturing capacity as quickly as possible,” said Annette Clayton, CEO and president of Schneider Electric North America.
Bloomberg reports tech giant Apple is expected to buy U.S.-made microchips, reshoring about one-third of its future processors. Apple Inc. is encouraging contractors to shift production outside of China, propelled by factory violence and turmoil from COVID-zero lockdowns, and increased monetary, social, political, duty/tariff and reputational risk.
Figure 1
Record-Breaking U.S. Developments
In stark contrast, 2022 U.S. reshoring and FDI manufacturing job announcements (Fig. 1) were at a record-breaking 364,000, a 53% increase from the 2021 record. The total number of jobs announced since 2010 is now nearly 1.6 million. New investments in U.S. manufacturing by domestic and foreign companies surged after President Biden’s Inflation Reduction Act and CHIPS and Science Act were passed. EV battery and semiconductor investments account for the largest increases in job announcements.
A generational shift in global sourcing strategy is under way. Much of the growth in 2020-2023 was due to the national and corporate experience and expectation of ongoing, long-term, potentially existential disruptions, especially those due to geopolitics. Great opportunities have emerged for an enduring and meaningful rebound of U.S. manufacturing.
Top Industries Reshored and the Products Driving Them
Electric-vehicle (EV) batteries were the most active product reshored in 2022 (Fig. 2). Investments in EV batteries are booming in the attempt to obtain needed supply and to not be dependent on Asian, especially Chinese, imports. The share of jobs announced by electrical equipment, including EV batteries, went from 3% in 2019 to 44% in 2022. In 2022, there were 146 battery-related cases that account for 105,000 jobs announced, including the supply chain.
The second largest industry was computer and electronic products. It continues to grow, pushed in recent years by solar panels, robotics, drones and, most recently, semiconductors. In the short term, we expect chip investment and jobs to continue to grow. In 2022, there have been 61 cases of semiconductor/chips with 28,800 jobs announced – most in the third and fourth quarters following the announcement of the Chips Act. Semiconductors are going to require much larger domestic markets in order to absorb the added capacity over the long run. We need to reshore more electronic product assembly.
In third place is chemicals, which is driven by pharmaceuticals (specifically vaccines and COVID- 19 treatments), renewable fuels like hydrogen and rare-earth-based chemicals required for batteries.
Table 1
Private U.S. Investment
To date, over 50 new semiconductor ecosystem projects and $210 billion in private investment have been spurred on by the CHIPS and Science Act of 2022 and will reduce dependence on critical technologies from China and strengthen the U.S. economy and supply-chain resilience.
Intel CEO Pat Gelsinger told CNBC, “Oil reserves have defined geopolitics for the last five decades. Where the fabs [semiconductor factories] are for a digital future is more important. Let’s build them where we want them and define the world that we want to be part of in the U.S. and Europe.”
Automakers and the U.S. government are spending tens of billions of dollars to establish a domestic battery supply chain. As of January 2021, a total of $92 billion has been invested in the U.S. battery supply chain, including recycling, materials separation and processing, and component manufacturing.
Priorities Shift to Resilience; Cost is Still Important
Support for reshoring is driven by an increased recognition of the total cost of offshoring and rising concern over U.S. dependency on China. The savings on non-manufacturing costs as a result of producing in the market in which the products will be sold can often overcome a 15-20% manufacturing cost gap caused by a 70% wage gap.
Using the Total Cost of Ownership Estimator® instead of manufacturing cost or Free on Board (FOB) price when companies make siting and sourcing decisions is the best way to recognize these savings. The impact of using TCO shows that shifting decisions from a price basis to TCO can be expected to drive reshoring 20-30% of what is now imported. Do the math with TCO.
Are you thinking about reshoring?
For help, contact me at 847-867-1144 or harry.moser@reshorenow.org. Our main mission is to get companies to do the math correctly using our Total Cost of Ownership (TCO) calculator. By using TCO, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors.
