How long will companies be able to afford to manufacture in China?

The answer, it seems (at first), is “not very long”:

Manufacturing wages across China have increased by 14 percent over the past year (see inside cover story), making the prospect of producing goods in nearby Southeast Asian countries such as Vietnam or in Bangladesh, Sri Lanka and even Africa seem a viable alternative.

To paraphrase the first half of the article, China is no longer a competitive manufacturing base for foreign companies.  The second half of the article goes on to agree that labor costs are not always that significant, but this viewpoint is not introduced until the second half.  Until you get there, the article seems to be telling us foreign factories to head for the door.  If you don’t read through to the surprise ending, that’s what you are left with.  It seems to be telling us foreign manufacturers that we should  consider leaving China because…

Ann Taylor and Coach are moving out to chase cheap labor in neighboring countries:

Two large US companies, Ann Taylor Stores, the women’s clothing retailer, and Coach, the luxury handbag maker, are poised to relocate production to countries, where labor rates are cheaper.

A bunch of unnamed British manufacturers are considering moving from China back to the UK.

A recent survey by EEF, Britain’s leading manufacturing association, said one in seven of its members were looking at shifting production back to the UK, fed up with problems in countries such as China.

“Getting goods of the right quality, issues such as time to market and rising fuel costs have been driving this trend,” said Lee Hopley, EEF’s chief economist.

Reading the first half of this article makes me feel like the last guest left at a party, where the hosts are starting to yawn, stretch and grouse about how early they have to get up in the morning.  They are thinking… Just get out and leave us alone!   Go to Vietnam!   Go to Africa for all I care!  Everyone else is rushing for the door, almost gone!  You brought a great casserole which everyone (including you) enjoyed, but it’s long been finished and complimented by all.  The dishes have been done (thanks for helping).  We’ve locked the liquor cabinet– no more scotch for you.  Why are you still hanging around?

If even the China Daily says manufacturers are headed for the door who am I to disagree?

Actually, the bit about Ann Taylor and Coach are from a Wall Street Journal article  U.S. Apparel Retailers Turn Their Gaze Beyond China, which  quotes executives from Ann Taylor and Coach but also from Guess, Guess and JC Penny. Looking at the original article, here’s why I wouldn’t take it too seriously:

1.  The original article was specifically about apparel retailers, not about manufacturing in general.  Apparel manufacturing has a relatively high labor content and are particularly sensitive to labor rate fluctuations.

2. Even so, most of those mentioned already had operations in neighboring countries, and were simply considering altering the mix of products made in China with those made outside China.  They were largely (not completely) discussing adjustments in strategy, not a major transition from China to lower cost counties.

3. The original WSJ article  also contains “balancing” quotes from apparel industry experts who people who believe that, even for apparel manufacturers, China is difficult to replace.

Indeed, for the money, the quality of Chinese-made goods is tough to match, and labor is just one of the costs of production. Others include the costs of raw materials like textiles, production facilities, transportation and quality control and training.

The skills of China’s labor force and its familiarity with the ways and expectations of U.S. companies, exceed that of any other Asian country, said Mr. Rubman, the retail strategist.

Vietnam has a big labor pool, but textiles aren’t as available there as in China, meaning retailers would have to ship in fabrics, said Andrew Jassin, managing director of fashion consulting firm Jassin Consulting Group.

“The only replacement for China is China,” said Li & Fung’s Mr. Darling, adding that his firm is scouting production possibilities in northern and western China. Since those areas have played only a minor role in the country’s manufacturing boom, wages there remain relatively low.

Regarding the British manufacturers who are going home, note that labor costs are not mentioned as contributing factors.  Also, note that they are only  “looking” at moving out.   It would be interesting to know more about those British manufacturers who can’t hack it here in China.  What are their quality and delivery problems, and why are they  so intractable?

Once again, the second half of the article tells us why we needn’t be rushing for the door just yet, but that that viewpoint is not evident in the articles introductory paragraphs.  Unfortunately, I think that a large percentage of the readers, having their pre-existing premise validated, won’t make it to the happy ending.

