The Daily Populous Wednesday March 19th, 2025 day edition
Authored by noahpinion.blog and submitted by SolRon25

Photo by Encik Tekateki via Wikimedia Commons

Under our Dear Leader President Trump, the United States is hard at work destroying its place in the world economy. But in the rest of the world, globalization is still proceeding apace. In the 2000s and early 2010s, when you said “globalization”, it often just meant “moving manufacturing to China”, but that’s pretty much over; inbound foreign direct investment to China has fallen off a cliff, and companies are now trying to pull their money out. Blame a combination of rising labor costs, the closing off of the Chinese domestic market, and “de-risking” over fears of war.

But this doesn’t mean that China is going to simply wall itself off from the rest of world and disappear. Far from it. Instead, China is going to shift from being a destination for direct investment to being a source of investment. A whole bunch of Chinese companies are going to build factories (and offices) in other countries.

In fact this is already happening, in a big way. Kyle Chan (whose blog I highly recommend, by the way) has a truly excellent post about this trend:

Chinese companies are racing to build factories around the world and forge new global supply chains, driven by a desire to circumvent tariffs and secure access to markets. Chinese companies have been building manufacturing plants directly in large target markets, such as the EU and Brazil. And they’ve been building plants in “connector countries” like Mexico and Vietnam that provide access to developed markets through trade agreements. Morocco, for example, has emerged as a surprisingly popular destination…due to its trade agreements with both the US and the EU…Countries across the developed world and the Global South alike are eager for Chinese companies to build factories in their markets, with the promise of new jobs and new technology.

Kyle has a great map showing just how global this investment boom is:

It can be a little difficult to see this boom in the overall numbers. As Rhodium Group reports, a large portion of China’s official completed outbound investment is actually “phantom FDI” — Chinese companies keeping their earnings outside of China by pretending to do FDI. And when you look at FDI announcements, the total is still way below where it was in the mid-2010s:

But this overall decline masks a very important shift in the type of FDI China is doing. Up until the pandemic, China’s foreign investment was focused more on acquiring foreign companies, usually in developed countries — basically, Chinese companies bought American/European/Japanese/Korean companies so that they could A) get their technology, and B) use them as local beachheads to sell stuff to rich consumers. This was the big boom of the mid-2010s.

Since 2022, however, China’s focus has shifted dramatically to “greenfield” investment — Chinese companies are building their own offices and factories overseas:

Most of this new wave of greenfield FDI is in the auto and energy industries:

Basically, the Chinese auto and battery industries are going global. In addition to his post, Kyle has a great thread about the expansion plans of BYD, China’s flagship automaker and in many ways its single most impressive company.

Greenfield FDI is in many ways more of a boon to the receiving country than M&A; when you build new factories and offices in a country, it creates new jobs, and often transfers new technologies, instead of just changing the ownership of an existing business. And unlike M&A, greenfield FDA tends to target developing countries, because it’s usually at least partially about reducing costs.

So it makes sense for developing countries around the world to be a lot more excited about the flood of Chinese investment now than back in 2016. And we should also expect this wave to be more durable than the previous one, because it’s driven by Chinese costs and by mature Chinese companies with a long-term stake in overseas markets.

Generally speaking, this is how economic development is supposed to work. As countries get richer, their costs go up, and they want to move production to cheaper locations. China was the cheap place to make stuff 20 years ago; now, it’s places like Vietnam, Indonesia, and Morocco. Like a flock of geese, manufacturing companies tend to fly from one country to another, helping each one industrialize along the way.

Also, it’s easier to sell products in a country if you also produce those things inside that country — transport costs are lower, you can get a better understanding of the local market, and you can more quickly respond to local changes in demand, policy, and so on. And on top of that, there are now a bunch of tariffs to consider — Europe will be much friendlier to Chinese companies’ products if those products are made in Europe.

So we should generally view China’s outbound investment boom as a great thing for the world. It’s helping to industrialize poor countries like Indonesia and Morocco, and to diversify and technologically upgrade the economies of middle-income countries like Brazil, Turkey, Mexico, and Thailand. Chinese-led globalization is looking like a positive alternative to America’s bizarre, ideologically-motivated retreat from the world economy.

