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American companies in China, the meltdown of bilateral relations represent the biggest concern in 2020, but few businesses invested in the country long-term are inclined to leave while enjoying healthy profits in an economy that has rebounded strongly from the coronavirus pandemic.
Almost two-thirds of respondents to the American Chamber of Commerce in Shanghai’s annual business survey said US-China tensions were their biggest worry – the first time bilateral issues have led the poll, and well ahead of the second biggest concern, domestic competition, on 58 percent.
“Under my administration, we will make America into the manufacturing superpower of the world and we’ll end our reliance on China, once and for all, whether it’s decoupling or putting in massive tariffs like I’ve been doing already,” US President Donald Trump said in a Labour Day address in which economically separating from China featured prominently.
Our biggest concern is to understand what the White House’s goals are and where we are headed
Only 4.3 per cent of AmCham’s members plan to move parts of their operations back to the United States, the fourth most popular destination for diversifying supply chains, with 70.6 percent of businesses planning no change in production allocation, up 5.1 per cent on last year.
The profile of the members surveyed suggests that these are not short-term players in China looking for manufacturing arbitrage.
More than 85 per cent of the firms have been in China for a decade or longer, with just 4.6 per cent there for under five years, suggesting they are hardened by the realities of working in China and less moved by short term fluctuations in markets and geopolitics. There is also the fact that China was the first in and out of the pandemic, while other markets still in its grips would certainly look less attractive.
“Our membership is fairly stable, most companies have been here a long-time and are well-rooted,” said Ker Gibbs, the president of the chamber. “But this is why we’re also so disturbed to see all the calls for decoupling. Our biggest concern is to understand what the White House’s goals are and where we are headed.”
Gibbs pointed to a and the lack of clarity over whether this would apply to businesses based in China. “We are waiting for September 20 for clarity, and frankly we have pins and needles right now. If American businesses in China have to stop using WeChat, this would be devastating.”Some 22.5 per cent of respondents said they were delaying investments due to trade war tariffs, compared to 32.3 per cent in 2019, suggesting that American businesses in Shanghai are adapting to a new normal, riding out the volatility to tap the world’s largest consumer market.
This is reflected in the fact that more than half, 57.5 per cent, are now operating a “China-for-China” strategy, meaning they serve the mainland with their operations there, with facilities elsewhere catering for demand outside China.
Almost all chemical companies are in this position, but just 25 per cent of technology hardware, software, and services companies – down from 55 per cent in 2019, showing that a major decoupling is ongoing in this sector.
A lot of members do feel a bit of whiplash from the past three-and-a-half years and want to see a more long-term strategy
The pay-off is clear: despite the trade war, 78.2 per cent saw higher profits last year than 2018, with 32.5 per cent greater revenues in 2020 versus 2019, despite the world being in the grips of a pandemic.
“Members are concerned, but dedicated to the market, which is attractive, large, and growing. We are aware of the national security issues and members hope that there can be some rebalancing of the relationship,” Gibbs said. “A lot of members do feel a bit of whiplash from the past three-and-a-half years and want to see a more long-term strategy.”
General Motors announced its second major electric vehicle partnership in less than a week on Tuesday, this time a $2 billion deal with startup Nikola.GM will take an 11% ownership stake in the Phoenix company and will engineer and build Nikola’s Badger hydrogen fuel cell and electric pickup truck. The Badger is expected to be in production by the end of 2022.
GM also will help with cost reductions for Nikola’s other vehicles including heavy trucks, and the company will use GM’s battery system and hydrogen fuel technology.
In exchange for the 10-year deal, GM will get $2 billion worth of Nikola’s newly issued common stock that will come in three increments through 2025.
News of the deal sent shares of both companies surging despite a broader-market downturn. Nikola’s shares jumped $14.50, or 40.8%, to close Tuesday at $50.05. GM advanced $2.38, or 7.9%, to end at $32.38.
The move sets up GM for a new revenue stream and possibly a change in its business model, essentially becoming a parts supplier to other companies for electric vehicle frames, batteries, controls, and components.
GM has been under pressure from Wall Street to more quickly monetize its electric vehicle technology, and industry analysts have suggested spinning off its EV unit as a separate company.
Barra said on a conference call that GM has a “platform that others can use that’s going to give us scale and help us drive efficiency.” She said the electric vehicle platform and batteries are attractive to other companies, which is a huge opportunity for GM.
“We’re going to leverage that and really seize the opportunity that we have to grow,” she said.
However, she wouldn’t comment on whether GM is in talks with other companies.
Nikola will be responsible for the sales and marketing of the Badger, but it will be built on GM’s new battery-electric truck underpinnings and use GM fuel cell and battery technology. GM also will supply batteries for other Nikola vehicles including heavy trucks.
GM has its own battery-electric truck, a GMC Hummer, due to go on sale a year ahead of the Badger.
The deal is the second major partnership announced by GM this month as it lines up companies to share in the costs of developing electric and autonomous vehicle technology. On Thursday GM said it would join with Japanese automaker Honda to share the costs of building vehicles powered by batteries and internal combustion engines.
GM expects to get more than $4 billion in benefits from the deal with the stock as well as from contracting to manufacture the Badger. GM also will get supply contracts for batteries and fuel cells and electric vehicle regulatory credits that can be used by GM to comply with fuel economy and pollution standards, or sold to other companies.
Nikola founder and Executive Chairman Trevor Milton said the agreement relieves his company of the expense of building another factory to make the Badger, which is a little larger than a Chevrolet Silverado. Nikola, however, will keep building a U.S. factory in Coolidge, Arizona, to make heavy trucks.
Nikola Corp., which hasn’t made a profit yet and lost $86.6 million in the second quarter, expects to save over $4 billion in battery and powertrain costs over 10 years.
Wedbush analyst Daniel Ives, in a note to investors Tuesday, wrote that the deal is a huge step forward for Nikola, giving the company credibility with Badger production and its hydrogen fuel cell and semi-truck ambitions.
“There have been many skeptics around Nikola and its founder Trevor Milton’s ambitions over the coming years, which now get thrown out the window with stalwart GM making a major strategic bet on Nikola,” he wrote.
Nikola, founded in 2015, became a public company in June after a merger with VectoIQ, a publicly-traded special-purpose acquisition company.
When it went public, Nikola added former GM Vice Chairman Stephen Girsky, CEO of VectoIQ, to its board of directors.
Barra said that Girsky made initial introductions to help start the deal.