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High China costs encourage overseas expansion

Suppliers have been moving some production to countries where labor and utility expenses are lower. Now, their long-term customers are buying directly from these offshore plants.

The rising cost of manufacturing has encouraged some China makers to build factories in countries with less expensive production outlay. It has also resulted in buyers placing orders directly at those offshore facilities.

High China costs encourage overseas expansion
LED products, including downlights, from Neo-Neon's Vietnam factory are priced 15 percent lower than those from the China facility.

This is true particularly for suppliers that have formed long-term relationships with customers. The possibility of lower export prices and fewer trade restrictions led such clients to source from China makers' overseas factories, which are often located in Southeast Asia or Africa. Countries in these regions typically have lower import taxes and manufacturing costs.

For instance, the US imposes a 37.1 percent import tax for candles purchased from China, but only 5 percent when procuring from Vietnam. China-made LEDs have a 6 percent levy, but those from Vietnam are duty-free.

Further, monthly salaries in Vietnam are three-fifths of what China workers receive. The country does not have labor recruitment problems as well.

LED maker Neo-Neon LED Lighting International Ltd is among the China manufacturers that moved a few production lines to Vietnam. The company sometimes suggests sourcing from the offshore facility to long-term clients as the quality is the same but export prices are up to 15 percent lower. This is because both factories adopt the same technology, raw materials and management systems. The only drawback is that shipping from Vietnam may take about five days longer. Hong Kong-based logistics and container transport company OOCL, for instance, needs 13 to 15 days to ship from Shenzhen in Guangdong province to California in the US. Shipping from Ho Chi Minh city in Vietnam, however, takes 15 to 18 days.

Neo-Neon's Vietnam factory now registers $50 million in annual sales, roughly one-third of the China facility's revenue.

Importing garments and textiles from Vietnam can be 15 to 20 percent less expensive as well. Since 2006, suppliers have been gradually losing orders to factories in Vietnam, Burma and Bangladesh because of the lower costs there. To recover sales volume and capture orders from buyers looking to source from lower-cost centers, China makers have started building factories in these Asian countries.

Smaller makers tend to lack the capital to construct plants overseas. Most that do are large enterprises that have been in the business for more than three years. The offshore factories are often large facilities with at least 500 workers.

The Hazan Group, one of China's major footwear manufacturers, has nine production lines at its overseas factory, which turns out 15,000 pairs daily. About 80 percent of revenue comes from this facility.

Cultivating a long-term presence

Once overseas factories have been set up, China companies naturally invest a substantial amount of time, money and effort into ensuring the facilities' success. This is done not only during the initial period, but even years after the factory started operations as well.

By moving some production to Vietnam, Neo-Neon has been able to save 60 percent in labor costs and 40 percent in water, electricity and rent. The company uses these cost savings to boost the manufacturing efficiency at the offshore factory, including purchasing more automated equipment and staff training. This comes particularly since workers in Vietnam do not complete tasks as fast as their counterparts in China. Skilled workers in China, for example, can finish 1,000 basic-style jackets in five to 10 days. Those in Vietnam or Cambodia need 10 to 15 days.

Communication lines are kept open as well to encourage workers to suggest ways to reduce wastage and streamline processes.

Those that have operated overseas factories for three to five years are now working on building and fortifying the supply chain by forming an integrated raw materials network with Vietnam, Cambodia and Thailand. Presently, such countries do not have a well-established supply chain.

Some suppliers are also sending their experienced engineers to the offshore facilities to help oversee compliance with international quality management standards.


Note: This article "High China costs encourage overseas expansion" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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