Interview: Can China Be Replaced?


This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Despite how intertwined and complex the global electronics supply chain is, seemingly everything exists in the orbit of one country: China. As the country matured economically during the same time as the electronics industry, and big box consumerism rose in prominence, the majority of the world's infrastructure for consumer electronics manufacturing exists in China. China isn't the first country to be the world's factory for consumer electronics, but it certainly is for the era of mass consumerism at everyday low prices.

With that in mind, the current US-China trade war is framed with a sense of urgency: reliance on China.    

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While there are other countries that have some of the same manufacturing capabilities as China, can China truly be replaced? If it can't, is the US-China trade war a futile, unwinnable effort that will only harm the global economy?

To find out more, Wccftech recently had the chance to speak with Los Angeles-based author and consultant Stanley Chao. Chao is the author of "Selling to China," and MD for All In Consulting, which assists Western companies in their China business. His professional career includes stints at Philips Lighting in California, and China; Kingston Technology in California and Japan; Softbank in Japan; and Merrill Lynch in New York and Japan

Trump recently tweeted an "order" for all US companies to pack up and leave China. Is this possible?

It's ridiculous for Trump to make such a request and impossible for US high tech companies to leave China. It shows Trump's lack of understanding of how interrelated the two countries are in business. Boeing, Ford, GM, GE, Emerson, Eaton, Apple and hundreds of other high tech firms can't just get up and leave. Even before the Trump trade war, companies were already looking for 2nd and 3rd outsourcing partners and manufacturing sites. I was assisting companies to look for alternative sources in Vietnam, Malaysia, and Indonesia. All of the easy stuff has already left China- consumer goods, textiles, large auto parts, and plastic injected goods and parts. What remains in China are the hard stuff- small, complicated connectors, advanced circuit boards, robotics, and clean manufacturing need specialized equipment.

China is well known for its supply chain, in particular, PCB manufacturing, clean rooms, electrical components and semiconductors. Is there anywhere else in Asia that has this ability? What about Taiwan?

There is virtually nowhere in the world that has the full-scale manufacturing from A to Z that China possesses. Ten years ago, Taiwan had it for IT but lost it to China as Taiwan-based companies moved across the strait. Today, countries like Taiwan, Korea, Japan, and Singapore have parts of the solution, but can’t provide the “one-stop shopping” like China.

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I’m working with smaller high-tech firms (robotics and 3-D printing) that get everything done in China today—from product conception to R&D to prototyping to final assembly. As I tell those unfamiliar with China, the country went from “manufacture and copy” to “copy and improve” to “conceptualize and design.” China does it all now.

In addition to manufacturing, Chinese companies have developed great service. PCB manufacturers will turn a new board design around in 24 hours, or an FCC compliance center will work at 2:00 AM to get your systems tested for EMC and EMI (electromagnetic compatibility, electromagnetic interference).

What about the firms that are coming back across the strait? For instance, Quanta is opening a big facility in Taoyuan? There’s also the argument that the trade war has only accelerated a movement that was already in place.

Taiwan and other countries are certainly reaping the benefits of the US-China trade war. But it’s not a 100% exodus from the country. Companies will still keep the “difficult manufacturing stuff” there while moving the final assembly, QC and packaging to the lower-cost countries. This has 3 benefits: lower total costs, avoidance of a “made in China” label to skirt the tariffs now and in the future and policy to be “in China for China.”

So countries like Taiwan or Vietnam will never be a complete substitute for China. They will only complement China.

I’ve been assisting Kingston Technology, a memory board manufacturer move some of their operations out of China. Hsinchu was once their Asian headquarters, and then moved to China, but are not looking to possibly reinvest in Taiwan and other countries. China will still remain Kingston’s main hub but it can off-load some of the China risks by moving 20-30% of their operations to other countries.

Yes, this movement started five years ago. China enacted a new policy to get rid of low-end and high-pollutant manufacturing like textiles, vinyl flooring, and coal-fired power plants. So China raised labor rates, made employment regulations stricter and increased manufacturing and safety regulations. These new policies forced companies to look to more manufacturing-friendly countries like Vietnam, Malaysia or Indonesia.

I think it’s safe to say that the trade war has forced companies even higher-up in the manufacturing chain to also look elsewhere. So Apple, Kingston, and even AI and robotics companies are at least looking to reduce their China exposure. At the minimum, let’s have an alternative source for our manufacturing and supply-chains in case China goes to hell.

