Global Sources
SmartChinaSourcing.com
Ready to import from China? Find verified suppliers on Global Sources.
Share / Recommend:

Challenges at home drive China plants overseas

Beset by rising costs, the labor shortage and policies discouraging low-value industries, China's export manufacturers are setting up production lines in Southeast Asia. But relocation has its disadvantages.

An increasing number of China companies are constructing factories overseas, mostly in Vietnam and Indonesia, to take advantage of lower costs and more favorable trade policies there. Although the exact number of factories that have established offshore factories is not available, many enterprises manufacturing household appliances, automobiles, TV sets, footwear, textiles and apparel have made the move in recent years.

Challenges at home drive China plants overseas

The Texhong Textile Group, for instance, set up a textile factory in Vietnam in 2006. The large supplier of cotton textiles rakes in $570 million in combined sales annually. A year later, one of China's major LED lighting suppliers, Neo-Neon LED Lighting International Ltd, built a 2,000-worker factory in Vietnam. In 2008, China's largest manufacturer of air conditioners, Zhuhai Gree Electric Appliances, Inc., constructed a production facility with an annual capacity of 200,000 units, also in the Southeast Asian country.

Pegasus Footwear Co. Ltd is now considering building a factory in Vietnam or Indonesia, citing lower production costs as the main reason. Vietnam has a relatively mature footwear industry and some parts of the supply chain are well-developed. Since shoe manufacturing does not require sophisticated technology, the low cost of labor in Vietnam is an enticing reason to transfer production there.

According to Aroma Consumer Products (Hangzhou) Co. Ltd, which has a candle factory in Vietnam, monthly salaries in the Southeast Asian country are just three-fifths of those in China. In fact, an assembly-line worker in Vietnam earns roughly $101 per month, 53 percent lower than in China, said Khiem Vu, Vietnam-based project manager of Kearny Alliance, a nonprofit organization that helps in trade, business education, training and applied research.

Monthly salaries in China have increased nearly 27 percent over the past year in many industries, particularly for skilled workers. In some rural areas, wages have risen 15 percent for assembly-line staff, which resulted in a 5 percent increase in export quotes.

"If you look at the statistics of labor costs in China between 2006 and 2010, you would see an explosion of costs from around 600 yuan per month in 2006 to 1,200 yuan per month in 2010," said Danny Friedmann, IPR consultant in China and editor of IP Dragon, a blog about IP issues in the country. "The strikes at factories such as the Honda suppliers and the suicide drama at Foxconn pushed up labor costs further."

Economist Tom Orlik believes that as labor and other costs increase in China, the appeal of the eastern coast as a location for factories will decline. That means there will be more investment overseas and in less expensive inland provinces. Orlik also writes for China Translated, a blog discussing the country's economic and political situation.

More than just lower wages

But there are other factors driving companies to build offshore factories. For instance, despite higher monthly salaries, the labor shortage remains a problem in China. The pressure to find sufficient manpower is one of the reasons Neo-Neon decided to relocate some production lines to Vietnam. Apart from being able to find enough workers, the company was able to save on electricity costs as power charges in Vietnam are 40 percent lower than in China.

The yuan's appreciation is also intensifying the pressure to keep manufacturing expenses low in China. The currency started strengthening in April and makers are concerned it will continue to climb up in value in the next few years.

Business professor and China Challenges blogger Brian Schwarz believes avoiding trade sanctions is another reason that has led suppliers to relocate some manufacturing offshore. China is the biggest target of anti-dumping investigations from various importing countries. This year, the EU imposed a 16.5 percent duty on China-made leather shoes. Footwear exported from ASEAN-member countries, meanwhile, are only levied 10 percent.

To avoid EU trade sanctions, Dongguan Huabao Shoes Co. Ltd set up a shoe factory in Vietnam five years ago, back when the country did not have to pay anti-dumping duties. The facility now produces 80,000 pairs monthly.

The push to relocate does not only come from the pressure to keep costs low and avoid trade sanctions, but also from Beijing itself. The national government is encouraging suppliers to expand their business overseas, particularly those engaged in low-value manufacture, and highly polluting and energy-consuming industries.

"China's government has been very clear on this," said Dan Harris, lawyer and writer of the China Law Blog. "It wants to see China moving up from low-end, high-pollution products and it has instituted policy after policy to help bring this about. And slowly but surely it is working. It is definitely much tougher now than it was five years ago to get approval to go into China with a low-end, high-pollution factory. It is also considerably more expensive to have such a factory in China today than it was five years ago. The tax subsidies are gone. Wages are up. Many of these sorts of companies are looking elsewhere."

Finance, politics and China specialist Greg Anderson thinks it would probably be unacceptable to send jobs abroad and leave workers in the country unemployed. Anderson, who also manages ChinaBizGov, a blog discussing business-government relations in the Greater China region, believes political reasons have kept many SOEs from building factories overseas.

The downside of offshore relocation

Despite the obvious advantages, there are concerns over infrastructure, supply chain, worker skills and cultural differences in Vietnam, Indonesia and other countries in Southeast Asia.

"Vietnam and Indonesia can produce cheaper, but Indonesia's political climate is not very stable and the infrastructure of Vietnam is less than perfect," Friedmann of IP Dragon said.

Dongguan Huabao admits production efficiency is lower than expected. Raw material deliveries, especially those that need to come from China, take longer. In addition, workers in China are faster, capable of finishing the tasks of two Vietnam hands. Cultural differences, including the language barrier, affect efficiency as well.

In addition, despite lower electricity costs, Vietnam has more power outages than in China. Moreover, instead of finding workers in job markets or just outside the factory gates, employers need to go to the countryside for recruitment.

 


Note: This article "Challenges at home drive China plants overseas" 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.

Add comment


Security code
Refresh

Stay Connected

Get Import from China Headlines by E-mail

Attend the Global Sources Summit


  • For online & Amazon sellers
  • Interactive training led by sourcing & Amazon experts
  • Learn how to source profitably, avoid pitfalls
  • April 17 - 19, 2017 in Hong Kong
  • Co-located with Mobile Electronics and
    Gifts & Home shows


Learn More

Join the Smart China Sourcing Facebook Group
  • Connect with other buyers
  • Ask questions
  • Get advice from experts


Join Group

Join Global Sources on Facebook

Be our fan now for the latest sourcing news, practical sourcing guides and expert advice.

Follow Global Sources on Twitter

We'll keep you updated with tweets on sourcing news, trade resources & more.