BEIJING – China’s resolution to Covid controls is pushing corporations to turn to factories outside the country, according to The Economist Intelligence Unit.
“What we’re hearing from corporations [is] that they’re moving forward with their supply chain diversification plans because this start-and-stop economy is here to stay,” said Nick Marro, head of global industry at The Economist Intelligence Unit.
“If it’s an intermittent economy, if things can’t be done, it has an effect on decision-making,” he said. “We don’t expect corporations to leave China. We just hope they diversify their footprint, China plus one. “
Beijing’s strict controls on Covid helped the country get back to work while the rest of the world was still grappling with the pandemic in 2020. While other countries have eased maximum restrictions and opted to “live with Covid,” Beijing has increased virus testing requirements and extensive controls since Shanghai shut down for two months earlier this year.
Authorities have attempted to produce from primary factories under what is known as a closed-loop system, in which painters live and paint on the same site or, at most, move only between the paintings and the home.
A Covid outbreak at Apple supplier Foxconn’s factory in recent weeks shows the ongoing demanding situations factories face as they seek operations while preventing the spread of infections.
“I don’t think we can extrapolate from a singles case, but it’s remarkable because it shows some kind of flaw in this closed-loop system,” Marro said.
Over the weekend, it was reported that some Foxconn staff forced them out of Covid checks at the factory. Later, the municipal government announced its target to staff who wanted to leave the factory to return to their places of origin.
Foxconn responded to a CNBC request for comment.
“Obviously, if they don’t replace this Covid 0 policy, we’re going to see instances like this over and over again,” said Patrick Chen, head of studies at CLSA in Taiwan. He said he expects little replacement in policy unless vaccination rates go up.
“I don’t see many additional charges related to this control or closed-loop production, but in fact there will be a negative effect on worker morale or the overall quality of production,” he said, noting that Foxconn has announced financial incentives for workers to stay at the plant.
Typically, Chen said staff at factories like Foxconn’s get a monthly salary of about $1,000.
While Foxconn’s Zhengzhou factory handles the main iPhone manufacturing, Chen said low demand for smartphone production disruptions has less of an impact.
The global smartphone market fell 12% in the third quarter from a year earlier, even though Apple maintained slight growth, according to Counterpoint Research.
Nearly twice as many U. S. corporations have reduced investment in China this year from last year, the American Chamber of Commerce in Shanghai found in a survey this summer.
Just under a third of respondents said they were expanding their investments in the country, according to the survey. But that’s down from 38% last year.
CLSA’s Chen said emerging operating prices from a major operation in China have led tech corporations to move less complex production out of the country.
However, he noted that it was difficult for Apple to locate between 200,000 and 300,000 additional employees, as there are at the Foxconn factory in Zhengzhou, to manufacture the iPhone outside China, in India.
The U. S. smartphone giant announced in September that it would manufacture its newest model, the iPhone 14, for the first time in India. JPMorgan analysts predicted that only 5% of Apple’s global iPhone 14 production would move to India this year.
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In recent weeks, China has announced measures to inspire greater foreign investment in production and industries such as animation and brewing. The point of implementation remains uncertain, especially as controlling Covid outbreaks remains the priority for the time being.
“Foreign corporations that are in China and corporations that are still in the market, I think we can take them literally when they say they are involved in the Chinese market,” said EIU’s Marro. “They are waiting for signs that the operating environment and the macroeconomic environment are going to improve. “
“The biggest challenge is getting the signals in,” he said. “At the end of the day, this uncertainty is the biggest challenge for investors. “
– Arjun Kharpal of CNBC contributed to this report.
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