Why Moving Electronics Production away from China Is hardly acheivable?

Not so long ago, Steve Jobs was a guest in a TV interview. When asked why iPhone cannot be made in the US, he explained that it would be an impossible mission. “Advanced electronics production will unlikely be brought back home”, Jobs stated. Just like back then, it is now even more clear why moving production from China is not that easy.

Ten or more years later, this is still the place where even US flags are made. In terms of industrial development, they advanced to the extent that nobody expected. In order to understand why moving chip-making to the West is hardly achievable, we have to go back in history a bit.

How did they achieve this level of development?

In the 1970s, during the Nixon era, negotiations on the normalization of relations and possible cooperation have begun. In 2001, the most populous country in the world reached full membership in the WTO. Interestingly enough, it was initiated by the US. Nevertheless, many US companies were present there even before. But the years 2000 and 2001 will be remembered as a turning point in China’s industrial development.

US firms started investing in China in the early 80s. They began by relocating production due to cheaper labor, and a wider range of opportunities to gain more profits. Back then, no one opposed it because everyone was satisfied. A large part of the population began to rise out of poverty.

On the other side, US companies gained higher profits. Also, not many people paid attention to the exploitation of the labor force and human rights. The simple reason is that it was not in anyone’s interest for established cooperation to fail.

After the year 2000, the Chinese authorities concluded that they could capitalize on their potential much better. So they began to develop an “ecosystem” strategy. For example, producing a cotton jacket requires not only cotton.

There is also its processing, weaving, sewing, and procurement of the necessary raw materials such as buttons, zippers, rope, etc. Therefore, they have organized the manufacturing of such materials on their own soil. As well as in some parts of neighboring countries such as Bangladesh, Nepal, and Vietnam.

Is moving production from China even possible?

The same is now happening with smartphones, computers, and all other advanced electronics. The authorities have created an industry strategy with interdependent supply chains. The production of all necessary components was organized in the region so the costs are as low as possible. It’s worth noting, that this process actually started in 1980 when China began opening up to the world.

One great example is the city of Shenzhen. In the late 70es, it was a fisherman village with a population of merely 30.000. 30 years later, it counts more than 10 million. The point here is that 30 or 40 years of developing strategy and making right decisions, led to the situation in which this country is today.

As time passed, the Chinese industry began to advance. It’s not just about cell phones. The key is the telecommunications infrastructure. European companies such as Nokia, Siemens, and Ericsson, didn’t consider it a problem. In the beginning, the Chinese competitor didn’t represent competition in the field of network infrastructure production. Well, it didn’t take long for them to rise to the top. The reason for that is simple. They were just more competitive. As it turned out, Huawei won the global market, but not everyone liked it. Especially not the US, which started with the campaign of Moving production from China. Not only infrastructure equipment but almost the whole industry is linked to advanced technology.

Development is still in progress

A similar development of events happened later with mobile phones when Huawei almost took first place in delivery numbers. In 2018. Trump invoked Section 301 of the Trade Act of 1974. This act imposed tariffs on vast amounts of Chinese goods which was the beginning of the trade war. One of the objectives here was forcing foreign companies to leave the country, but it’s not happening as it was supposed to. At least not at the pace the US administration wanted to see. So, moving production from China could reasonably be their ultimate goal.

Trump eventually imposed sanctions on Huawei, under allegations of spying, which was proclaimed as a national threat. Huawei lost access to Google services and was practically kicked out of the game. Many analysts believe that Huawei was actually just collateral in the negotiations between the Chinese and the American side. Because of the US trade gap, the whole picture is far bigger and more extensive than just one entity. In this case, Huawei.

Taking over the smartphone market

In the meantime, China has taken over practically the complete production of mobile phones of almost every brand. Megafactories like Foxconn and Pegatron manufacture the vast majority of smartphones that you can buy in stores today. If you wonder why the production of phones cannot be returned to the West, the answer is simple. Actually, it’s the same as in the case of cotton jackets. Not that long ago, phones were made in Sweden, Germany, and Finland. The US certainly doesn’t like it, so they are now forcing moving production from China.

For example Nokia and Ericsson. US and Canada were home to Motorola and BlackBerry, respectively. All these companies faced some challenges at some point in time. And China was the one who took advantage of it at the right time. It was not difficult to assume that Chinese smartphone manufacturers would overtake the world’s market. Maybe not in terms of brand domination, but rather as the land where industrial facilities are located.

All the supporting industry is located in Asia. This means that any attempt of moving them across the Pacific or Atlantic would create unacceptable costs. In addition to making phones, the entire supporting industry should be relocated as well.

