On the Mind of Investors

Are companies moving production out of China?

Marina Valentini

Global Market Strategist

Mary Park Durham

Research Analyst

Published: 09/13/2024
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00:00

Hi. My name is Marina Valentini and I am a Global Market Strategist at J.P. Morgan Asset Management. Today's blog post answers the question "Are companies moving production out of China". Rising geopolitical tensions, pandemic-related disruptions, and tariffs concerns are prompting multinationals to reassess their reliance on China. Many are adopting a “China+1” strategy or favoring nations with stable political ties and proximity to key markets. But where are they relocating, and how quickly is the trend unfolding?

The change is most evident in international trade data. China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024. Additionally, FDI into China turned negative for the first time on record in 3Q23, suggesting that foreign companies are divesting at a faster rate. Meanwhile, business surveys, like the 2024 AmCham survey shown below, indicate the trend remains in early stages. Specific country developments also provide further evidence:

  • India: Reforms to boost manufacturing and exports in high-tech goods and services are attracting multinationals. Key initiatives include “Make in India”, which cut corporate taxes for new manufacturing firms to 17%, and a $2.0 trillion infrastructure investment. This has helped increase greenfield investments inflows in India, which averaged $87 billion in 2022-23, up 54% from the 2015-19 average.
  • Southeast Asia: Markets like Vietnam, Thailand, and Indonesia are also benefitting from increased trade and investments. For example, Vietnam has established major trade agreements with the EU and reduced its standard corporate tax rate to 20%. Its exports as a share of GDP have risen 17% in the past decade, and credit growth continues to be concentrated in trade and industrial sectors. Additionally, as China looks to design and manufacture more advanced products, like electric vehicles, other Asian countries are gaining market share for labor-intensive goods. 
  • Mexico: Mexico has become the U.S.’s top individual trading partner, with its share of U.S. exports rising from 13.5% to 15.9% since 2018, highlighting its nearshoring potential. However, MORENA’s landslide victory1 in June and the recently approved judicial reform, combined with long-term bottlenecks, have dampened nearshoring momentum and investor confidence. Consequently, investment announcements have dropped to an average of $3 billion YTD, down from $6 billion in 20232. Markets have been accounting for these elevated risks, with Mexican equities and the peso down 19.2% (in USD) and 14.5% year-to-date, respectively.

While some doors may be closing, others are opening for China. Its share in U.S. exports has dropped 8% since 2017, but its share in global exports has continued to rise, hitting 14% in 2023, as it strengthens trade with neighbors and seeks ways to bypass punitive tariffs. U.S.-China tensions will likely remain high regardless of the U.S. election outcome3, making risk management essential to identify exposed companies. As global supply chains evolve, investors should diversify their emerging market exposure, focusing on the beneficiaries of this powerful long-term trend.

1Link OTMI on Mexico election outcome

2Source: According to J.P. Morgan Research’s proprietary investment announcements tracker as of August 2024.

3Link OTMI on Key policy implications US election

China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024.

Rising geopolitical tensions, pandemic-related disruptions, and tariffs concerns are prompting multinationals to reassess their reliance on China. Many are adopting a “China+1” strategy or favoring nations with stable political ties and proximity to key markets. But where are they relocating, and how quickly is the trend unfolding?

The change is most evident in international trade data. China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024. Additionally, FDI into China turned negative for the first time on record in 3Q23, suggesting that foreign companies are divesting at a faster rate. Meanwhile, business surveys, like the 2024 AmCham survey shown below, indicate the trend remains in early stages. Specific country developments also provide further evidence:

  • India: Reforms to boost manufacturing and exports in high-tech goods and services are attracting multinationals. Key initiatives include “Make in India”, which cut corporate taxes for new manufacturing firms to 17%, and a $2.0 trillion infrastructure investment. This has helped increase greenfield investments inflows in India, which averaged $87 billion in 2022-23, up 54% from the 2015-19 average.
  • Southeast Asia: Markets like Vietnam, Thailand, and Indonesia are also benefitting from increased trade and investments. For example, Vietnam has established major trade agreements with the EU and reduced its standard corporate tax rate to 20%. Its exports as a share of GDP have risen 17% in the past decade, and credit growth continues to be concentrated in trade and industrial sectors. Additionally, as China looks to design and manufacture more advanced products, like electric vehicles, other Asian countries are gaining market share for labor-intensive goods. 
  • Mexico: Mexico has become the U.S.’s top individual trading partner, with its share of U.S. exports rising from 13.5% to 15.9% since 2018, highlighting its nearshoring potential. However, MORENA’s landslide victory1 in June and the recently approved judicial reform, combined with long-term bottlenecks, have dampened nearshoring momentum and investor confidence. Consequently, investment announcements have dropped to an average of $3 billion YTD, down from $6 billion in 20232. Markets have been accounting for these elevated risks, with Mexican equities and the peso down 19.2% (in USD) and 14.5% year-to-date, respectively.

