Zero COVID Means Zero Future Business For China
Companies Are Pulling Out Rather Than Endure Endless Lockdowns
The permanent damage to China’s economic future can be seen not just in the factories that are being shuttered again and again and again in cities such as Wuhan and Yiwu, but also in the businesses that are simply throwing in the towel and taking their business elsewhere.
Cosmetics giant Maybelline is closing most of its stores in China, largely due to the disruptions of Zero COVID.
ccording to mainland media reports, the makeup brand “Maybelline New York,” which belongs to the L’Oréal Group, is gradually closing offline shops across the country. After that, most offline shops will be closed, but counters in the beauty collection store Watsons will remain.
Maybelline has had a presence in China since the mid 1990s, but the prospect of recurring closures is proving a strong disincentive to remaining in China.
Nor is Maybelline alone. South Korean cosmetics firms Amorepacific and LG H&H are also pulling out of China due to Zero Covid, accelerating their efforts to further penetrate North American markets instead.
On the manufacturing front, Apple is for the first time kickstarting production of its latest iPhone model, the iPhone 14, in India as well as China. Previously the Indian production lines ran at least one quarter behind China.
The development came to light through noted Apple analyst Ming-Chi Kuo who took to his Twitter account to share the news. Kuo has been a reliable source when it comes to developments related to Apple and its products.
In his tweet, Kuo stated that based on his survey, Foxconn’s iPhone production site in India will ship the new 6.1-inch iPhone 14 along with China for the first time. He also said that India was one quarter or more behind in the past.
Between Zero COVID and rising tensions with China, Apple is seeking to make its supply chains a bit more resilient against future disruptions—and that means less business being done in China and with China in the future.
Other businesses are similarly viewing China with greatly reduced expectations. Shoe company Aididas once viewed China as its leading market, but no longer.
In 2016, when China was its fastest growing and most profitable market, Kasper Rorsted, the chief executive at Adidas, declared that the country was "the star of the company." Adidas invested aggressively to expand its foothold. It went from 9,000 stores in China in 2015 to its current 12,000, though only 500 are operated by Adidas. Then the music stopped.
After initially projecting that sales in China would accelerate this year, Adidas ratcheted down expectations in May as COVID-19 lockdowns continued to spread. The company said it now expects China revenue to "decline significantly" and that a sudden rebound is unlikely.
Zero COVID has also left China without a good response to the restrictions being advanced by US trade legislation such as the recently passed CHIPS act, which prohibits companies which receive US investment from expanding or upgrading Chinese facilities for ten years.
This is prompting two major South Korean chip vendors, Samsung and SK Hynix, to accelerate on a pivot from China to the US for future chip production.
The Chips and Science Act passed by Congress last week, will pour A$75 billion into chip manufacturing companies operating in the US. One of the stipulations for receiving these funds is that recipients cannot expand or upgrade their Chinese chip operations for 10 years.
This will lead Samsung and SK Hynix to pivot chip manufacturing to the US.
“The guardrails against China will accelerate Korean chipmakers’ shift to the US from China,” said Kim Young-woo, head of research at SK Securities.
“They have been rethinking their strategies because of the US-China technology war, and they are now tilting further towards the US because of geopolitical risks.”
Between rising hostility with the US and the constant threat of business closer due to Zero COVID restrictions, China is no longer an economically viable market.
Xi Jinping gave a clear message to the world with the Zero COVID policy: China is closed for business. The world’s industries are taking the hint.
People can recover from COVID. China’s economy is not likely to recover from Zero COVID.
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