NORMALLY 200,000 buyers, hailing from just about every country, would have flocked to the Canton Fair, the world’s biggest trade show. This year, because of the pandemic, it has been conducted entirely online, running for ten days and ending on June 24th. Although no substitute for meetings in the flesh, the virtual fair was a spectacle in its own right, testament to China’s manufacturing muscle. Some 25,000 exhibitors have hosted live-streams simultaneously, often from their factories, chatting to anyone interested in their products.
Among them, Wen Li, a young product manager, demonstrated Z-Green’s self-propelled lawnmowers, to the background clang of the shop floor. Sherry, a manager with My Dinosaurs, gingerly stepped around fake bones as she introduced her company’s giant animatronic beasts, pausing to insert a tongue into the gaping mouth of a brachiosaurus. Joy, a saleswoman with PK Cell, sat behind an array of rechargeable lithium batteries, explaining the workings of the firm’s 23 automated production lines and reeling off its partners’ names, from Walmart to the Chinese government.
On it went. There were companies making motorbikes and electric cars, coffee machines and milk-frothers, dog toys and hummingbird-feeders. Even if the individual live-streams were mostly amateurish, in halting English with poor lighting, the overall effect was powerful. Here, the Canton Fair proclaimed, is China: home to 28% of the world’s manufacturing—nearly as much as America, Japan and Germany combined (see chart)—and, despite all the dislocations from the coronavirus crisis, still going strong.
China has two big advantages as a manufacturing power, amply displayed in recent months. First, its industrial base is unparallelled in breadth and depth, churning out everything from low-end footwear to high-end biotech. Even as wages have steadily increased, China’s combination of manufacturing clusters, first-class infrastructure and upgraded factories have made it more competitive. In 2005, 26.3% of the value of China’s exports was added abroad; by 2016 that was down to 16.6%, with the share of foreign content falling most sharply in electronics, according to the OECD. In other words, more of the bits and bobs that end up in Chinese gadgets are themselves made in China.
Face masks, a must-have during the pandemic, offer a vivid illustration of China’s strengths. At the start of February, it made about half the world’s supply, 10m a day. Within a month, output had increased to nearly 120m. That was not simply through exertion. It was thanks to having “the world’s most complete supply chain”, as Xinhua, the state-run news agency, put it. A simple surgical mask consists of a woven layer fused to a non-woven layer, elastic loops that go around your ears and a thin metal band to fasten it to your nose. More sophisticated masks add a thin plastic filter and an activated carbon filter. Any country hoping to make masks on its own needs companies with expertise in textiles, chemicals, metallurgy and machining, along with sufficient supplies of raw materials, factory space, trained workers, engineers and capital. It cannot just be done from scratch, and a similar story plays out across thousands of products.
The second advantage for China is its own vast market. This is why many American companies want the Trump administration to go only so far in its tussles with China, applying enough pressure to free up more space for them to operate in China, but not so much as to blow up their opportunities. By one measure global firms look even more wedded to China, despite the trade war: during the past 18 months the value of foreign mergers and acquisitions in China reached its highest in a decade, according to Rhodium Group, a research firm. There have also been several high-profile investment projects. BASF, a German chemicals company, is investing $10bn in a production complex in southern China, to serve local customers. Tesla opened its first foreign factory in Shanghai last year to cater to the Chinese market, its biggest after America.
As is to be expected, the global downturn is weighing heavily on Chinese manufacturers. China’s exports fell by 8% in the first five months of 2020 compared with the same period a year earlier. Yet Chinese firms are in better shape than most elsewhere, thanks to the country’s success in slowing the spread of the coronavirus. Not only is China’s economy one of the few likely to grow this year; its earlier resumption of industrial activity has allowed exporters to gain market share while most other countries are still in varying states of lockdown. In Japan, goods from China accounted for a record 30% of total imports in May. In Europe, they made up 24% of imports in April, also a record.
Unmade in China
Yet this may be the high-water mark for China’s exporters. Other countries are only too well aware of China’s manufacturing prowess—and that it leaves them vulnerable to shortages of critical products. That point hit home earlier this year, as they scrambled to buy ventilators and masks from China. Concern that too much manufacturing had been offshored to China motivated some members of the Trump administration—notably Peter Navarro, a brash White House adviser—to impose tariffs on Chinese products. A few years ago Mr Navarro’s obsessive focus on luring manufacturing back to America made him seem eccentric. Now plenty of others sing the same tune, if in gentler tones. In April Japan earmarked $2.2bn to help defray the costs of manufacturers leaving China. European officials have warned of excessive dependence on China, especially for medical products. From India to Taiwan, governments are offering loans, cheap land and other incentives to lure companies from China.
Such inducements have rarely worked in the past, but they stand a better chance now. Three factors are pushing firms to shift some manufacturing operations, even as they continue to target the Chinese market for sales. First, China’s climb up the value chain and rising labour costs have squeezed out low-end firms. Many garment-makers and basic electronic-assembly plants have already left, typically for South-East Asia. Second, tensions between China and America have made companies wary of being caught on one side or the other. Apple still makes most of its iPhones in China but to hedge its political risks has encouraged its suppliers to expand elsewhere, such as India. Third, the rolling shutdowns of factories during the pandemic, with China’s production almost entirely knocked out in February, has underscored the danger of being over-exposed to any one country.
Evidence of the shifting tide can be found in surveys of senior executives of big companies from America, China and north Asia (eg, Japan and South Korea), conducted by UBS, a Swiss bank. Among its 1,000-plus respondents, 76% of American companies, 85% of north Asian ones and even 60% of Chinese firms said that they had already moved or were planning to move some production away from China. Keith Parker of UBS estimates that companies might shift between 20-30% of their Chinese manufacturing capacity. The relocations will not happen overnight but they will slowly chip away at China’s dominance in manufacturing.
In the meantime, Chinese businesses are resilient and retain a well-honed ability to adapt. Take Sowind, a maker of household-cleaning tools—one of the companies showing off its wares at the virtual Canton Fair. Along with mainstays such as brooms and lint rollers, it was flogging a new product: motion-activated, battery-powered soap-dispensers for home use. In a live-stream, Ivy, a young saleswoman in a Sowind red polo shirt, tailored her pitch to the grim viral reality: “You don’t need to touch the soap dispenser, so you can avoid cross-infections.” Contacted after her broadcast, Ivy said that customers in Europe and America were buying thousands at a time. “Our clients really need this,” she said. As for the online migration of the world’s biggest trade show, she was also upbeat. “It takes time to get used to a new technique, but it’s gone better than I had expected.”