While some doors may be closing, others are opening for China. Its share in U.S. exports has dropped 8% since 2017, but its share in global exports has continued to rise, hitting 14% in 2023, as it strengthens trade with neighbors and seeks ways to bypass punitive tariffs. U.S.-China tensions will likely remain high regardless of the U.S. election outcome3, making risk management essential to identify exposed companies. As global supply chains evolve, investors should diversify their emerging market exposure, focusing on the beneficiaries of this powerful long-term trend.

More companies now consider Developing Asia as a top destination for relocation

Of the members who are considering moving capacity, what are the target destinations?

More companies now consider Developing Asia as a top desination for relocation

Source: The American Chamber of Commerce in China 2024 China Business Climate Survey Report, U.S. Census Bureau, China Customs, McKinsey, EY, J.P. Morgan Economic Research, MSCI.*Survey conducted yearly between 2020-2023. Data are as of September 12, 2024.

1 What are the investment implications of MORENA’s landslide victory in the 2024 Mexican elections?
2 Source: According to J.P. Morgan Research’s proprietary investment announcements tracker as of August 2024.
3 What are the key policy implications in the 2024 presidential race?
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Marina Valentini

Global Market Strategist

Mary Park Durham

Research Analyst

Published: 09/13/2024
Listen now
00:00

Hi. My name is Marina Valentini and I am a Global Market Strategist at J.P. Morgan Asset Management. Today's blog post answers the question "Are companies moving production out of China". Rising geopolitical tensions, pandemic-related disruptions, and tariffs concerns are prompting multinationals to reassess their reliance on China. Many are adopting a “China+1” strategy or favoring nations with stable political ties and proximity to key markets. But where are they relocating, and how quickly is the trend unfolding?

The change is most evident in international trade data. China's share of U.S. imports peaked at 22% in 2018 during the U.S.-China trade conflicts and sits at 11.5% as of June 2024. Additionally, FDI into China turned negative for the first time on record in 3Q23, suggesting that foreign companies are divesting at a faster rate. Meanwhile, business surveys, like the 2024 AmCham survey shown below, indicate the trend remains in early stages. Specific country developments also provide further evidence:

  • India: Reforms to boost manufacturing and exports in high-tech goods and services are attracting multinationals. Key initiatives include “Make in India”, which cut corporate taxes for new manufacturing firms to 17%, and a $2.0 trillion infrastructure investment. This has helped increase greenfield investments inflows in India, which averaged $87 billion in 2022-23, up 54% from the 2015-19 average.
  • Southeast Asia: Markets like Vietnam, Thailand, and Indonesia are also benefitting from increased trade and investments. For example, Vietnam has established major trade agreements with the EU and reduced its standard corporate tax rate to 20%. Its exports as a share of GDP have risen 17% in the past decade, and credit growth continues to be concentrated in trade and industrial sectors. Additionally, as China looks to design and manufacture more advanced products, like electric vehicles, other Asian countries are gaining market share for labor-intensive goods. 
  • Mexico: Mexico has become the U.S.’s top individual trading partner, with its share of U.S. exports rising from 13.5% to 15.9% since 2018, highlighting its nearshoring potential. However, MORENA’s landslide victory1 in June and the recently approved judicial reform, combined with long-term bottlenecks, have dampened nearshoring momentum and investor confidence. Consequently, investment announcements have dropped to an average of $3 billion YTD, down from $6 billion in 20232. Markets have been accounting for these elevated risks, with Mexican equities and the peso down 19.2% (in USD) and 14.5% year-to-date, respectively.

While some doors may be closing, others are opening for China. Its share in U.S. exports has dropped 8% since 2017, but its share in global exports has continued to rise, hitting 14% in 2023, as it strengthens trade with neighbors and seeks ways to bypass punitive tariffs. U.S.-China tensions will likely remain high regardless of the U.S. election outcome3, making risk management essential to identify exposed companies. As global supply chains evolve, investors should diversify their emerging market exposure, focusing on the beneficiaries of this powerful long-term trend.

1Link OTMI on Mexico election outcome

2Source: According to J.P. Morgan Research’s proprietary investment announcements tracker as of August 2024.

3Link OTMI on Key policy implications US election