The rationale underpinning former President Donald Trump’s China strategy can be summed up in a few lines: The country had gamed the international trading system, and it was time to right the scales.
The end goal was to force American (and Chinese) firms to bring manufacturing to the U.S. by ratcheting up trade pressure. But this proposed “decoupling” of the world’s two largest economies proved to be much easier said than done.
That was evident during a Georgia State University CIBER webinar Feb. 11, where two Georgia-based CEOs still investing in China after decades operating there shared their experiences.
For Anisa Telwar Kaicker, China’s allure is more than just the low-cost labor and access to raw materials that drew Anisa International’s first makeup brush factory to the northeastern port city of Tianjin 18 years ago. In her industry, where much of the manufacturing process is still done by hand, it’s an irreplaceable node of knowhow.
“When people ask why don’t you leave China, it would be like asking someone to make Italian wine in a different country, to make French cheese in a different country,” she said. While it started in other parts of Asia, the “handicraft — that intellectual property — is in China.”
It hasn’t always been easy for Anisa. Even after installing its own water-treatment plant, the company was forced out of its original factory as part of a government cleanup. The brush plant moved a few years ago, with Anisa breaking out its anodization processes in a separate state-of-the-art facility whose opening coincided with the initial COVID-19 outbreak in China last year.
Not everything has run smoothly. Anisa’s status as a wholly-owned foreign enterprise, or WFOE, sometimes meant it was held to a higher regulatory standard than local firms, adding to already immense competitive pressures, Ms. Telwar Kaicker said.
Still, the company is thinking now less about how to diversify away from China than how to better compete within it. Ms. Telwar Kaicker is betting on her new facility investments to deliver the sustainability metrics that her customers, which include some of the world’s largest cosmetics brands and retailers, are starting to require — and that’s on on top of more stringent government regulations.
“We want sustainable manufacturing, and in China I can do that,” she said.
Scott Ellyson, co-founder and CEO of East West Manufacturing, has been using arbitrage in Asia since he started making electronics in the Pearl River Delta encompassing Shenzhen and Hong Kong with his brother at the age of 26 in the mid-1990s.
“Back then it was largely toys that you saw coming out of China, and I knew that we could make a quality product anywhere in the world, and that quality had nothing to do with location. It had everything to do with processes and controls,” he said.
Nearly three decades, two companies and many countries later, China is still an integral part to East West’s contract manufacturing. While the company now has factories in the Vietnam, the U.S., Costa Rica and soon to be Canada, as well as a sourcing office in India, it buys from more than 400 factories across China, including its joint-venture motor plant in the city of Changzhou.
That last facility is a good example of why the decision about where to make a product is so complex — and why it will not be easy to bring manufacturing back to the U.S.
Much of the cost the metal, plastic and rubber parts East West makes for sectors like robotics, medical devices and motors, lies in the material itself, much of which is readily available in China. Account for that and tack on labor, China is still very affordable despite well documented wage increases.
“For the cost of health care for a U.S. employee, you can still hire one or two employees in China. And that’s still increasing in the U.S. at a faster rate than the cost of labor in China,” Mr. Ellyson said. In Vietnam, where East West employs more than 1,300 people across its factories, it’s one-fourth the cost of China.
But that’s not all — ingrained supply chains and massive scale give China a leg up on certain products.
Changzhou, a city about the size of Atlanta has 200 motor components factories, Mr. Ellyson said.
“Because our supply chain is efficient, we only need to carry three or four days of inventory at our factory because our suppliers are all around us,” Mr. Ellyson said.
For that reason, moving to a place like Mexico would be cost-prohibitive for that product.
Trade War Impacts
All this said, tariffs do have seem to have at least anecdotal impacts on investment decisions. Four Chinese companies have announced operations in northwest Georgia to avoid the levies, while a Korean firm hit hard by a dumping duty on foam mattresses out of China is now going to be doing some of that work in Henry County, Ga.
The U.S. trade deficit with China, which many economists argue is not a bad thing, shrunk to about $310 billion in 2020 (though the drop might have had to do with supply shocks early in the pandemic-plagued year, and imports from other Asian nations were up.)
Anisa’s business did fine when hit with the 10 percent phase of American tariffs on Chinese-made goods, which President Joe Biden has not rolled back since entering office.
Worse, however, was the retaliation from China: Since Anisa is a foreign-owned firm, new restrictions mean it can’t even sell China-made makeup brushes within the world’s most populous country.
“It wasn’t smart, because now China has gotten really competitive, and they’ve outsourced to other countries what they were buying from us,” Ms. Telwar Kaicker said.
Asked for his views on the political turmoil that has surrounded the bilateral relationship, one of her China-based executives responded: “You’ve made us stronger.”
Mr. Ellyson said he would have rather seen a coalition of nations take on some of the imbalances in the trade relationship, which he views as somewhat real, although he hasn’t experienced the intellectual property challenges many have decried.
As for the Trump tariffs, they’ve made some U.S.-based factories that use Chinese-made components less competitive, he said.
“You can try and pass that cost on your customer, or the more negative thing is, you are incentivized to move the entire finished assembly to another region,” Mr. Ellyson said. “It has had a much bigger impact on the cost of our U.S. operation, and our ability to compete, than I think most politicians realize.”
Meanwhile, both Anisa International’s Chinese factory and Mr. Ellyson’s widely dispersed suppliers are largely focused on growing their own operations after weathering the outbreak of COVID-19 last February. China is operating normally after having largely kept a lid on the pandemic after it spread around the world.
“They’re more focused on business, and on doing what they can control,” Mr. Ellyson said of his suppliers. “Concern about tariffs has largely dissipated at this point.”
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Read more about the companies’ pandemic responses in China in 2020 Global Atlanta stories:
- Atlanta’s Anisa International Ramps Up New China Factory Amid Coronavirus Recovery
- Interview: Inside East West Manufacturing’s Pandemic ‘Playbook’
Learn more about the GSU Center for International Business Education and Research and attended future events in the International Business Webinar Series: https://ciber.robinson.gsu.edu/
