ASIA OUTLOOK

by Christine Casati

Manufacturing Initiatives And Trade In China

FIGHTING DECOUPLING:

China’s factories are launching a major worldwide “charm offensive” to regain lost buyers due to pandemic disruption and rising geopolitical tensions. (FT 2/27/23) Now that international travel from China is easier, they are sending delegates to trade fairs and business conferences all over the U.S., Europe, even Saudi Arabia and Russia, bucking the trend, to try to reverse the damage caused by customers relocating their purchasing and supply chains outside of China. These represent- atives are primarily exporters and factory directors sponsored by local governments which have been severely hit by shrinking tax revenues from both export manufacturing and property market chaos. The central government has made it clear to local continued governments that they will not provide funds to bail them out beyond loosening credit, so provincial and municipal governments must do it themselves. Their initial efforts are to invest in travel and digital communications to regain lost customers. (It would help if the central government toned down their military saber-rattling.)

NOT JUST CHIPS:

China’s export manufacturing companies in nearly every sector (except EVs and drones), including the food industry, packaging, eyewear, garments (think Disney, not just Target), appliances, and toolmaking (think Black & Decker), among others, have been shell-shocked by a confluence of rising export prices due to inflation, Covid-impacted delayed shipments, the fall-out from geopolitical conflict rhetoric and ongoing reduction in global demand. The post-Covid reopening purchasing boom is in decline. Consumers are spending, but product choices are changing. Warehouses in the U.S. are overflowing with unsold Chinese goods. The greatest impact is being felt in southeastern and southern China, especially in Fujian, Guangzhou, and Shenzhen, a region known as China’s “factory floor” for the rest of the world.

RECORD TRADE VOLUMES:

Will Chinese factory overtures succeed? Trade statistics for 2022 may give us a glimpse of the answer. Despite China’s falling exports in November (8.9% year on year) and further in December (9.9%), U.S.-China total trade volume in 2022 boomed, hitting a record $690.6bn. And China’s manufacturing sector is on the mend. February 2023 PMI for factories came in at 52.6 (Caixin 51.6), beating estimates and growing at the fastest pace in a decade. China has a deeply developed, efficient man- ufacturing ecosystem that exporters like and which can be found in every region of the country. Logistics and shipping costs are dropping. Metals prices are stabilizing. Three years of rolling lockdowns may have simply lowered the temperature and pushed pause on an already overheating economy while laying the groundwork for a more diversified global supply chain landscape. China’s 2023 revised growth projection is now expected to exceed 5.5%.

MORE BATTERIES PLEASE:

China leads the world in EV battery development. One of the brightest spots in China’s Covid-era manufacturing is the growth of its EV and battery industries. China sees its speedy EV growth as a pathway for achieving more sustainable transportation with lower emissions and higher efficiency, and to deflect from its continued use of coal and shocking levels of increased investment in coal production to fuel the growth of other industries. China is by far the largest EV manufacturer in the world, producing 3.5 million units in 2021, over 160% more than the year before, with projected production of battery (BEV) and plug-in hybrid (PHEV) vehicles to be several times more in 2023 than the combined global production of other developed markets, including Germany, The U.S., Japan, France, and South Korea. Domestically, China is only constrained by its electrification expansion and charging station installations. It also continues to provide subsidies and tax benefits for EV buyers. Globally it has enhanced its customer charm offensives with superb customer service, especially in Europe, where Chinese EV passenger cars are likely to dominate in years to come.

BATTERY MINERAL MINES:

The global race for lithium is on. China has been searching worldwide for sources of lithium, the ultra-light metal used in electric vehicle batteries. Australia and Chile are the world’s largest lithium producers. continued

But Bolivia has huge undeveloped reserves which China has its eye on. China already has contracts to import over 90% of Australia’s exportable spodumene lithium and is waiting for Australia to develop the export of lithium hydroxide. With limited options and an insatiable appetite to expand its already globally dominant battery industry, it has recently clinched a very significant deal with Bolivia to develop its valuable lithium reserves called ”white gold” contained in its Potosi and Ururo salt flats, which are connected to Chile and Argentina.

In January, the giant Chinese battery company, CATL, won the bidding process to develop Bolivia’s reserves. It will take an investment of over $1 billion just to develop the first phase, a historic investment for Bolivia. Elsewhere, according to Reuters, Tesla, and other EV manufacturers routinely have discussions with mining companies, both large and small, scattered all over the world, about lithium and other EV metals supplies but without signing contracts. But one big change to watch out for is future buyouts. Elon Musk has openly stated that he is considering the option of refining his own supply of lithium and other electric vehicle metals if it would “speed up the worldwide adoption of clean energy technologies.” He is currently considering a buyout of Canada-based battery metals miner Sigma Lithium Corp. (Bloomberg 2/24/23). Sigma is finishing up construction of a hard rock lithium mine in Brazil that could open as soon as April. It will produce spodumene concentrate, the same material that China imports from Australia, which can be used to make the type of lithium hydroxide preferred by Tesla and BMW. Such a development would follow his stated goal of taking leaps to “stay ahead of the competition” in the face of rivals clamoring to catch up while maintaining superior profitability in the EV price war he started.

OTHER INTERNATIONAL EV DEVELOPMENTS:

On February 28, Tesla announced its decision to locate its next assembly plant in Northern Mexico’s industrial hub of Monterrey. Earlier in February, BMW announced its plan to invest $800 million to expand production in Mexico. Elsewhere Indonesia launched a new industrial policy to join the electric vehicle supply chain (The Diplomat, 2/7/23). And India recently announced that its electric-scooter leader Ola is on track to roll out its first car in 2024.

Author profile: Christine is cofounder and President of China Human Resources Group, Inc, a management consulting firm based in Princeton NJ. She has provided U.S. companies with strategic development and project implementation services for projects in China since 1986. n

MARCH 2023