Silver Lining, Open Door

By+Mei+Xinyu

Are large multinationals leading an upsurge in foreign companies leaving China？ Some media reports may give that impression， but these reports are somewhat one-sided.

It is true that some factories owned by foreign companies in China have recently been shut down， and these actions by some large multinationals particularly arrest peoples attention： Japanese watchmaker Citizen shut down its factory in Guangzhou， south Chinas Guangdong Province； Panasonic announced plans to shut down two TV production lines in China； and Microsoft decided to shut down two cellphone production lines of Nokia in China.

Company and industry operations are an ever-changing process. However prosperous a company once was and however good a business environment used to be， the shutdown or even bankruptcy of some companies is inevitable. We should instead focus on the net amount of foreign investment. In recent months， Chinas paid-in foreign direct investment （FDI） has been going up on a yearly basis. Despite slight monthly drops in the latter half of 2014， China still saw a yearly increase of 1.7 percent in FDI in the non-financial sectors. With the amount of non-financial FDI reaching $119.56 billion last year， China has become the worlds largest FDI recipient.

In the shutdown of Chinese factories by large multinationals， we can find that the ma- jor reason is not the deterioration of Chinas business environment but rather business difficulties faced by those multinationals after they become less competitive than Chinese-funded or other foreign companies. The most typical examples include Japanese home appliance makers， which have suffered huge losses for years， and the former worlds biggest mobile phone maker Nokia， which has failed in market competition.

Japanese companies used to lead the world home appliances industry. However， with the robust rise of Chinese and South Korean companies， Japans home appliances industry has lost power， in part due to several major mistakes in decision-making. For instance， Sonys home appliance business alone has lost 300 billion yen （$2.47 billion） in the past decade. As a result， slashing manufacturing operations worldwide， not just closing factories in China， has become the only option for some Japanese home appliance makers. However， they still sustain their relations with Chinese production chains by offering semi-finished products or other supplies to Chinese manufacturers. Sharp not only acquired 150 billion yen （$1.24 billion） in bank loans but also gained financial support from a deal with Samsung. Sharp is also withdrawing from the Mexican， Southeast Asian and Australian markets. Like Sony， though， Sharp still sustains its relations with Chinese production chains.

Rise of Made-in-China

Is this a sign of the decline for Chinas manufacturing industries？ The answer is no. Chinese manufacturers are growing rapidly. In the 1990s， China had already become the worlds largest home appliance producer and exporter， and it now holds even bigger advantages in this industry.

While Motorola and Nokia are in decline， Chinese mobile phone makers， which got a late start， have become world leaders in production and exports. Motorola made the worlds first mobile phone in June 1983， but Chinas mobile phone industry only began in 1997， and Chinese manufacturer Kejian produced the countrys first mobile phone in 1998. At that time， domestic market shares of Chinese mobile phone makers could even be overlooked， and almost all the 3.96 million mobile phones made in China were from wholly foreign-funded enterprises or joint ventures. However， in 2012， China produced 1.18 billion mobile phones， almost 300 times the amount in 1998 and accounting for 75 percent of all the mobile phones sold worldwide. In 2013， among all the 1.8 billion mobile phones made in the world， 81.1 percent or 1.46 billion were from China.

After China joined the Information Technology Agreement in 2003， it reduced the import tariff on mobile phones to zero. In such a market for open competition， the Chinese mobile phone industry has realized high growth in both output and exports.

Citizens Chinese counterparts such as Fiyta and Seagull have also kept growing and more than half of the watch movements for Swiss brands are made by Chinese factories. Under these circumstances， reactions to individual cases seem overblown.

Some foreign companies shut down their old factories in China， but unless they declared bankruptcy， most of them are trying to transform their businesses so as to remain competitive in the Chinese market.

After all， China is very likely to replace the United States and become the largest economy in the world in the next decade. It has already been the worlds largest consumer of various kinds of raw materials， consumer goods and equipment， and it is also maintaining one of the highest economic growth rates in the world. Leaving such a market will mean suicide to any multinational who aims at being a global leader in its industry.

The closing of Nokias factory was an inevitable outcome after Microsoft acquired Nokias device and service business in 2014， because according to their mutual agreement， Nokia sold all its device and service business to Microsoft and will no longer manufacture products. However， it will retain its patent portfolio related to telecommunications and smartphones with the aim of establishing a model focusing on technology development and patent operations.

Japanese home appliance giants have reduced their traditional business， but have in turn developed some new businesses. In Panasonic， car and housing businesses have contributed 50 percent to the companys total profits.

Business environment matters

A reasonable view on multinational companiesshutdown of factories in China certainly does not mean we will not improve the investment environment. As China has already been a net capital exporter and its capital exports will continue its trend of quick growth， we must pay special attention to this.

Rapid growth of Chinas outbound investment is a result of the countrys fast-growing economy and national strength， and the improvement of its position among world economies will be more conducive to elevate the efficiency of Chinas trade and investment.

Just as every coin has two sides， outbound direct investment can weaken the strength of domestic industries and impede Chinas sustainable economic growth. Since the late 1800s， the United Kingdom invested heavily in overseas countries， but its domestic investment remained stagnant. In other words， the origin of modern industrial revolution missed the opportunity of the second and third industrial revolutions. Such risks should not be neglected. In China， private capital from Wenzhou， east Chinas Zhejiang Province， was formerly invested throughout the country， but the local economy later hit a bottleneck. This has also warned us to proceed with caution.

Moreover， sustained high growth of outbound direct investment is also likely to dampen the efforts China has made to balance regional development. Chinas overall economic development falls behind those of developed countries， and the development is unbalanced among different regions.

When Chinas developed coastal areas are transferring out labor-intensive industries because they have lost cost advantages， the central and western regions have to compete with developing countries such as Viet Nam， the Philippines and Indonesia for these investments. If surplus capital in the developed coastal areas is transferred to foreign countries merely for profits， the less developed central and western regions， which are still in want of capital， will be deprived of opportunities for development.

For these risks， it is not advisable for China to restrict outflow of capital. Instead， it must keep the domestic business environment attractive for investors in order to ensure the countrys long-term competitiveness.