With regards to Taiwan, Foxconn’s Terry Gou was known to be quite bullish on Vietnam. How long would it take for Vietnam to evolve to the point where it can start to be a competitor to China on the more complex elements of the manufacturing supply chain? After all, Samsung does a considerable amount of assembly there and Google recently announced it has shifted production of the Pixel phone to Vietnam. Or is Vietnam going to be simply a point for assembly versus an integrated supplier of components and assembly?

I’ve visited Vietnam several times this year trying to find alternative suppliers for my clients, and I would describe Vietnam as a Shenzhen or Dongguan 20 years ago. Yes, Vietnam does some things very well—assembly of phones, drones, or computers; making textiles, shoes, shirts; and manufacturing simple items like large plastic-injected products and electronics. But Vietnam is limited, and I think always will be, for a couple of reasons.

First, the country has many capacity constraints related to skilled labor, electricity, air and ground logistics, and domestic capital. Because of this, Vietnam cannot serve as a full-scale top-to-bottom supply chain. Companies can do final assembly and testing in Vietnam but will still need to ship in components and sub-systems from China.

Second, people forget companies came to China not only for its manufacturing prowess but also for its massive consumer market and its behemoth state-owned companies that had an insatiable appetite for Western industrial equipment and products. So, we all went to China, not just for its manufacturing, but to sell to the second-largest economy in the world. We killed two birds with one stone. Vietnam unfortunately, will never have such demand.

China, at least for the foreseeable future, will continue to be the number-one place to manufacture. Vietnam, Malaysia, and other Asian countries will play second fiddle to China.
Though it will never compete with China, Vietnam can serve as a secondary hub, a place for testing and manufacturing prototypes, and supplying lower demand products.

How has this shift away from China for the ‘easy stuff’ impacted the labor market and wages?

There’s no question, it’s been a big shock to China’s economy. Large manufacturing companies have been less affected, because they can bear the pain, but not the secondary suppliers and manufacturers.

I just came back from Shenzhen and Guangzhou, where I walked around the so-called shadow factory areas. These are technically illegal companies operating just outside of the visibility of the police and municipalities. Though illicit, they serve a purpose by hiring undocumented workers and providing high-quality “easy stuff” products and components to customers and larger suppliers.
But many of these operations—which made transformers, plastic-injected auto parts, and textiles—have closed down. Unemployment is up. The work has all moved to Vietnam.  So, yes, the China-US trade war is negatively affecting China.

But how much of this is from the trade war, and how much is this is from Beijing cracking down on illegal migration or hiring workers without a Hukou [household registration]?

In the past, these closures will all due to the hukou issue, but this has past and gone. The current closures are all due to the trade war. These factories were all well-established entities and survived the employment crackdowns, but are dying due to the trade war. Vietnam and other countries can easily make these things now and it’s not worth the 20-30% tariffs for American buyers to stay with the Chinese manufacturers.

Finally, given that the cost of labor is rising in China because the demographic dividend is over what can China do to make its market more competitive with the higher labor costs and higher costs from tariffs?

They have been planning for at least the higher labor costs for some time by trying to move up the food chain in manufacturing, supply chains and business in general. Thirty years ago, it was about making cheap stuff, then they moved to copy and manufacture, then to R&D and manufacture, and now it’s having the whole product from conceptualization to manufacturing all done in China.

To combat tariffs and dependence upon the west, China wants to develop expertise in certain key industries including AI, robotics, the internet of things, bioengineering, aviation, semiconductors, raw materials, medical, and even the entertainment industry. These industries will produce high-paying jobs, higher product margins, and self-reliance which will enable China to create its position in the world order. This is essentially China’s Made in China 2025 initiative and the Chinese are doubling down on their efforts with the trade war threat.

China’s One Belt One Road initiative is also an endeavor to combat tariffs and isolate itself from the US by creating its own trading zone with over 100 countries in Africa, the Middle East, Eastern Europe, and Asia. I believe in the next 5-7 years, countries will need to decide what world order they want to be part of: the US’s or China’s. With this world economic bifurcation, a country won’t have any tariffs being in one of the regional trading zones, but will pay heavy tariffs to sell or buy from the other trading block.

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