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Low costs ease transfer worries

Savings could run into millions of dollars for makers planning to move production to India.

Comparatively lower costs are working to India's advantage as it develops into a suitable alternative for international businesses looking to relocate factories from traditional Asia hubs.

The country's manageable salary expectations, for instance, can help offset termination expenditure should manufacturers opt to close down and shift facilities to control outlay and sustain margins. In China, a significant portion of moving costs goes to compensation for workers who are displaced as a result of the transfer. China has been beset in past months by a shortage of personnel and rising wages.

Chris Devonshire-Ellis examined recently the basic expenses of a typical factory in Dongguan in China's Guangdong province against similar plants in Chennai, southeast India. The two cities were selected because they attract similar backing in small-midsize manufacturing, have relatively well-developed infrastructure and are export-oriented hubs for foreign investment.

For the comparison, Devonshire-Ellis, principal and founding partner of Dezan Shira & Associates, considered among others the differences in salary structures of a 300-worker midsize factory in Dongguan and Chennai.

Estimates for the former hub show expenditure for wages and mandatory welfare benefits reaching $208,085 monthly, while rent is at $7,352. On an annual basis, such enterprises disburse more than $2.6 million.

A plant in Chennai, in contrast, would require $345,782 every year. Worker-related expenses there total only $23,400 monthly.

And with salaries in Dongguan climbing about 15 percent per annum for the past three years, the gap between compensation there and Chennai is expanding further. Wages in the latter have been increasing roughly 5 percent.

"In terms of the salary, welfare and rental comparisons, Dongguan is over seven times more expensive than a similar operation in Chennai," Devonshire-Ellis said. "In the basic scenario we have demonstrated, the business would save over $2 million per annum by moving to India purely on salary, welfare and rental costs."

Termination expenses resulting from closing the Dongguan factory would be recovered in less than four months from savings generated by transferring to India, added Devonshire-Ellis. For the purposes of the comparison, severance pay was based on an average of four years of employment and totaled $626,294.

While Devonshire-Ellis recognizes there are other related expenses, including the shipment of machinery, shifting from China to India is feasible in terms of rent, salary and worker welfare. "The results demonstrate that in essence, the termination costs of staff in China should not be a deal breaker when it comes to relocation."

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates.

Richard Hoffmann of Dezan Shira & Associates China, Hoang Thu Huyen of Dezan Shira & Associates Vietnam, and Aneet Virk of Dezan Shira & Associates India also contributed to this article.

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