But there are signs that China will not be as friendly and beneficent a globalizer as the U.S. was in the 90s and 2000s. Kyle reports that China is trying to isolate the world’s biggest and most important developing country from its new economic world order:

Beijing is trying to shape the global expansion of Chinese manufacturers, including which countries they invest in and how. Beijing is encouraging Chinese companies to build plants in “friendly” countries while discouraging them from investing in others in a kind of “industrial diplomacy.”…India represents the most striking case of Beijing’s effort to shape the international behavior of Chinese firms…[A]cross a number of industries, Beijing seems to be discouraging Chinese firms making future plans to invest in India while also limiting the flow of workers and equipment… Beijing appears to be limiting Apple’s manufacturing partner Foxconn from bringing Chinese equipment and Chinese workers to India. Some of Foxconn’s Chinese workers in India were even told to return to China. This informal Chinese ban extends to other electronics firms working in India…Beijing has told Chinese automakers specifically not to invest in India…China has been reportedly blocking the export of Chinese solar equipment to India…[Tunnel boring machines] made in China by Germany’s Herrenknecht for export to India have been reportedly held up by Chinese customs.

Why is China doing this? One possible reason is geopolitical spite; as Kyle notes, China also appears to be limiting investment into the Philippines, with whom it has a territorial dispute. China also has a border dispute with India. And to be fair, not all of the chill is coming from China; India’s leaders have also blocked some Chinese investments.

But it’s fairly obvious there’s something more strategic going on here — China doesn’t want to build up the manufacturing capabilities of its biggest potential rival.

India is now the world’s most populous country, having surpassed China a couple of years ago. Its GDP is growing faster — it grew 6.5% in 2024 and 9.2% in 2023, significantly faster than China. And as the Wall Street Journal reported back in 2023, it’s been making a push to become a global manufacturing hub, much as China did in the 2000s:

Western companies are desperately looking for a backup to China as the world’s factory floor, a strategy widely termed “China plus one.”…India is making a concerted push to be the plus one…Only India has a labor force and an internal market comparable in size to China’s…Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past…[India] scored a coup with the decision by Apple to significantly expand iPhone production in India, including expediting the manufacturing of its most advanced model… [A]fter decades of disappointment, [India] is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s…The biggest gains have been in electronics, where exports have tripled since 2018 to $23 billion…India has gone from making 9% of the world’s smartphone handsets in 2016 to a projected 19% this year… Foreign direct investment into India averaged $42 billion annually from 2020 to 2022, a doubling in under a decade.

India’s electronics sector has especially taken off, helped by specific government incentives and by Apple’s decision to locate much of its production in the country.

India still has some poorly designed policies that are holding back its manufacturing industry — in particular, tariffs on imported components that make it hard for India to do the kind of assembly work that propelled Chinese growth in the 2000s. But the country’s infrastructure has improved by leaps and bounds, and the government has made some progress in reducing red tape. The government should build on that momentum by reducing burdensome regulations even more, by improving education and labor mobility, and by pivoting from protectionism to export promotion.

But the most important reason companies want to make things in India isn’t low labor costs — it’s the lure of the company’s domestic market. Putting factories in India means getting a direct line to 1.5 billion people, whose incomes are growing quickly.

Remember, scale matters in manufacturing. The more units you can ship, the lower your costs go, and the more competitive you become. It’s going to be a while before Indians can all afford the latest and best electronics and cars and appliances, but soon they’ll be able to afford unbelievably huge numbers of the pretty-good stuff. Any company that cashes in on that demand won’t just get tons of revenue; it’ll also drive down its costs.

And unlike China, India probably won’t force out multinational companies once it has strip-mined them for their technological secrets. India is the great market opportunity that China never really was. Of course companies want to put their factories there, just as soon as government policy makes it feasible to do so.

At first, multinational companies will keep their best technology out of India, doing only low-value assembly work in the country. But as Indian manufacturers master those simple tasks, they will start to climb the value chain, learning how to do more complex processes and make higher-value goods. At that point it will make economic sense for multinationals to do more higher-tech stuff in India.

