Chexit: The Great March Out of China

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You could call it the ultimate Chinese take-out order: American companies are in the process of an unprecedented migration out of China, seeking new places to make products that U.S. consumers have become used to. For much of the past four decades China has been the go-to resource for just about any and everything sold to American consumers. From the most sophisticated Apple iPhones, electronics and apparel to home merchandise and the most rudimentary novelty item – can you say Fidget? – chances are it all came from China. When Richard Nixon made his historic visit to the country in 1972 and sat down with Mao Zedong they opened up a pipeline that has redefined international business.

The initial glow of American and other Western brands setting up shop in China has peaked. Part of this is due to Chinese-owned brands gaining market share in their own country, the result of pro-China sentiments on the part of consumers. But it’s also related to the pandemic shutdowns that have made in-person shopping less of a factor in purchasing decisions.

Now, a redefinition is being written and if China is not going away as a valuable resource for products, it is rapidly losing its dominance across the broad spectrum of consumer products. It is also losing some of its luster as a place American retailers want to set up shop. It’s why there’s a new phrase you’ll hear in the sourcing offices of American importers, wholesalers, and retailers: ABC. It stands for Anywhere But China

What’s Behind Chexit?

Full credit to Keith Bradsher of The New York Times for coining the term Chexit, a play of course on Brexit and a slogan you’re going to be hearing and reading about a lot more over the next few years.

It pretty much sums up the factors that are coming into play causing American and many other Western companies to rethink their business strategies and seek new sources for products. It comes down to three big factors:

  1. Politics: Despite the recent face-to-face meeting between President Biden and Chinese leader Xi Jinping, relations between the two Superpowers are about at their lowest point in the post-Nixon era. The Chinese government’s policies on human rights, Taiwan and control of its citizens (think: Hong Kong) is spooking U.S. companies. They worry that their operations in China will increasingly be in jeopardy from the authoritative Xi government and could even be taken over in an extreme meltdown of international relations.
  2. Pandemic: The Zero Tolerance policy of the Xi administration is making China a less-than-reliable resource for goods. At any given time, tens of millions of people (read: workers) could be quarantined due to Covid restrictions, knocking out large areas of manufacturing and shipping around the country. This is a bit less of an issue given the over-inventoried levels in the American market right now but there are still immediate needs for seasonal goods, products in high demand and other merchandise U.S. businesses have come to depend on. Uncertainty is the biggest deal-breaker when it comes to finding a sourcing partner.
  3. Populations: China remains the biggest country in the world by population but its two-child policy – since lifted but still playing a huge role in its demographics – has created worker shortages in some industries and areas across the country. China is also increasingly redirecting its labor force to higher tech sectors like automotive, aviation and electronics leaving the more rudimentary categories like apparel, housewares and all those Fidgets undermanned when it comes to the workforce. It’s a problem nobody could have foreseen even a few years ago when prior Chinese government policy was all about creating jobs for hundreds of millions of under-employed citizens.

All of this put together is creating a perfect storm for Chexit, something that is likely to keep playing out for much of the rest of the decade…at least.

Apple Falls from the China Tree

Perhaps no other company is making a more-high-profile change than Apple, which has one of the largest and most sophisticated sourcing operations in China. And while its partnership with Foxconn is not going away and remains the primary way it gets its iPhones, Macs, and other assorted electronic doodads into the hands of waiting American consumers, it is now not the only way.

Earlier this year Apple announced it would be shifting some of its production of iPhones to India, an amazing move given that country’s low-tech reputation. It’s a fairly modest move…at least at first. The initial stage is to move just 5 percent of iPhone production from China this year. But by 2025, the company expects to make one out of every four of its iPhones – its best-selling and most profitable product by far – to India.

Right now, China still makes 90 percent of all Apple products but the “decoupling,” as the Economist magazine puts it has the potential to be a game changer not only for the company but for the entire consumer electronics sector in general. Just as Apple was a leader in developing its Chinese sourcing model so too is it likely to take the front position in transitioning its business elsewhere.

Tesla Drives Away from Some China Showrooms

Another American company closely identified with the Chinese market is also rethinking its positioning in the country. Tesla, which operates 200 dealerships in the country, plus a giant factory for domestic sales as well as exports to other markets, recently closed its flagship store in Beijing. It has replaced it with a smaller location elsewhere in the city and so far, there are no indications it is planning to close additional dealerships elsewhere in China.

But given the mercurial management of the electric vehicle company one can speculate that there could very well be a further retrenchment. Initial speculation is that closing the big flashy two-story dealership in the upscale Parkview Green shopping center was done for cost savings and doesn’t necessarily represent any pullback in Tesla’s presence there. Tesla sold just over 318,000 vehicles in China through the first nine months of 2022, making it the first or second largest market for the brand, neck-and-neck with the U.S.

But it does seem to signal that the initial glow of American and other Western brands setting up shop in China has peaked. Part of this is due to Chinese-owned brands gaining market share in their own country, the result of pro-China sentiments on the part of Chinese consumers. But it’s also related to the pandemic shutdowns that have made in-person shopping less of a factor in purchasing decisions. Many American brands, from Home Depot to Gap, have shut down or sold their Chinese operations and one of the biggest ones still there, Walmart, is believed to still be struggling to bring its business there up to the levels of its domestic U.S. levels.

Cotton-Picking Problem

One of the biggest problems in making goods in China – from high-tech electronic vehicles and smart phones – has been in the apparel and home textiles sectors. China is the largest cotton grower in the world; India is a close second and the U.S. a distant third. China is the number-one place where American importers get basic cotton-based merchandise like t-shirts, clothing and sheets, towels and curtains. Much of that cotton comes from the Xinxiang region in the western part of the country and that region has been the subject of numerous charges of human rights violations by outside sources who claim the local population is being persecuted and forced to adapt their beliefs to the China way. The problem is that the people in that area are predominantly Muslim and don’t adhere to the policies and religious principles of the rest of the country. President Xi has denied these charges, but many outsiders have been adamant in claiming the human rights violations.

The result is that products using Xinxiang cotton are now banned in the American market, forcing importers and wholesalers to look elsewhere for both raw materials and finished products. These organizations are spooked by getting much of anything made of Chinese cotton and are fearful of the common practice of transshipping and mislabeling goods in violation of U.S. regulations. Again, India has been a beneficiary of all of this, but other Southeastern Asian nations like Bangladesh, Vietnam, Thailand, and Indonesia are all benefiting and picking up market share.

The China Syndrome

Let’s be clear: China is not going away as a massive resource for American importers and marketing companies. It will likely remain the largest trading partner for the foreseeable future. But the decades-long dominance it enjoyed appears to be coming to a rapid ending, a process that is unlikely to reverse anytime soon.

The trading relationship between China and the U.S. has been an incredible win-win for both nations. It transferred one country out of poverty and into a global power, at the same time creating a marketplace that has allowed generations of Americans to enjoy well-priced goods and services at unprecedented levels. The fact that it is turning into a lose-lose situation is a very unfortunate turn of events.

An old Chinese proverb says: “There are no never-ending banquets in the world. (Everything will eventually come to an end.) ” Although the exact moment of when all of this is over will be hard to know, it will be bittersweet indeed.

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