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Some foreign companies recently shut down their factories in China. Japanese watchmaker Citizen shuttered its manufacturing base in Guangzhou， south China’s Guangdong Province， Panasonic announced plans to close down two TV production lines， and Microsoft decided to discontinue two cellphone production lines previously run by Nokia. Does it mean an exodus of large multinationals from China？ mei Xinyu， a researcher with the Chinese Academy of International Trade and Economic Cooperation， says there is no reason to panic. Excerpts of his argument follow：
iT is true that some foreign companies recently shut down their factories in China and these multinational moves are bound to draw attention. However， the reports by a section of the media giving the impression that multinationals are leading an exodus of foreign companies from China are one-sided.
Company and industry operations keep on changing. A company may once have been prosperous and the business environment good but it is inevitable that eventually some companies would shut down or even go bankrupt. We should instead focus on the net foreign investment. In recent months， China’s paid-in foreign direct investment （FDI） has gone up on a yearly basis. Despite slight monthly drops in the latter half of 2014， China saw an annual 1.7-percent increase in FDI in the non-financial sectors. With non-financial FDI reaching $119.56 billion last year， China has become the world’s largest FDI recipient.
The major reason some multinationals shut down their factories in China is not deterioration in China’s business environment but the difficulties they faced after becoming less competitive than Chinese-funded or other foreign companies. The most typical examples include Japanese home appliance makers who have suffered huge losses for years， and Nokia， formerly the world’s biggest cellphone handset maker.
Japanese companies used to lead the world home appliances industry. However， with the robust rise of Chinese and South Korean companies， the Japanese industry lost its edge， partly due to major wrong decisions. Sony’s home appliance business alone lost 300 billion yen （$2.47 billion） in the past decade. As a result， not just closing factories in China but slashing manufacturing operations worldwide became the only option for some Japanese home appliance makers. However， they still maintain relations with Chinese production chains by offering semi-finished products or other supplies to Chinese manufacturers. Sharp is also withdrawing from the Mexican， Southeast Asian and Australian markets. But like Sony， Sharp too sustains its relations with Chinese production chains. Enter the dragon
Is this a sign of the decline of China’s manufacturing industries？ The answer is no. Chinese manufacturers are growing rapidly. China had already become the world’s largest home appliance producer and exporter in the 1990s and now holds even bigger advantages in this industry.
While Motorola and Nokia are in decline， Chinese cellphone makers， who got a late start， have become world leaders in production and export. Motorola made the world’s first cellphone in June 1983 but China’s cellphone industry began only in 1997 with Kejian producing the first indigenous cellphone in 1998. At that time， the domestic market shares of Chinese cellphone makers were negligible； almost all the 3.96 million cellphone handsets made in China were manufactured by either wholly foreign-funded enterprises or joint ventures. However， in 2012， China produced 1.18 billion handsets， almost 300 times the number in 1998， and accounted for 75 percent of all handsets sold worldwide. In 2013， of the 1.8 billion handsets made globally， 1.46 billion - 81.1 percent - were from China.
After joining the World Trade Organization’s Information Technology Agreement （in which signatories agree to bring down all taxes and tariffs on information-technology products to zero） in 2003， China reduced the import tariff on cellphones to zero. The Chinese cellphone industry has realized high growth in both output and exports in such an open-competition market.
Citizen’s Chinese counterparts such as FIYTA and Seagull have also kept growing and more than half of the watch movements for Swiss brands are made by Chinese factories. Under these circumstances， reactions to individual cases seem overblown. While some foreign companies shut down their old factories in China， most are trying to transform their businesses to remain competitive in the Chinese market.
After all， China is very likely to replace the United States as the largest economy in the world in the next decade. It is already the largest consumer of raw materials， consumer goods and equipment， and maintains one of the highest growth rates in the world. Leaving such a market would be suicidal for any multinational aiming to be a global leader.
The closing of what used to be Nokia’s factory was an inevitable outcome after Microsoft acquired Nokia’s device and service business in 2014. According to the agreement， Nokia sold its entire device and service business and was to stop manufacturing. However， it was to retain its patent portfolio related to telecommunications and smartphones to establish a model focusing on technology development and patent operations. Japanese home appliance giants have reduced their traditional business but developed new businesses. Panasonic’s car and housing businesses have contributed 50 percent of the company’s total profits.
Proceeding with caution
Though just some multinationals have shut down their factories in China it certainly does not mean we will not improve the investment environment. As China is already a net capital exporter and its capital exports will continue the trend of quick growth， we must pay special attention to this.
Rapid growth of China’s outbound investment is a result of the country’s fast-growing economy and national strength. Improving its position among world economies will be more conducive to elevating the efficiency of trade and investment.
Just as every coin has two sides， outbound direct investment （ODI） can weaken the strength of domestic industries and impede China’s sustainable economic growth. Since the late 1800s， the United Kingdom invested heavily in overseas countries， but its domestic investment remained stagnant. In other words， the country where the industrial revolution originated missed the opportunity of a second and third industrial revolution. Such risks should not be neglected. In China， private capital from Wenzhou， east China’s Zhejiang Province， was formerly invested in the country but the local economy hit a bottleneck later. This warns us to proceed with caution.
Sustained high ODI growth is also likely to dampen China’s efforts to balance regional development. China’s overall economic development falls behind developed countries’， and the development in its different regions is unbalanced.
When labor-intensive industries are moving out of China’s developed coastal areas because they have lost cost advantages， the central and western regions have to compete with developing countries such as Viet Nam， the Philippines and Indonesia for these investments. If surplus capital in the developed coastal areas is transferred to foreign countries merely for profit， the less developed central and western regions， which are still in want of capital， will be deprived of development opportunities.