Eventually the Indian companies themselves will get so good that they’ll be able to create their own brands, start doing R&D for themselves, and compete on the global stage, using the advantages off scale that they get from knowing their home market better than anyone else.

This means that multinational companies naturally tend to train their future competitors. Nowhere was this effect more powerful than in China, where European, American, Japanese and Korean companies offshored production to China in the 1990s and 2000s, then found themselves competing with Chinese companies in the 2010s. Many in the U.S. now believe that allowing this was a grave strategic error.

China’s leaders probably concur with that assessment, and are determined not to make a similar error with respect to India. It would be cheaper for BYD, or CATL, or Chinese electronics companies to move their factories to India, to take advantage of its cheaper labor and huge domestic market. But in the long run, that could risk speeding up the technological development of Indian rivals to Chinese manufacturers, as well as making India itself rich enough to challenge China on the world stage.

People in China are definitely thinking about this possibility. In a great article back in 2023, Viola Zhou and Nilesh Christopher wrote about how Chinese engineers working at plants in India felt like they were training their own replacements:

Li said Chinese engineers sometimes talked about how they were working to make their own jobs obsolete: One day, Indians might get so good at making iPhones that Apple and other global brands could do without Chinese workers. Three managers said some Chinese employees aren’t willing teachers because they see their Indian colleagues as competition. But Li said that progress was inevitable. “If we didn’t come here, someone else would,” he said. “This is the tide of history. No one will be able to stop it.”

This is what Korean and German engineers working in China surely felt like in 2007 or 2012.

But it’s not just that Indian companies might one day compete with Chinese ones. In a world where economic development is relatively evenly distributed, India and China will be the most powerful countries, because they have by far the world’s largest populations. So if China wants to stay much more powerful than India, it has an incentive to make sure that economic development is not evenly distributed — that the new wave of globalization skips India entirely.

China’s leaders probably envision a new global economy in which high-value manufacturing activity resides in China, lower-value assembly work lives in other countries, and India remains a service-dependent backwater.

India, of course, doesn’t want this, and it has some powerful natural allies. Other advanced countries — Germany, Japan, Korea, France, and so on — want to avert a future where Chinese companies dominate the globe. The best way to do that is to invest in India.

The U.S., of course, ought to be India’s most important and valuable ally in this struggle. A rational and reasonable U.S. would be trying to encourage as much investment as possible in India, and to boost India’s technological capabilities and income level as fast as possible. But the days of the U.S. acting rational and reasonable are gone; at least for now, America has retreated from the world, embroiled in its own internal struggles and tearing itself apart with bizarre ideology.

So India needs to focus on partnering with the world’s other developed countries — with Japan, Korea, Taiwan, Canada, and the nations of Europe. It needs to maintain friendly and cordial relations with these countries, sign free trade pacts, reduce or eliminate tariffs on imported components, increase business-friendly policies, encourage more inbound FDI, and generally integrate itself into a worldwide bloc that includes every rich country that doesn’t want to see China rule the global economy.

The withdrawal of the U.S. will create headaches for India, as will China’s determination to keep Indian manufacturing down. But India still has plenty of places it can get technology and investment from. And in the long run, I believe its natural advantages will allow it to industrialize and grow rich, regardless of the forces arrayed against it.

Update: An X user who writes about Indian industrial policy wrote a very interesting thread on the topic of China’s desire to hold back Indian industrialization. Some excerpts:

Dhiraj also links to an interesting report by the Observer Research Foundation. ORF finds that Chinese companies themselves really want to invest in India, despite the fear that India will eventually become a competitor. The conclusion is that for now, economics is winning out over geopolitics:

China and Chinese enterprises are increasingly facing a dilemma vis-à-vis India. If Chinese enterprises pull out of India, as domestic public opinion demands, it will not only hit China economically, but will also amount to a triumph of India’s Atmanirbhar initiative, which attempts to reduce India’s dependence on China. The bigger apprehension for China is that India’s experience may serve as a template for other nations that want to reduce their dependence on China, and facilitate the rise of a US-Europe-India industrial cooperation model that bypasses China. On the other hand, if Chinese enterprises choose to stay in India, it is feared that they will be forced to contribute to the country’s economic take-off, helping it grow into another world factory and replacing China as a global manufacturing hub. Whatever these companies earn in India, they might be forced to spend in India without being able to repatriate the profits home. So far, Chinese enterprises have been reluctant to give up on the Indian market. Faced with various bans in Western markets and sluggish domestic consumption, they seem to have little choice but to prioritise India and engage in a long-term game with the Indian government.

