Over Thanksgiving weekend, while the average American was spending time with family and friends, the Chinese people from Wuhan to Shanghai were protesting the fact that they could not do the same. Call it China’s “Zero Covid Revolt” – this past weekend’s protests against the Chinese Communist Party’s draconian pandemic restrictions further highlights the wanton human rights abuses that routinely take place in the world’s No. 2 economy.
Zero Covid is more than just an inconvenience to unknown Chinese people thousands of miles away. China’s pandemic management has shut down supply chains around the globe. American businesses should be protesting against Zero Covid as much as the Chinese. Only they have more power than the average Chinese to do so. They can protest by moving supply chains out of China, a country that has become an unreliable partner to American multinationals and a geopolitical risk as well.
Calls for “freedom” and criticism of Xi Jinping and the CCP this weekend should not be taken to mean that the Chinese people are longing for Western democracy. They might simply want a return to the “good ole days” of CCP leadership, pre-Covid. They don’t want to be locked in their homes if their neighbor on the fifth floor tests positive for Covid. They don’t want to be tracked and banned from moving between cities. They don’t want the constant fear of reprisal from face-tracking technology for participating in the protests or breaking Covid quarantines. Unlike here, they have little say over such matters, fight as they might for some leniency.
Protests began on two fronts: one was a fire at a locked tight apartment complex in Xinjiang. People were allegedly barricaded inside and died in the blaze.
Another was at a Foxconn factory where workers revolted against the constant barrage of testing and quarantining and an issue over bonuses. Foxconn makes numerous American consumer tech products, but it is famously known for being the go-to manufacturer of Apple’s iPhone.
Images of angry, masked Chinese people throwing metal barricades at police and public health workers in white PPE uniforms needs to be ingrained in the heads of American CEOs: this is where their corporations come to build things for the world. This has become their preferred base of operations. This is the government they kowtow to most. When push comes to shove, who would they support – the Chinese people or the Chinese government? Consistently, the answer is the Chinese government.
Apple is back to abiding by CCP rules on social media, censoring certain apps and activities related to the protests. They did the same in Hong Kong. No one should expect that China’s crackdown of protests would move the needle on U.S.-China relations. A few individuals were sanctioned because of the Hong Kong protests pre-Covid, yet as Hong Kong just became another Chinese city faster than anyone had expected, it remains a privileged member of the government procurement agreement of the World Trade Organization. That gives the Chinese city a chance to bid on U.S. government contracts. Shanghai-based companies can’t. Hong Kong based companies can. This privilege remained despite months of protests against the Chinese government there. Changes in the relationship are going to boil down to individual, corporate decisions. Washington has tried to persuade importers by imposing tariffs on China goods to make sourcing from there more costly. But a weaker renminbi was the answer to those higher prices. Some of those Section 301 tariff rates were as low as 7%. An overvalued dollar erased the purpose of that tariff.
Where do we go from here?
China continues to present itself as a dystopian, high-tech society that accepts no deviance from the mean. The government is not tolerant of dissent. It locks up people in Xinjiang arbitrarily and without due process. The United Nations said so in their report on the Xinjiang prison system and the Uyghurs in August. The global pandemic started in Wuhan, leading to millions of deaths around the world. Politicians lambast China regularly. Washington is trying to make it harder to do business there. But Corporations remain enmeshed, with a few exceptions.
From Washington’s perspective, the protests are yet another reminder that China is a real serious risk to important American supply chains.
We have banned forced labor solar equipment from American markets, and that’s led to bottlenecks at the ports. The U.S. is reliant on solar for at least 90% of the solar cells that go into making solar panels. Solar panels in the U.S. are around 70% imported from Asia, mostly by Chinese multinationals like Jinko Solar. The Inflation Reduction Act, signed into law this year, gave U.S.-based solar companies production tax credits to ramp up production so the country’s green push is not reliant on Chinese companies. As a result, First Solar is investing $1.1 billion in a solar manufacturing facility in Alabama. Micron Technology said in October that it plans to spend $20 billion to build a state-of-the-art semiconductor production complex in upstate New York, part of a domestic manufacturing effort that could see the company investing as much as $100 billion in the area over two decades. Micron CEO Sanjay Mehrotra said the CHIPS Act helped. To entice corporate America to rely less on China and rely more on local production, Washington needs more of the above.
From the perspective of the consumer, nothing is more powerful than an American credit card. Bloomberg recently reported that China’s fast fashion retailer, Shein, sells clothes made with cotton from Xinjiang. Xinjiang cotton is banned from American supply chains. Consumers who don’t want to live in ghost towns, replete with drug treatment centers and cannabis shops, are becoming increasingly mindful of where they shop, and where their products are made. But will consumers say they don’t want to buy an iPhone because it is made in China – the country that sends drones up and down apartment rows demanding people stay in their homes, and keep their kids out of school, or face jail? So far, the answer to that question is no.
