Articles regarding the pending demise of China as a global power require deeper review. Here’s what we see at Forsyth.
40 years ago, China attempted to perfect the “Third Way”; Keep authoritarian control while allowing a few to enjoy a “capital-ish” market. As China’s less expensive labor & material costs became apparent, companies from all industries quickly migrated resources, and resourcing, to China. With their entry into the WTO in 2001, China became aware of their global influence and continued investing in infrastructure. Less expensive textiles gave way to ceramics, which led to metal working and computer chip production. The pandemic-like adaptation of the “interweb” didn’t hurt either as smaller companies with less resources were able to participate.
Now, post pandemic and post Xi Jinping’s unstated (but understood) lifelong appointment to Chinese Communist Party (CCP) leadership, things are looking less awesome. While Chinese GDP growth clocked 10%+ from 2001 to 2010, slowing in the 2010’s to just over 8%, it was 2% in the Year of the Pandemic and just 3% in 2022. With a population over 1.3 billion, a majority of whom remain at or below poverty levels, 2-3% growth disrupts the balance between authoritarian rule and access to economic vitality. Unemployment across ages 18-24 has risen to levels so high the government stopped reporting (it was over 20% in June 2023). Another problematic indicator: Large real estate firms, having enjoyed almost two decades of ungoverned investment in vast swaths of high-rise dwellings for middle to upper middle class families find themselves with vast swaths of empty domiciles, built for a population that is now unable to afford them. This accrued (and ultimately unpaid) debt places another unwanted burden on the CCP also faced with appeasing those unemployed. Lastly, those ambitious Chinese entrepreneurs from 40 years ago are now in their late 60’s and 70’s with children oblivious to the efforts invested to build these businesses and, albeit generally, less apt or equipped to sustain them. Who’s going to lead that factory you’re sourcing from come 2026 and beyond?
What does this mean for those of us sourcing from China? Partnering in China was a supply chain investment and as with any investment, requires diversification. For one, diversification allows sustainability of supply (See:’20-’21). Secondly, future due diligence by investors will recognize this lack of diversification and apply a corresponding deleterious effect on your return. A third and more shrewd, but meaningful, benefit is that while supply options provide alternative supply and underlines a management team’s long term approach, having an alternative source doesn’t hurt when negotiating with a supplier in China who always thought they were the only game in town.
An important note: A mistake made when considering an Ex-China supply strategy is that it doesn’t exclude China. It can, and should be done IN ADDITION to Chinese partners; hence, the diversification.
If you’re interested in hearing more or want to investigate an Ex-China strategy, our Team at Forsyth Advisors has the flexibility and function to show you the way.