From the standpoint of Indian industrialization, this is very encouraging. The combined lure of India’s workforce and market is just too strong for even China to fully resist — at least, for now.

Linny911 on March 19th, 2025 at 07:51 UTC »

The CCP worries about quenching its thirst by drinking salty water bottles supplied by India the same way it supplied salty water bottles to the West who wanted to quench their thirst. The thing with best fake smilers is that they constantly worry about getting best fake smiled themselves.

It is not looking to make the mistake with India the same way the West did with it, who are now paying the high price of cheap goods that could've been sourced elsewhere.

ImperiumRome on March 19th, 2025 at 06:40 UTC »

Kinda odd title, "kneecap India", uhmm China stops Chinese firms from moving to India, just like ... US stops American firms from outsourcing to China ?

But anyhow I hope India succeeds, but from what I've read, Indian labor skill isn't up to par, even to Vietnam let alone China, and just leave a lot to be desired. A few years ago when Foxconn (or maybe someone else) moved part of its production to India, it found out the failure rate is significantly higher than elsewhere.

Edit: found the article

https://www.firstpost.com/world/apples-india-production-faces-quality-issues-about-50-per-cent-of-iphone-housings-produced-rejected-12170362.html

SolRon25 on March 19th, 2025 at 05:37 UTC »

SS: authored by Noah Smith - Chinese companies are racing to build factories around the world and forge new global supply chains, driven by a desire to circumvent tariffs and secure access to markets. Chinese companies have been building manufacturing plants directly in large target markets, such as the EU and Brazil. And they’ve been building plants in “connector countries” like Mexico and Vietnam that provide access to developed markets through trade agreements. Morocco, for example, has emerged as a surprisingly popular destination…due to its trade agreements with both the US and the EU…Countries across the developed world and the Global South alike are eager for Chinese companies to build factories in their markets, with the promise of new jobs and new technology.

Beijing is trying to shape the global expansion of Chinese manufacturers, including which countries they invest in and how. Beijing is encouraging Chinese companies to build plants in “friendly” countries while discouraging them from investing in others in a kind of “industrial diplomacy.”…India represents the most striking case of Beijing’s effort to shape the international behavior of Chinese firms…[A]cross a number of industries, Beijing seems to be discouraging Chinese firms making future plans to invest in India while also limiting the flow of workers and equipment…

Beijing appears to be limiting Apple’s manufacturing partner Foxconn from bringing Chinese equipment and Chinese workers to India. Some of Foxconn’s Chinese workers in India were even told to return to China. This informal Chinese ban extends to other electronics firms working in India…Beijing has told Chinese automakers specifically not to invest in India…China has been reportedly blocking the export of Chinese solar equipment to India…[Tunnel boring machines] made in China by Germany’s Herrenknecht for export to India have been reportedly held up by Chinese customs.

Western companies are desperately looking for a backup to China as the world’s factory floor, a strategy widely termed “China plus one.”…India is making a concerted push to be the plus one…Only India has a labor force and an internal market comparable in size to China’s…Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past…India scored a coup with the decision by Apple to significantly expand iPhone production in India, including expediting the manufacturing of its most advanced model…

[A]fter decades of disappointment, [India] is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s…The biggest gains have been in electronics, where exports have tripled since 2018 to $23 billion…India has gone from making 9% of the world’s smartphone handsets in 2016 to a projected 19% this year…

Foreign direct investment into India averaged $42 billion annually from 2020 to 2022, a doubling in under a decade.