Due to these risks， it is not advisable for China to restrict outflow of capital. Instead， it must keep the domestic business environment attractive for investors to ensure longterm competitiveness.
iT is true that some foreign companies recently shut down their factories in China and these multinational moves are bound to draw attention. However， the reports by a section of the media giving the impression that multinationals are leading an exodus of foreign companies from China are one-sided.
Company and industry operations keep on changing. A company may once have been prosperous and the business environment good but it is inevitable that eventually some companies would shut down or even go bankrupt. We should instead focus on the net foreign investment. In recent months， China’s paid-in foreign direct investment （FDI） has gone up on a yearly basis. Despite slight monthly drops in the latter half of 2014， China saw an annual 1.7-percent increase in FDI in the non-financial sectors. With non-financial FDI reaching $119.56 billion last year， China has become the world’s largest FDI recipient.
The major reason some multinationals shut down their factories in China is not deterioration in China’s business environment but the difficulties they faced after becoming less competitive than Chinese-funded or other foreign companies. The most typical examples include Japanese home appliance makers who have suffered huge losses for years， and Nokia， formerly the world’s biggest cellphone handset maker.
Japanese companies used to lead the world home appliances industry. However， with the robust rise of Chinese and South Korean companies， the Japanese industry lost its edge， partly due to major wrong decisions. Sony’s home appliance business alone lost 300 billion yen （$2.47 billion） in the past decade. As a result， not just closing factories in China but slashing manufacturing operations worldwide became the only option for some Japanese home appliance makers. However， they still maintain relations with Chinese production chains by offering semi-finished products or other supplies to Chinese manufacturers. Sharp is also withdrawing from the Mexican， Southeast Asian and Australian markets. But like Sony， Sharp too sustains its relations with Chinese production chains. Enter the dragon
Is this a sign of the decline of China’s manufacturing industries？ The answer is no. Chinese manufacturers are growing rapidly. China had already become the world’s largest home appliance producer and exporter in the 1990s and now holds even bigger advantages in this industry.
While Motorola and Nokia are in decline， Chinese cellphone makers， who got a late start， have become world leaders in production and export. Motorola made the world’s first cellphone in June 1983 but China’s cellphone industry began only in 1997 with Kejian producing the first indigenous cellphone in 1998. At that time， the domestic market shares of Chinese cellphone makers were negligible； almost all the 3.96 million cellphone handsets made in China were manufactured by either wholly foreign-funded enterprises or joint ventures. However， in 2012， China produced 1.18 billion handsets， almost 300 times the number in 1998， and accounted for 75 percent of all handsets sold worldwide. In 2013， of the 1.8 billion handsets made globally， 1.46 billion - 81.1 percent - were from China.
After joining the World Trade Organization’s Information Technology Agreement （in which signatories agree to bring down all taxes and tariffs on information-technology products to zero） in 2003， China reduced the import tariff on cellphones to zero. The Chinese cellphone industry has realized high growth in both output and exports in such an open-competition market.
Citizen’s Chinese counterparts such as FIYTA and Seagull have also kept growing and more than half of the watch movements for Swiss brands are made by Chinese factories. Under these circumstances， reactions to individual cases seem overblown. While some foreign companies shut down their old factories in China， most are trying to transform their businesses to remain competitive in the Chinese market.
After all， China is very likely to replace the United States as the largest economy in the world in the next decade. It is already the largest consumer of raw materials， consumer goods and equipment， and maintains one of the highest growth rates in the world. Leaving such a market would be suicidal for any multinational aiming to be a global leader.
The closing of what used to be Nokia’s factory was an inevitable outcome after Microsoft acquired Nokia’s device and service business in 2014. According to the agreement， Nokia sold its entire device and service business and was to stop manufacturing. However， it was to retain its patent portfolio related to telecommunications and smartphones to establish a model focusing on technology development and patent operations. Japanese home appliance giants have reduced their traditional business but developed new businesses. Panasonic’s car and housing businesses have contributed 50 percent of the company’s total profits.
Proceeding with caution
Though just some multinationals have shut down their factories in China it certainly does not mean we will not improve the investment environment. As China is already a net capital exporter and its capital exports will continue the trend of quick growth， we must pay special attention to this.
Rapid growth of China’s outbound investment is a result of the country’s fast-growing economy and national strength. Improving its position among world economies will be more conducive to elevating the efficiency of trade and investment.
Just as every coin has two sides， outbound direct investment （ODI） can weaken the strength of domestic industries and impede China’s sustainable economic growth. Since the late 1800s， the United Kingdom invested heavily in overseas countries， but its domestic investment remained stagnant. In other words， the country where the industrial revolution originated missed the opportunity of a second and third industrial revolution. Such risks should not be neglected. In China， private capital from Wenzhou， east China’s Zhejiang Province， was formerly invested in the country but the local economy hit a bottleneck later. This warns us to proceed with caution.
Sustained high ODI growth is also likely to dampen China’s efforts to balance regional development. China’s overall economic development falls behind developed countries’， and the development in its different regions is unbalanced.
When labor-intensive industries are moving out of China’s developed coastal areas because they have lost cost advantages， the central and western regions have to compete with developing countries such as Viet Nam， the Philippines and Indonesia for these investments. If surplus capital in the developed coastal areas is transferred to foreign countries merely for profit， the less developed central and western regions， which are still in want of capital， will be deprived of development opportunities.
Due to these risks， it is not advisable for China to restrict outflow of capital. Instead， it must keep the domestic business environment attractive for investors to ensure longterm competitiveness.