Foreign Companies in China Reducing Production Capacity and Moving Factories to Vietnam and Other Countries

China's economy is sluggish, and traditional manufacturing industries continue to shrink. Low-tech production sectors such as garment manufacturing and electronics no longer require intensive labor. (Getty Images)

[People News] U.S. President-elect Donald Trump, who is set to return to the White House, stated during his campaign that he would impose a 60% tariff on Chinese goods upon taking office. Meanwhile, some foreign companies are scaling back their investments in China and even planning to relocate factories to countries like Vietnam. To what extent is this new wave of production reduction and factory relocation by foreign companies in China, particularly tech firms, related to Trump's tariff threats?

Concerns Over Trump's Tariffs Prompt South Korean Semiconductor Giants to Accelerate "Decoupling from China"

According to South Korea's Chosun Ilbo on November 15, concerns over escalating U.S. sanctions on China's semiconductor industry and fears of high tariffs under Trump have led South Korean semiconductor giants Samsung Electronics and SK Hynix to cancel all plans for capacity expansion in mainland China. Both companies have significant investments in the country.

The report, citing market research firm Omdia and industry insiders, noted that SK Hynix has halted its plans to expand production capacity at its Wuxi plant in China, instead focusing on expansion in Icheon and Cheongju, South Korea. Similarly, Samsung Electronics plans to significantly reduce its initial quarterly output target of 600,000 NAND flash memory wafers at its Xi’an plant.

Experts believe these decisions to stop expanding production capacity in China may be influenced by Trump's tariff threats. However, some restrictions initiated during the Biden administration under the guise of national security and supply chain risk mitigation have already been implemented.

Thibault Denamiel, an associate fellow on economic and international business issues at the Center for Strategic and International Studies (CSIS), told Voice of America via email: "These companies reasonably anticipate that the U.S. will intensify restrictions on imports from China. These restrictions could include expanding export control rules, implementing stronger foreign investment screening mechanisms to cover broader activities related to the semiconductor supply chain, or imposing higher trade barriers on goods entering the U.S. from China."

Denamiel added that Trump, upon becoming the 47th President of the United States, would further implement such measures.

At the same time, it is anticipated that the Biden administration will unveil its "final act" in technology controls targeting China in the coming weeks, issuing a set of export control measures. According to The Washington Post, the internal debate within the Biden administration in recent months has focused on how to restrict China's tech industry access to U.S. technology while minimizing the economic impact on American companies caused by these controls.

U.S. CHIPS Act "Guardrails" Restrictions Prompt Foreign Companies to Reduce Investments in China

The semiconductor industry is vital to South Korea's trade-dependent economy, with chip exports accounting for 16% of the country’s total exports last year. South Korean semiconductor giants Samsung Electronics and SK Hynix hold significant production shares in China: Samsung’s Xi’an plant produces 40% of the world’s NAND flash memory, while SK Hynix’s factories in Wuxi and Dalian contribute 40% of global DRAM production and 20% of NAND output.

Experts suggest that a specific provision in the U.S. CHIPS and Science Act aimed at attracting semiconductor companies to establish operations in the U.S. may be discouraging further production expansion in China by companies like Samsung and SK Hynix.

Under the CHIPS Act passed by the U.S. Congress in 2022, the federal government will provide up to $39 billion in subsidies and tax incentives for chipmakers building factories in the U.S. However, the "guardrails" provision, implemented in 2023, stipulates that companies receiving funding cannot expand their production capacity in "countries of concern" such as China and Russia.

Yeo Han-koo, a senior fellow at the Peterson Institute for International Economics (PIIE) and former South Korean Minister of Trade, Industry, and Energy, told Voice of America: "Once these companies receive massive subsidies from the U.S. government, they are restricted from investing in so-called foreign entities of concern, including China, Russia, North Korea, and Iran. This represents a new trend in the U.S. economic security policy. Therefore, these global companies have no choice but to comply with U.S. legislative and regulatory requirements."

Samsung and SK Hynix have both received substantial federal grants to build advanced chip production facilities in the U.S.

In response, South Korea's ruling party introduced a bill last week to provide subsidies to its chipmakers and reduce labor-hour limits. This initiative aims to mitigate the impact of potential tariffs from Trump on South Korea's semiconductor industry.

Reuters reported that high tariffs on Chinese imports could lead Chinese semiconductor manufacturers to lower prices, thereby undermining the competitiveness of South Korean chipmakers in overseas markets.

Yeo Han-koo noted: "Whether allies or competitors, these critical technologies have become the focal point of economic power and national security. South Korea must continue to build its domestic production and innovation base while striking a delicate balance among these geopolitical rivals."

South Korea’s semiconductor backend processing company Hana Micron and U.S. semiconductor packaging and testing giant Amkor Technology are also accelerating their "decoupling" from China.

China's Economic Conditions Push Foreign Companies to Further Disengage

Analysts point out that foreign companies' reduced investments in China are driven not only by concerns over U.S. tariffs but also by negative economic factors within China.

Thibault Denamiel remarked: "While China remains a manufacturing powerhouse, it is experiencing an economic slowdown due to a slumping real estate market, weak consumer confidence, deteriorating local government finances, and recent crackdowns on businesses. Foreign companies face additional challenges, including discriminatory treatment and, in some cases, threats of employee detention by the government."

Brian Tycangco, an analyst at U.S.-based Stansberry Research, told Voice of America: "President-elect Trump’s hawkish stance on China and trade issues is a continuation and acceleration of trends since 2016. Many U.S. companies have been adapting to the changing global supply chain landscape. While a complete decoupling from China is neither reasonable nor realistic, further decoupling in sensitive areas—particularly semiconductors, strategic metals, and medical supplies—will occur."

Vietnam Benefits from Shift in Global Supply Chains

According to Chosun Ilbo, companies exiting China are ramping up equipment investments in Southeast Asia, with Vietnam expected to be a key beneficiary of this shift.

Beyond the tech industry, some consumer-focused foreign brands are also considering withdrawing their investments from China. Bloomberg reports that U.S. footwear company Steven Madden Ltd. is accelerating plans to move production out of China, aiming to reduce the proportion of products made in China by 40% by the end of next year, up from its previous target of a 10% reduction.

The company has been redirecting its supply chain toward countries like Cambodia, Vietnam, and Mexico, with a goal of lowering the proportion of China-made goods to about 25% by the end of next year. At one point, 95% of the goods Steven Madden sold in the U.S. were imported from China.

A survey released on November 14 by global consultancy firm Bain & Company revealed that 69% of executives from multinational corporations plan to move operations out of China—14 percentage points higher than the figure from 2022.

Thibault Denamiel from the Center for Strategic and International Studies (CSIS) noted that Vietnam is emerging as a key beneficiary of international companies’ divestment from China. However, this shift is also expected to increase the U.S. trade deficit with Vietnam. He explained: "The Trump administration will have to balance concerns over the (U.S.-Vietnam) bilateral trade deficit with the goal of moving critical supply chains out of China. As companies continue shifting to Vietnam and other third countries outside of China, these nations’ trade surpluses with the U.S. will grow. However, this should be viewed as a net gain for U.S. economic security."

Trump has indicated plans to impose a 60% tariff on Chinese products and a 10% tariff on all imports from other countries. These measures are aimed at reshaping global supply chains and prioritizing U.S. economic and national security.

(Source: Voice of America)