From a pure business perspective, China is becoming a bad look. It’s one thing to be in China for the sake of selling a product or service to China. It’s another to be in China to use it as a low (or free) labor pool, with less stringent environmental regulations, and sell it to the U.S. This comes at an expense to the U.S. worker, as the International Trade Commission said in recent reports about offshoring.
In 2019, the Business Roundtable of CEOs said that their new commitment was to stakeholders, not shareholders. Stakeholders included the communities they served. Choosing to set up shop in China over the U.S. is the antithesis to that new stakeholder commitment. Doing so will now be seen as a public relations nightmare. The old adage, “you are the company you keep”, becomes more relevant when dealing with the world’s most powerful totalitarian system. They’re going to have to pick a side.
Finally, from the perspective of sane policy that most of Washington, American voters and consumers would back, is the turn towards reshoring. To make this a real trend, Washington needs to make it affordable to do business here – from assuring the country has cheap and abundant energy, to competitive tax rates.
China’s risk profile is changing.
“The safest and best place in the world to do buinsess and make anything is in the USA. So many things have changed in the last 20-30 years and our higher labor costs are no longer so high. Plenty of places around the world now have relatively high wage standards but still manufacture a lot. Automation and other technology advances help. Plus, the cost of risk is far lower here. The rule of law is strong, and IP is safe. We do things in a way that can leave shareholders feeling good about the jobs they provide for other Americans and the impact of their processes on the environment. It’s the cleanest, safest place to create jobs and wealth for business, investors, and workers.” — Zach Mottl, President, Atlas Tool Works and Chairman of the Coalition for a Prosperous America
The WSJ looked at this from the view of Wall Street and the C-suites in an article published on November 28. To them, if China cracks down hard on protesters and further intensifies its already harsh Covid controls, that will pile more supply chain pressures onto exporters. Ongoing lockdowns will also create further disruption to factory production. Sales forecasting will be impossible.
If Beijing eases Covid controls, the result could be large-scale fatalities – as most Chinese have been hiding out from Covid rather than catching it. This could be a trigger for even worse unrest. Anti-lockdown protests could also embolden labor activists to push for higher pay.
Washington will only do so much to decouple from China. It will be up to corporate America to make a move.
Most have chosen to stay regardless of the optics – from weeping Xinjiang women accusing their Chinese handlers of forced sterilization to the inflation-inducing supply chain disruptions caused by Zero Covid. They remain dependent on Chinese manufacturing. Some, happily so.
Only a handful of big companies have said they want to diversify out of China.
Worries over China geopolitics have been a boon for India, Korea, Southeast Asia, and to a lesser extent, Mexico. Government policies like the CHIPS Act and the Inflation Reduction Act helped two industries glued to China turn inward towards the U.S. The China debacles of the last four years have shown us that companies will not reshore on their own. Theirs is a numbers game, and the bigger the company, the more notorious they are for penny pinching. If they can find a widget for five cents cheaper in Vietnam, that’s where they’ll be going. The least the U.S. can do is to make it less attractive to do business in a country that is looking less attractive by the day.
“Businesses like to keep costs low but more than that, they like tomorrow to be like yesterday. They like certainty and regularity,” said Zach Mottl, president of Atlas Tool Works in Lyons, Illinois, and Chairman of the Coalition for a Prosperous America. “China offers little of that anymore and in fact it’s just the opposite now. China offers ever-increasing risk and unlimited uncertainty.”
For businesses, China is a supply chain and public relations risk. For consumers who do not want to support abusive, totalitarian regimes, many will look for other brands. The damage to China-centric corporate brands, like Apple, like Nike, could be surprising. Selling China as the good guy will take a lot of marketing capital.
“Many amoral corporate boards will continue telling CEOs to do any deal necessary to stay in China because of their incorrect views of access to a large number of consumers,” says Michael Stumo, CEO of CPA. Commerce Secretary Gina Raimondo made this point on Wednesday, saying the U.S. doesn’t seek a decoupling from China because it wants to sell goods to the Chinese consumer.
“Waiting out the Zero Covid policies, accepting CCP cells in their regional headquarters; they’ll do anything to stay,” says Stumo. “But when the U.S. government decides that America will no longer fund China’s rise and disentangles our goods and capital markets more broadly, the multinationals will simply have to move elsewhere. They won’t lead, they will follow.”
Washington’s role is to entice them to come here, not just to India, Southeast Asia, and Mexico.
“The current unrest in China is possibly the last warning bell for manufacturers and investors to get out of China,” said Mottl. “Xi Jinping and the CCP have run the country into the ground. It will only get worse. The risk of damage or disruption to your business’s reputation, investment, supply chain, and income stream is nearly unlimited today.”