With its COVID-19 measures, China should be highly alert to the risk of a large number of foreign capital withdrawing from the country. This is especially in some traditional industries; foreign capital has reduced production in China and begun to transfer production capacity and supply chains outward. As it stands, this could possibly bring systemic industry damage that cannot be ignored.
There have recently been cases of foreign capital suspending work and production due to the COVID-19 outbreaks in China. On November 28, a German Volkswagen spokesperson stated that due to the increase in the number of new COVID-19 cases, the Volkswagen-FAW plant in Chengdu has halted production, and two production lines at its Changchun plant have also been suspended. BMW CEO Oliver Zipse previously said the company's factories in China were operating normally, but offices were closed and employees were working from home. While there is steady Chinese demand for BMW's all-electric models and global sales are expected to remain steady, BMW sees further COVID-related lockdowns in China in 2023 as a risk for the business.
Researchers at ANBOUND believe that Volkswagen's suspension of some production lines in Chengdu and Changchun is a risk signal worthy of great attention. The German carmaker has invested in China for decades and is one of the first German companies to enter the Chinese market with the largest investment. It is rather uncommon for Volkswagen to stop production on such a large scale in the country. The company cited that the suspension of production is mainly due to the impact of the pandemic, and the control measures have made it difficult for normal production in some cities. While the market reasons cannot be excluded, the production and supply chains are obstructed due to the COVID-related measures and it is inconvenient for employees to go to work, which is the more important reason for it.
What should be noted is that, Volkswagen is not an exception among leading foreign-funded companies that have stopped or reduced production due to China's COVID-19 measures.
The chaos at Foxconn's Zhengzhou plant earlier has directly caused Apple to reduce the production capacity of the plant and partially move iPhone production to India and other locations. Apple and Foxconn have raised their estimates of production gaps at the Zhengzhou site over the past two weeks due to mounting disruptions. According to Apple's latest assessment, at present, the situation at the Zhengzhou plant remains unstable, and the estimate of production loss may change. The exact loss figure will depend largely on how quickly Foxconn can get workers back on the assembly line. If the lockdown continues in the next few weeks, the related losses may be further expanded. In a worst-case scenario, Foxconn's Zhengzhou plant will not be able to ship any iPhone models for the rest of the year, leading to a nearly 20% drop in the company's overall sales for the quarter, according to Morgan Stanley estimates. If Zhengzhou's production capacity is to be moved out on a large scale, it will be a loss for China's supply chain. Of Apple's top 200 suppliers, 150 have factories in Mainland China. If Apple leaves, these companies will likely follow suit.
Nikkei reports that under the strict COVID-19 measures, Japanese carmakers such as Toyota and Honda are being forced to reduce the production capacity of Chinese factories or stop production as well. From November 28 to 29, Dongfeng Honda's three vehicle factories in Wuhan stopped operating, where they mainly produce CR-V and Civic models. Guangqi Honda, another joint venture of Honda, maintains production at its vehicle plant in Guangzhou but is reducing production capacity. On the other hand, General Motor's Chongqing plant, which makes engines, is expected to be largely shut down by December 2.
For factories with a large scale of investment in China to have such a major suspension or reduction of production has occurred, this may have a huge impact on foreign investors' re-evaluation of the Chinese market. A huge negative effect is that similar incidents will significantly affect foreign investors' expectations of China.
If merely looking at the data on foreign investment, the relevant figures are constantly increasing, from there the conclusion might be made that foreign investment still favors China. However, there are actually various issues behind the increase in foreign investment data.
The first is the source of foreign capital. Among the foreign capital introduced in Mainland China, investment from Hong Kong and Taiwan is considered foreign capital, especially the foreign capital entering Mainland of China through Hong Kong, which accounts for 60%-70% of the year-round. In fact, quite a number of the capital in this actually comes from the Mainland itself and enters the Mainland via Hong Kong. There are relatively few foreign capitals from Europe, the United States, Japan, South Korea, and other countries.
The second is the supply chain system formed by foreign capital in China. When a foreign-funded enterprise invests in China, it will bring capital, technology, management, knowledge, and information. The production and operation of foreign capital in China also involves suppliers, supply chains, and a series of issues such as logistics and trade. It took many years of development for many foreign capitals in China to form the current system and ecology. If mature foreign capital withdraws or shuts down, it means the collapse of a system; while new foreign capital comes in, it will take a long time to build a similar ecosystem. Therefore, if mature foreign capital withdraws, it will cause greater losses in the short term. While conducting a survey, researchers at ANBOUND learned that some foreign investors believe some government departments or local governments in China pay more attention to new foreign investors, but not as much to those who are already in China and do not provide sufficient follow-up services to them.
The third is the scale and level of foreign capital. At present, China hopes to attract large-scale foreign investment. European enterprises investing in China are mainly large enterprises. For example, Germany's BASF Group invested more than EUR 10 billion in Zhanjiang, Guangdong. However, the introduction of foreign capital should not only be large-scale foreign capital but also medium-sized and small-scale ones as well, so as to form a dynamic and diversified foreign capital ecology. If China only focuses on large-scale foreign capital and ignores those of other scales, it will face a situation where foreign investment is mainly sustained by these big companies. During the lockdown in the first half of this year, many cities in China saw the withdrawal of some foreign capital.
Under the impact of the COVID-19 outbreaks in the past three years, coupled with the intensification of geopolitical frictions and anti-globalization, the restructuring of the global supply chain has escalated the transfer of foreign capital from China. It is worth noting that once foreign capital leaves systematically, it will inevitably bring a great impact on the Chinese economic ecology.
Final analysis conclusion:
Although China has a huge domestic market, this does not mean that the door must be closed for foreign investment and development in its dual-circulation. Therefore, in terms of policy, it cannot afford to ignore the risk of foreign capital withdrawal. At the same, it needs to attach great importance to the shifts in the Chinese market. Once foreign investors generally change their expectations of China, the withdrawal or reduction of foreign capital will continue to build up.
