Biting the hand

There’s a huge change coming to the way our tech products will be developed, compared to what’s been done over the past three decades. Check the label on many of these products and you’ll usually see Made in China or Made in China and Designed in the U.S. or designed in California, etc. These labels reflect the close collaboration between U.S. and Chinese companies, a model that began in the 1980’s and has been continually growing – until this year. This broad collaboration between thousands of Asian and Western companies is being substantially disrupted by China’s President Xi Jinping.

For decades U.S. companies have been sending their employees to China to work side-by-side with local companies to develop and manufacture technology products. It’s allowed our companies to expand their product offerings and produce their products at lower costs. While it also has led to the loss of our manufacturing jobs, because we were unable to compete with their low labor costs and their local sourcing, it’s also allowed U.S. companies to prosper and grow, creating more products more quickly and more high paying jobs here, while outsourcing the low paying work to China.

Typically the initial concept, design, refinement, and testing is done in the U.S. Then the Chinese partner, under close supervision of U.S. engineers, refine the design for production, build tooling, set up an assembly line, and take the product into mass production. The model works because each company does what it does best.

But this is coming to a screeching halt because of hostile new rules that have gone into effect in China, such as allowing the governement to detain and arrest visitors without due process and unannounced random raids of local offices of U.S. companies. It’s gotten so bad that our governement has issued a warning against traveling to China.

Nearly thirty years ago when I brought Apple’s first products to China, I simply followed this same recipe that Dell, Compaq, Sony and others were doing. That model has now been used by nearly all consumer tech companies throughout the world.

But President Xi’s national-security agenda of attacking what he perceives as foreign threats has suddenly uprooted all this to China’s detriment. According to the Wall St. Journal, “China’s exports contracted in June at the fastest pace since the start of the Covid-19 pandemic…..and…(this) is yet another indication that China’s leaders will not be able to entirely count on external factors in reviving the faltering growth momentum in the world’s second-largest economy…(and)…foreign direct investment in China fell to $20 billion in the first quarter of this year, compared with $100 billion in last year’s first quarter.”

Xi is biting the hand that feeds him. U.S. companies will not put their engineers in danger and, in fact, most have banned employee travel to China. Perhaps Xi doesn’t understand how his policies are impacting these relationships, doesn’t care or is just ignorant. But what he’s doing only make matters worse and severely damages China’s economy.

What does that mean for future tech products? We’re alreading seeing a flight from China to Taiwan, Vietnam, Korea, Indonesia, India, Mexico, and the U.S. Apple, who has a huge presence in China, is now building millions of iPhones in India. They have no choice, as their dependency on China is an existential threat, certainly enough to keep Tim Cook up at night.

Many of the Chinese companies will struggle now that they are on their own. No longer able to work with their U.S. partners, they’ll need to design and develop their own products for worldwide markets. We see a sampling of that on Amazon – thousands of Chinese companies selling accessories and lower tech products directly to customers. But without U.S. partners providing the innovation, capital, distribution and marketing, the Chinese companies will suffer the most.

It’s a sad end to decades of cooperation that established the model for efficiently and quickly bringing new tech products from concept to market. And totally self-inflicted by Xi.

by Phil Baker

One thought on “Biting the hand

  1. Bill Owen says:

    China may be looking at expanding in other markets to make up for the loss of sales to U.S. customers. Last week on the Brazilian national nightly news, the reporters were ecstatic about China opening a factory for eletrodomésticos (basically kitchen appliances) in Manaus, with the understanding that Brazil will lower its infamously high tariffs on certain Chinese products.
    China already has an inroad in Brazil with autos, e.g., CAOA Chery (sounds awfully close to “Chevy”, doesn’t it?), filling the gap of several American and European auto manufacturers who have ceased production in Brazil.

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