China prices: Moving not necessarily a solution to rising prices

By David Dayton

Making the decision to move your sourcing or manufacturing to inland China or another country requires the same kind of forethought as your original decision to come to China. And the first questions you need to ask yourself concern the overall financial viability of moving anywhere.

Really, honestly, why are you considering moving? Because you've confirmed prices are better elsewhere, or only heard that's the case? Because a competitor in your industry is suddenly doing things that are making you wonder? Because factories and industry resources are moving and you need to keep up? Because it is the popular thing to be talking about?

Honestly assess your reasons
Reasons to move should not include any version of "Because we heard it's cheaper" or "Because other companies are doing so." Before you say, "Of course I'd never do that," you need to be honest with yourself. Have you done your homework and is it really cheaper?

We have had multiple requests in the last year from people asking me if I include Vietnamese factories in the sourcing and information we provide. We often do, but I always ask "Why?" in response. Without exception, the answer has been some version of, "Because we heard it's so much cheaper there." These aren't just new buyers asking for this either. Two of these requests came from multinational companies -- companies that are buying/producing goods worth hundreds of millions dollars a year. No research, no numbers, just hearsay. Media "buzz."

There are legitimate reasons for moving, of course. And price might be the decision-maker for you. But you need to confirm all the numbers first. Other legitimate reasons include, for example, relocation of an industry, specific tax advantages in newly developed special industrial zones, or new legal, labor or environmental restrictions/advantages.

Because of the new labor law in China, many factories -- and some entire industries -- are leaving traditional export strongholds along the coast, and even China as a whole, due to increased prices and restrictions on labor. Thousands of factories have closed down in Guangdong province alone and some industries now have (or soon will have) a larger presence in Vietnam or Thailand than they had in China just a year or two ago. But not every industry or factory is moving. And lower costs alone don't always translate into an improved sourcing picture overall.

Cover all the bases
With that in mind, there are some key areas to focus on when determining which city best meets your needs:

1. Confirm that needed industrial services are on hand
Assuming you have already found the primary factory you are going to be working with, you need to scout the local support and secondary factories (sub-assemblies, components, packaging). Just because big first-movers are in a city you like doesn't mean all the resources you need are there yet.

2. Ensure a good selection of educated employees.
Smart people gravitate toward opportunities, and the majority of opportunities are still on the east coast. The standard of living is better, the facilities are better, most international companies have a presence there and so there are more jobs there. The educated in China are still mostly centered in the large cities of Beijing, Shanghai and Guangdong province. You're not going to find as many well-educated and experienced job applicants in China's second-tier cities.

3. Determine how wired you will be
Communications infrastructure, specifically Internet access and other physical services, is not always up to speed -- literally. Don't be misled by the fact that the hotel you are staying in has relatively good access. Not all office buildings or industrial zones (or individual factories) have the same physical wiring. And domestic providers are not held to the same standards as international hotels. Further, just because the local office of China Telecom ADSL or cable is telling you how fast their services may be, if your building or area is not wired correctly it may be like drinking Red Bull through a baby bottle rather than the wide-mouth can they are advertising.

4. Be comfortable with the available professional services.
While you can access lawyers from just about anywhere via the Internet, the other physical services you may need (notary public, copy centers, translators, IT, etc.) will be harder to find -- not impossible, but again, harder than in the coastal export centers.

5. Become well-versed in relevant interprovincial tariffs.
This is something to look at with China's inland, rather than when considering other countries. Interprovincial tariffs are an often overlooked problem in China. The country is much more like a group of loosely affiliated states than a unified United States. There is a great deal of regional and provincial protectionism. This translates into fees and transportation limitations on many products moving between provinces. Some items -- wood, some foodstuffs and even electronics, for instance -- are more sensitive than others. I don't know all the laws or all the restrictions, but your factory should be able to tell you what they can or can't ship to where and at what cost. Make sure you know this before you ever place an order.

Enjoy your search!
Just about every week you can find someone writing about the opportunities in the second-tier Chinese cities or lower-cost countries. But not many of these authors have been there for more than a trade show or quick trip to write a story. Make sure that if you are betting your future on a new location that you visit it first and talk extensively with foreign companies that are already established there.

Some simple starting points may be your own embassy, a local chamber of commerce, business and law blogs written by businesspeople in China, trade and manufacturing associations, sourcing Web sites and even travel agencies.

Good luck!

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Readers have left 2 comments.

 1. Sales Manager
Rick, Unregistered

David is a expert in researching China. the situation you described is correct. But for the other hand, we also recieve orders from less developed countries, such as India. And known from clients, because the product the produce in India is unqualified. they import from China, though the price is rising rapidly in China. and also the priceof similar prodcucts is also rising in India. For the world economical enviroment, it is because of the decreasing of US dollor.

 Posted 2008-07-19 16:54:59

 2. General Manager
David Levy, Unregistered

I remember when the buzz was all about moving to Sichuan, now it's Vietnam. I would venture that for most of us now manufacturing in the PRD (I run a factory in Gongguan), there are lots ways to combat rising prices before we consider the costs (many hidden until it's too late) of moving inland or further to chase cheap labor.

1. If your not lean, go lean.

2. Get more flexible in your manufacturing and materials purchasing, so you can add value (and get better margins) by quick-turning smaller orders (high mix/low volume).

3. Go JIT to reduce cash held in inventory.

4. Try widening the product mix to include more higher value added products.

David Levy
http://dlevy.com/changejunkie

 Posted 2008-10-31 15:34:45

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