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Mood swing: Global producers in US hunt for China alternatives

By Timothy Aeppel

(Reuters) - Jason Andringa’s company was part of the stampede of U.S. businesses that built factories in China.

Iowa-based Vermeer, a 4,000-employee maker of industrial and farm machinery, opened a plant there two decades ago—and Andringa, the company’s president and CEO, frequently visited what many be considered the world’s premier fast-growing, future-oriented economy. But the mood of Vermeer and many other global producers has turned sour on China.

"If we didn’t already have a plant in China, we sure wouldn’t start one now," he said.

He has no plan to leave and is pleased with the operation, but said he would not expand there given the tensions in the U.S.-China relationship that seem more likely than not to escalate. He worries it could be increasingly difficult to find employees and receive fair treatment in a country that is mutually antagonistic with the U.S.

The latest example of that hit Tuesday, when the Biden administration said it plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others. The move is aimed at curbing Beijing's access to cutting-edge technology that could be used in weapons.

Surveys now show U.S. business leaders are eager to cut back their China exposure and are shifting investment to other, friendlier countries. This is a radical shift from the days when offshoring production to China was rewarded by Wall Street and investor calls often highlighted multi-million-dollar expansions in the world’s second-largest economy.

Mexico has surpassed China as the top destination for foreign direct investment by U.S. firms, according to the U.S. Bureau of Economic Analysis, while a survey from the U.S.-China Business Council shows a growing number of U.S. firms pulling back on their China investments.

ACCELERATING EXODUS

Souring trade relations would likely be a key topic if U.S. President Joe Biden and Chinese President Xi Jinping meet next month during the Asia Pacific Economic Cooperation forum in San Francisco. The White House is working to arrange a meeting, though the plans remain unsettled.

The move away from China began on a small scale during the Trump administration’s trade war, as producers shifted supply chains to sidestep the cost of tariffs.

The exodus has intensified as relations between Beijing and Washington have continued to deteriorate under the Biden administration, morphing from a trade battle into a geopolitical struggle over Taiwan and the U.S. downing of China's spy balloon.

After a visit to China in August, Commerce Secretary Gina Raimondo said U.S. companies had complained to her that China has become "uninvestible," due to government actions such as fines and raids that have made it risky to do business in the country.

"We have businesses doing full exits from China," said Matt Dollard, a senior analyst at RSM US, a consulting firm that focuses on mid-market companies.

For instance, Dollard is working with a group of auto suppliers who plan to be entirely out of China within three years, he said. But many find it isn’t easy to leave a country that developed such a vast production base. In many cases, they end up expanding operations in other countries that still require parts and raw materials from China to produce finished goods.

CAUGHT IN CHINA'S WEB

The mood swing against China is visible in the numbers. An annual survey by the U.S.-China Business Council, conducted in June and July, showed more than a third of respondents have cut or paused their investments in China over the past year—a record high and far above the 22% who said that in last year’s survey. Most of the respondents to the survey are large U.S.-based multinationals.

The group said geopolitics is the "single largest issue weighing down business sentiment over the long term." However only a few of the firms indicated they plan to fully exit China.

Faced with these pressures, many companies are pursuing a so-called China-plus-one strategy. Rather than expand in China, these companies are directing new investments to other low-cost countries such as Vietnam and India.

To be sure, some companies are doubling down on China. Ryan Gunnigle, CEO of Atlanta-based toy maker Kids2, said he is continuing to invest in his China factories, adding both automation and new capacity. Gunnigle, in an email, said he is doing a few projects in Vietnam, "but nothing of significance" because China continues to have the combination of a strong infrastructure, high quality producers, and low costs necessary in the toy business.

"POLITICAL" CONCERNS

Meanwhile, companies that are pushing to build new factories or find existing suppliers in other countries face a common problem: they often end up still relying heavily on Chinese factories for parts and materials.

Jim Estill is wrangling with this issue. The CEO of Danby Appliances, a Canadian company that sells over half of its products in the U.S., got 85% of its goods from Chinese factories five years ago. He’s been steadily moving to suppliers in places like Turkey and hopes to have his Chinese supply base down to 50% in the next year.

Danby also has its own factories in the U.S. and Canada that do final assembly of some products and has spent over $20 million over the past few years to buy operations in Canada that can supply parts to those factories. Those parts would have previously come from China, said Estill.

"My concerns are primarily political," he said. "We could wake up tomorrow and find out China invades Taiwan." That would shatter his business.

(Reporting by Timothy Aeppel; Editing by Anna Driver)