What does China ‘de-risking’ actually mean?

This is an audio transcript of the FT News Briefing podcast episode: ‘What does China “de-risking” actually mean?’

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Marc Filippino
Good morning from the Financial Times. Today is Thursday, September 28th, and this is your FT News Briefing. Western companies are trying to protect their interests from China. And Chinese companies are insulating themselves from the west. We’ll look at why Morocco has become a popular alternative. But first, mergers and acquisitions are in a rough spot, but it’s not all bad. I’m Marc Filippino, and here’s the news you need to start your day.

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Dealmaking has gone comatose lately. Mergers and acquisitions are having their worst third quarter in over a decade. That’s thanks in large part to higher interest rates. They’re driving up the cost of borrowing. A tougher regulatory market isn’t helping things. The UK and the US have been giving Microsoft a hard time for its planned $75bn bid to buy Activision Blizzard. Now there are a few bright spots. Last week, the US tech company Cisco agreed to buy the software maker Splunk — Cisco’s largest acquisition ever. And earlier this month, two of the world’s largest packaging companies, WestRock and Smurfit Kappa, merged to create a global group. It’s worth almost $20bn.

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China is a difficult place for western businesses to operate these days. Washington and Beijing’s less-than-stellar relationship is forcing western businesses to find workarounds, and a lot of them are choosing to de-risk from China. Yuan Yang is the FT’s Europe-China correspondent, and she’s been looking at some of the strategies western companies are using to be less reliant on Beijing. Hey, Yuan. How are you? 

Yuan Yang
Hi. I’m well. How are you doing? 

Marc Filippino
I’m doing well, thanks. Yuan, can you explain what de-risking is and what’s the motivation behind it? 

Yuan Yang
De-risking is a term that’s emerged over the last year, mostly from Europe, to describe a slightly different approach to the term that was being used in the US before, which is decoupling. And, whereas decoupling was seen to mean a complete breaking of ties with China, something that’s really economically impossible, de-risking is an attempt to change the terms of the discussion, not around kind of how much trade and how much business we have with China, but what kind of business and how risky is that business. 

Marc Filippino
OK, so what are some of the strategies companies are using to protect their interests? 

Yuan Yang
So divestment is one strategy and that means either shifting existing investment out of China or simply making new investment in other countries without reducing their China presence. Apple has been one of the companies that has been divesting, shifting its production from China to other neighbouring countries in south and east Asia. For other companies, though, they’ve quite counter-intuitively almost made themselves more Chinese. They’ve localised themselves in China. For example, the drugmaker AstraZeneca is planning to spin out its China arm and to list it in Hong Kong. And that’s partly to ward off the risk of China starting to regulate foreign companies in a harsher way in China that would make it harder for a foreign drugmaker to do business in China. 

Marc Filippino
So it sounds like companies are de-risking in two main ways. They’re shifting investment out of the country or they’re isolating themselves within it. What are the downsides? 

Yuan Yang
I mean, the whole enterprise of trying to shift your supply chain from a, just in time, you know, maximum efficiency model is extremely costly. So, for example, I spoke to the German machinery association, and they found that more than a third of their members have been looking for alternative suppliers so they can serve various markets with kind of neutral or politically acceptable products, so products without Chinese components for US customers, products without US components for Chinese customers. And then right now for European customers, they can kind of have a mix of US and Chinese components, but that may well shift in the future. So the biggest downside to all of this is simply the duplication and cost that it requires to move from this kind of very streamlined and low duplication supply chain to a scenario where companies accept actually there may be unforeseen risks, delays, logistics, political issues that mean we have to have more than one copy of our production plan. 

Marc Filippino
Yuan, it sounds like this could impact a lot of countries besides the US and China. Are we at a turning point here of how global trade works? 

