Tech giants ‘de-risk’ from China, but selectively
Micron Technology products are banned but tech gurus willing to keep more eggs in the China basket are welcome
It’s been an interesting week for Siemens and China. In a meeting with China’s Minister of Industry and Information Technology Jin Zhuanglong in Beijing on Wednesday, Siemens AG’s Chief Executive Roland Busch said the company will strengthen cooperation with China in areas such as advanced manufacturing and digital transformation of SMEs.
On Thursday, Siemens said it will also spend €140 million (US$153 million) to expand its digital factory in Chengdu to serve markets. It will set up a new digital R&D Innovation Center in Shenzhen to speed up development of motion control systems with its digitalization and power electronics technology.
Prior to this, Busch had told the Financial Times On May 24 that it was “not an option” for Siemens to pull out of China’s market, which accounts for 13% of the company’s revenues. On Thursday, however, the company said that it will build a new factory in Singapore for €200 million.
Wirtschaftswoche, a Germany magazine, reported that Busch had originally favored China as a location for the new factory but he faced resistance from Siemens’s supervisory board, which had concerns over the growing geopolitical tensions.
There’s a larger trend here: Due to those rising geopolitical tensions combined with a sluggish economic recovery in China, only 55% of German companies plan to invest further in China within the next two years, compared with more than 70% that did so in 2020 and 2021, according to a survey conducted by the German Chamber of Commerce (DIHK) in China.
Like Siemens’s Busch, not a few Western technology gurus have visited China in recent months to try to figure out how they can continue to stay in Chinese markets and make money – in the end meaning, ideally, geopolitical-risk-free money.”
Contributing to the geopolitical tensions, G7 leaders said in a joint statement on May 20 that they have a common interest in preventing a narrow set of technological advances from being used by some countries to enhance their military and intelligence capabilities to undermine international peace and security. They said G7 countries will seek to de-risk from China.
And China has not hidden its dissatisfaction with Western companies that are seen as following their countries’ policies too closely, to China’s disadvantage. On the same day, May 20, the Cybersecurity Review Office, a unit of the Cyberspace Administration of China, banned the country’s key national infrastructure operators from purchasing products from Micron Technology, a US chip maker which has downsized its China business since 2019.
Diversifying investments
But China is walking a fine line. In recent weeks, Beijing has encouraged foreign technology bosses to visit.
On Friday, Chinese President Xi Jinping met with Bill Gates, founder of Microsoft and co-chair of the Bill & Melinda Gates Foundation, in Beijing.
Calling Gates an “old friend,” Xi said China is ready to carry out extensive cooperation with all countries on scientific and technological innovation.
In late May, Tesla’s Chief Executive Elon Musk departed for Beijing and hoped to meet with Chinese Premier Li Qiang. But he could only meet Vice Premier Ding Xuexiang.
On June 8, 36Kr, a Chinese IT news website reported that during his China trip Musk had asked Chinese suppliers to move to Mexico to support Tesla’s flagship factory. It said some Chinese suppliers are told that they will miss some big orders if they do not take action to react to Tesla’s requests now.
A Shanghai-based columnist on June 12 published an article titled, “Is Elon Musk fleeing from China? Tesla builds a factory in Mexico, and demands Chinese suppliers to go with it.”
“At present, China is not only a world factory but also the world’s second largest consumption market,” he writes. “American companies cannot leave China’s productivity and consumption markets.”
The columnist says that while Tesla is building a factory in Mexico, it cannot abandon the Shanghai one. He says that for a very long period of time in the future, Tesla’s Shanghai factory will stay put, going nowhere.
FDI and ODI
Tesla’s Gigafactory Shanghai commenced production in October 2019 with a production capacity of 500,000 electric vehicles per year. It was shut down for two weeks in early 2020 due to the Covid-19 epidemic. Its production was disrupted again between March and May last year due to Shanghai’s lockdowns.
In March this year, Tesla announced its plan to build a gigafactory in Mexico with an annual production capacity of one million vehicles.
“The growing Sino-US tensions and intensifying geopolitical risks have prompted the leaders of multinational companies to adjust their investment plans,” a Hunan-based writer says. “Most multinational firms have chosen the ‘friend-shoring’ or ‘China + N’ model to rebuild their supply chain.”
He says more and more Chinese capital will go overseas to get close to their customers or they will lose orders. He says this is why China’s foreign direct investment (FDI) is falling while overseas direct investment (ODI) is growing.
In the first four months of this year, China’s FDI dropped 3.3% to US$73.5 billion while ODI increased 17.1% to US$52.8 billion.
Meanwhile, some commentators said the G7’s call for de-risking is not very meaningful. They said the so-called re-shoring and friend-shoring merely substitute Chinese exports of intermediate goods for exports of assembled products to the US.
They said China is shifting capacity to Southeast Asia and some other countries while foreign investors in China are following suit.
In recent months, China has attracted some foreign technology firms to set up factories in the country.
In March, KMWE, a supplier of the Dutch chip-making equipment maker ASML, said it will build a new factory in Sichuan to produce robot arms for chip packaging machines, which are not covered by the US sanctions.
On June 7, STMicroelectronics, a Sweden-based chipmaker, said it had signed an agreement with China’s Sanan Optoelectronics to create a new 200mm silicon carbide (SiC) device manufacturing joint venture in Chongqing.
Sanan will build the new fab, which will commence production in the fourth quarter of 2025. STMicroelectronics will contribute its technology to owe a 49% stake in the JV.
On Friday, Micron announced that it will US$603 million over the next few years in its chip packaging facility in the city of Xian.
Western companies doing business in China generally don’t go out of their way to be precise about the tradeoffs both sides find themselves needing to make.
Take Siemens’s Busch. Here’s what he said about the week’s bidirectional investments: “The investments underpin our strategy of combining the real and the digital worlds – as well as our focus on diversification and local-for-local business. We are clearly doubling down on our strong global presence to support growth in the most relevant markets in the world.”
The non-Chinese recipients of new investments, however, are not hesitant to express their pleasure. Ping Cheong Boon, Chairman of the Singapore Economic Development Board (EDB), exulted that “Siemens’s new high-tech factory in Singapore will leverage our trusted hub status and strong advanced manufacturing capabilities to meet rising demand across Southeast Asia’s high-growth markets.”