China export model in trouble

 Barron's:

Japanese chief executives aren’t generally known for bold political statements. Hideo Tanimoto, president at electronics power Kyocera (ticker: 6971.Japan) broke with tradition last month to share what he really thinks about China.

“The business model of production in China and exporting abroad is no longer viable,” he told the Financial Times.

Tech heavy hitters across the globe are leaning the same way. Dell Technologies (DELL) the world’s No. 3 computer manufacturer, leaked plans to stop using Chinese microchips by next year. Rival Hewlett Packard Enterprise (HPE) is selling out of a 20-year-old IT equipment joint venture, a securities filing by Chinese partner Tsinghua Unigroup revealed. German engineering giant Siemens (SIE.Germany) is looking to invest its next euro in Southeast Asia to decrease Chinese dependence.

Companies and consultants have talked about “China +1” for years as relations between Beijing and Washington deteriorated. The trend is accelerating. “I heard from companies throughout the region an increased appetite to reduce component sourcing or move manufacturing out of China,” says Mehdi Hosseini, senior tech analyst at Susquehanna International Group, just back from an Asian swing.

Potential beneficiaries of the China techxodus stretch from Mexico to Poland, Malaysia and Vietnam. Potential losers are global consumers, who may have to pay more for their gadgets as humming Chinese supply chains, built up over two decades, fragment. “Companies have experienced significant margin improvement from being in China,” Mehdi says. “They’ll have to find other ways to take the cost out.”

U.S. restrictions on advanced semiconductors for China, which ratcheted up last October, are one driver of the search for alternatives, but not the only one. Chinese labor costs have climbed 40% since 2010. Russia’s invasion of Ukraine, and the mass exit of foreign companies there, pushed investors to contemplate a repeat with China and Taiwan.

China’s zero-Covid shutdowns underlined the perils of keeping too many supply chain eggs in one basket. “People think that Taiwan could actually happen now,” says Daniel Karlsson, managing director of consultant Asia Perspective. “And zero Covid was the last straw.”
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South Korean corporations have been pioneers of sorts in hedging their China bets. Their impetus dates to 2016, when the Seoul government, with an eye on North Korea, committed to installing the U.S.-made Terminal High Altitude Area Defense, or THAAD, antimissile system. Beijing objected and fomented a consumer boycott of Korean goods and services. “The hatred that came out affected a lot of Korean businesses in China,” says James Lim, head of Korea research at Dalton Investments.

Samsung Electronics (005930.Korea), Korea’s biggest company, subsequently yanked all its smartphone production out of China, mostly to Vietnam. Hyundai Motor (005380.Korea) lost three quarters of its China sales and sold its flagship factory.

The out-of-China story comes with two large caveats. The productive ecosystems developed there can’t be entirely reproduced anywhere else. Some can’t be reproduced at all for the foreseeable future.

One example: While South Korea and China slug it out for supremacy in electric vehicle batteries, Korean producers like LG Chem (051910.Korea) still have to source necessary minerals from their prickly neighbor, Lim says. Global electronics manufacturers are dependent on Chinese rare earth metals. “It’s impossible to replace China even in a medium time range,” Budaghyan concludes.

The pullout from China is also countered by a pull into China for companies that want to sell there, which can be the same companies that export from there. For all its recent stumbles, China’s economic growth is projected above 4% annually for years to come, well outstripping the U.S. and Europe.
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I like Japanese and South Korean products.  I recall taking advantage of Japanese stuff when I was in Okinawa on my way to Vietnam.  I bought nice China and watches for example. I think South Korea has become much more advanced in recent years.  Depending on China at this point has become a questionable bet.