Yuan Yang
That’s a really good question because one of the criticisms of de-risking says that, yes, you can shift your assembly of a final product outside of China, but your components will still be coming from China. I think what would happen over time if these trends of divestment and alternative supply chains continue is that we would see more and more value added in the supply chain done outside of China. And that’s actually quite a huge opportunity for developing countries, particularly those around China and south-east Asia, that have missed out on the manufacturing boom that China greatly enjoyed from the nineties onwards. And that could be, you know, good news story for global development. 

Marc Filippino
Yuan Yang is the FT’s Europe-China correspondent. Thanks, Yuan. 

Yuan Yang
Thank you. 

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Marc Filippino
So you just heard how western companies have been de-risking from China. But a similar process is going on for Chinese businesses. They’re looking for places to invest besides the US and Europe. Take the Chinese company CNGR. It supplies materials for batteries. And while it might have once invested in the US or Europe, Morocco has become an attractive alternative. Harry Dempsey, the FT’s commodities correspondent, is here to talk to me about it. Hey, Harry. 

Harry Dempsey
Hi there. 

Marc Filippino
So tell us about CNGR. What exactly does it produce and how is it looking to expand? 

Harry Dempsey
So CNGR produces these things called precursor materials for electric vehicle batteries, and they are essentially very specialised chemicals that go into the batteries. So they take the raw materials that are processed, such as lithium, nickel, cobalt, and they then turn that into a compound of materials that can then be used in electric vehicle batteries. So now they are looking to build this plant in Morocco, which could supply enough material for 1mn electric cars, and it’s a $2bn investment. But I think they are saying, look, if this goes well, we could expand this even further. So this is a bit of a sort of litmus case for Morocco and how it will fare as an investment location for Chinese companies that want to build a battery supply chain. 

Marc Filippino
Yeah. And why Morocco? I mean, what’s the appeal for this type of investment? 

Harry Dempsey
So I think there’s three main factors at play here as to why they’ve gone for Morocco, which, you know, it doesn’t seem like an obvious choice. One is that Morocco is a free trade partner of the US, and therefore, you know, you can invest in that country and then supply raw materials from there. So that’s a great sort of sell for Morocco. The second thing is that the US and the EU have become increasingly hawkish towards China. If you are a Chinese company, it’s just not certain whether policymakers will allow you to invest in those regions. So Ford and CATL have been bogged down in a lot of political scrutiny over whether planned investment into Michigan will be allowed or not. And so I think others are seeing that and thinking, God, that looks too risky for us to countenance. 

Marc Filippino
So Chinese companies are doing their own de-risking, kind of like the US companies we just talked about?  

Harry Dempsey
Completely. And then I think the third factor is some of the resources that Morocco is endowed with. One is phosphate, and that is increasingly important for cheaper, lower-range batteries, which are very popular in China. And so if you’ve got the resources there, it’s a great place to then, you know, set up the rest of your operations because you’re near the resources that you need. 

Marc Filippino
Now, Harry, to what extent do you see CNGR as part of a wider trend of companies doing the same thing, you know, de-risking from the west? 

Harry Dempsey
Well, for a while now, people have been talking about Morocco’s promise, but we actually didn’t see much happen. But then just in one week, we had CNGR announce its investment, but we also had LG Chem, which is a South Korean company together with Huayou Cobalt, a Chinese company, say they were going to invest in Morocco. And so then you’re starting to see something of a trend. And it also plays into what you’re seeing in other parts of the world. So, for example, in South Korea, a lot of the Chinese companies are trying to essentially replicate their Chinese supply chain in South Korea, which they will then use to supply the US market. So it’s a really interesting trend that we’re seeing in terms of global flows of capital and where people are setting up supply chains. 

Marc Filippino
That was Harry Dempsey, the FT’s commodities correspondent. Thanks, Harry. 

Harry Dempsey
Thanks a lot. 

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Marc Filippino
Before we go, we want to give a huge shout out to some FT podcasts. Behind The Money, Tech Tonic and FT Weekend have all been nominated for Lovie Awards. How cool is that? And if you like those podcasts, they could use your help. Just click the link in our show notes to learn how to vote for my awesome co-workers and their excellent work.

You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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