Moving production could cause unimaginable costs

To put things into perspective, China imports cotton for making jackets and other textile goods from the US. So, the US exports raw materials and imports the final product. This is basically one of the biggest defeats of the US economic strategy if it ever had one at all. Apart from the fact that it was guided by the short-term goals of increasing the profits of individual companies. Now they find themselves imposing sanctions for defense, so they insist on moving production from China back to their soil.

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In the process of moving the entire industry, many companies would simply go bankrupt. While some others would possibly survive with the state’s help. But the real question is whether Western countries have enough resources for undertaking such a quest. And whether there is even a political will on this issue or not. Of course, they always have the possibility of printing more money, and we’ve just seen where it has led.

It’s not just about China

Just like moving production from China, we’ve recently also seen attempts to move chip production from Taiwan. And partially from Korea as well. The latter complied with the US calls for Samsung’s investments in a chip-making plant in Texas. These projects encountered many obstacles right from the beginning, though. From unfulfilled promises about subsidies, mismatched tax policies, etc., with a still questionable outcome due to unpredictable costs. So it can very easily occur that even if they succeed, everything could turn into a Pyrrhic victory. Because those products would be so expensive, there would be no one to sell these products to.

We have also seen that European carriers are under pressure to get rid of Huawei equipment. The problem here is that it has been built into their infrastructure for years. In such a scenario, European carriers would suffer much higher expenses than those in the US.

Industry under political influence

Finally, let’s mention the words of experts who have been covering this industry since the very beginning. For example, it would take more than 20 years for Apple to become independent from the Chinese industry. Apple has already started moving part of iPhone production to India and neighboring countries. The problem here is that this cannot be done overnight. It will take much longer to achieve small progress in terms of diversifying sources. It also turns out that the costs associated with leaving are simply too high. Moving production from China will just partially benefit Apple. Maybe in terms of diversifying production. On the other hand, it may cause other disruptions, like rising costs.

With regard to the latest geopolitical tensions, it is only a matter of time before India starts moving away. The BRICS countries have already reacted. They are currently rejecting the US dollar as a reserve currency as well as the currency of mutual trade. All the US is left with is political pressure and sanctions to impose on those who oppose its policy.

It’s hard to predict will the moving production from China happen in the first place. The unfolding of events certainly won’t happen in the near future. US and EU use sanctions as a tool. Some analysts consider it as a weapon in many cases. Even worse, they ban their own companies from exporting goods, which may result in high losses. On the other hand, the latter could therefore become completely independent in terms of supply chains from the West. It could also be a matter of time when Chinese manufacturers will no longer need help from Western companies. For example, Qualcomm’s 5G modems build cutting-edge SoCs.

What about the EU?

The same could take place with Duch’s advanced machines needed to produce the most advanced chips. In case you’ve missed it, Bloomberg reported that Duch ASML is currently under the scrutiny of their government. For those unaware, ASML is the most valuable EU tech firm by market cap. The Netherlands obviously gave in to the US. So they ordered ASML to stop selling its tech to Chinese firms. It once again turns out that the EU can be described just as a US puppet. To achieve the goal of moving production from China, the US obviously uses the EU as a hostage.

If we now go back to the beginning, you could ask yourself why is this coming out. Why would those who let China into WTO now want it out of the game? Also, some may argue that all of this is contrary to the free trade policy, introduced by the US itself. The answer is rather simple. And it goes deep into the globalization matter. The latter was also introduced by the US and is considered good while it serves their interests. When some other country starts to gain progress, the story changes.

Moving production from China might be possible, but at what price?

Moving production from China appears to be a must for the West, in order to protect its dominance. In other words, the US wants to remain the only superpower. So, it’s ready to do anything to make it a reality. In this process, they don’t seem to be worried about the losses of the EU’s firms. Here we can mention how they made pressure on South Korea and Samsung. A few months ago, they forced them not to make advanced chips in their plants on the mainland.

We’ve also noticed Chinese foundry SMIC working hard to bring its products to the next level. Without ASML’s help, it will take a while. Considering the overall progress, it’s not impossible for them to compete with TSMC or Samsung in the near future.

Of course, this can’t be achieved overnight either. The more US and EU sanction other countries, the more they work toward their full independence by all means. China could start making all the advanced tech on its own. So, the US and EU wouldn’t be able to compete at all. Of course, it will take a while. Bear in mind that China is playing in the long run, so time is on its side.

How will this mess eventually end?

There is still much uncertainty in moving production from China. Other countries like India, as well as Indonesia, and many others, are also progressing. The main reason for not doing any sensitive political move is always the same. The eco-system and supply chains are located in the Asia region. Any attempt to move it to the West could easily fail. In another scenario, it could end up with higher production costs, which could lead the world to new confrontations. As China and neighboring countries continue to lead the market of advanced electronics, it’s not wise for the West to make things worse. Since the outcome is still quite unpredictable, we’ll surely keep on track to inform you about developing events.

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