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Note: This article is drawn from a Hinrich Foundation White Paper entitled “A Profitable Partnership Under Stress: Why it makes sense to ratchet-down US-China trade tensions”. The white paper is based on an extended research effort undertaken by the Hinrich Foundation, which included interviews with scores of MNC executives doing business in China, as well as an analysis of publicly available financial data for 22 MNCs with substantial business operations in China. Our objective is to provide a firmer factual basis for a discussion of the US-China economic relationship. Download the full white paper report here.

When China first began opening its economy to the outside world in the 1980s, US companies viewed the country primarily as a low cost manufacturing platform. Little more than 3 decades later, it’s remarkable how much that calculation has changed. China has evolved from being a low cost manufacturing center, to an important consumer market in its own right, and now – increasingly – to a source of important technological innovation and R&D activities which support the profitability of US companies on a global basis.

US companies have integrated their operations so heavily into China, the China operations are now feeding positive contributions back into the companies’ global operations. For instance, R&D facilities in China are now producing the innovation and intellectual property which are helping companies compete around the world, not just in China. Some noteworthy examples include DuPont, and Texas Instruments.

DuPont runs an R&D center in Shanghai that serves as the main center for research, customer support, product development and materials testing in China. The R&D center originally began with a US$20 million investment in 2005 and doubled in square meters with an expansion in 2013. Tony Su, President of DuPont Asia Pacific, said a substantial amount of the company’s sales in the country come from products developed locally.

An example is a DuPont product called YO-MIX yogurt. It was designed in order to satisfy Chinese consumers love for yogurt drinks but lack of guaranteed cold storage. The YO-MIX yogurt cultures can resist post acidification at room temperature. The product has since expanded to emerging markets and is now distributed in the Middle East and Africa. The company cites it as an example of locally developed products that can generate global revenues.

Texas Instruments provides another telling example. Although TI has 15 manufacturing sites in 9 different countries, its facility located in Chengdu, China is the company’s only end-to-end wafer fabrication and assembly/test (A/T) facility. In 2013, the company said its total investment in the operations of this “world-class” facility could add up to US$1.69 billion over the next 15 years. The Chengdu plant was further upgraded in 2014 when the company announced it was adding a 300mm wafer bumping facility. The Chengdu site manufactures analogue and embedded processing semiconductors— the two products that represented 86 percent of TI’s revenue in 2016.

These companies, and more, have highly integrated R&D and manufacturing facilities located in China that are contributing substantially to their global success – an important point which should not be overlooked when reflecting on the US-China trade and economic relationship.

 

Download full white paper report

Authors

Stephen Olson – Research Fellow at the Hinrich Foundation.

Lauren Kyger – Research Associate at the Hinrich Foundation.