Share/Save

Anyway, the money quote comes at the end of the article:

In the question stated above, “cheap” is a misleading word. The more productive China becomes, the cheaper its labour will be, at least relative to what you get.

Share/Save

Just wanted to share some of the main points:

• Yes, the fact that there were strikes is significant. But no, the actual effect of those strikes has not been significant because of their limited scope.   (It is, however, important to get at the underlying reasons for those strikes.)

• Yes, workers are becoming more demanding and more vocal.

• [My favorite] Yes labor costs are rising but no, this is not the end of China as a production base.  This is because rising labor (and other) costs are not a new phenomenon, and because labor costs constitute a fraction of overall manufacturing costs in China.  Some manufacturers may move inland or out of China, but…

“China is still an attractive option for most companies looking for an effective manufacturing base, although many companies have been pursuing a China plus one or a China plus two strategy in recent years to diversify their manufacturing operations,” said Geoffrey Crothall of the China Labour Bulletin in Hong Kong, which advocates for improved workers’ rights.

“I really don’t think we’re going to see companies suddenly leaving China en masse.”

• Yes, in some cases supply chains may be impacted, but no,  it doesn’t look like a significant issue with regards to stocking strategies.

• Yes,  the Chinese government will likely to play a greater role (by more stringent enforcement of labor laws,  and by encouraging collective bargaining)  in balancing the needs of a more assertive workerforce with those of industry.  But no, it will not allow independent labor unions.

Share/Save

A pair of recent articles in the South China Morning Post offer some more perspective on the much-predicted exodus of manufacturing from the Pearl River Delta and why, for the most part, it just ain’t gonna happen. (a paid subscription is required to access SCMP articles, but a 14-day free trial is available).

One article, Minimum wage rise doesn’t worry all China plants, is mainly about how minimum wage hikes don’t affect those who aren’t complying with the minimum wage law.  It also also discusses the how two manufacturing groups well established in the PRD,  garments and toys, are likely to react to rising labor costs.

First, according to the article, garment makers (40% labor content) gotta hit the highway…

Willy Lin Sun-mo, vice-chairman of the Hong Kong Textile Council, said: ‘Now, setting up a factory 500km from Hong Kong is okay, but several years ago, most Hong Kong factories were in a 100km radius from Hong Kong. The only way is to move further away. There is nothing much we can do. Rules are rules, so Hong Kong manufacturers have to pay.’

Hong Kong garment factories had difficulty paying ever increasing wages, as labour accounted for 40 per cent of the cost of a garment, he said. ‘If all garment factories have to raise salaries by double digits overnight, how can they compete?’

but toy makers  (20% labor content) ain’t going nowhere…

A Hong Kong toy executive said he knew of a handful of toy factories that moved from Dongguan to more remote cities in Guangdong this year, namely Heyuan, Shaoguan and Qingyuan.

Toys are among Hong Kong’s biggest export industries and most toy factories are in Guangdong.

The impact of the minimum wage increase had not been too severe on Hong Kong’s toy industry, said the executive. Labour accounted for 20 per cent of the cost of making a toy, he estimated.

The toy industry was informed of the wage rise months ago, so they factored it into the cost of their products, said the executive. ‘We will raise the prices of our toys by about 5 per cent. Customers have to accept the higher prices because all toy factories in China are affected.’  [Note from DJL:  I wonder how much of that 5% increase could be offset by gaining efficiencies in the manufacturing processes.]

The second article, Factories likely to stay in Pearl River Delta,  shows why  moving factories out of the PRD just to chase cheaper labor probably doesn’t make economic sense.  Among the economists cited are Paul Krugman.

US economics Nobel Prize winner Paul Krugman, in his book Geography and Trade, says it is often uneconomical to move manufacturing from costly but established manufacturing coastal areas to lower-cost distant locations.

It is more profitable for manufacturers to keep factories in places like the Pearl River Delta than to relocate to cheaper but more remote places. The reason: convenient and cheap transport infrastructure, a large pool of migrant workers and a network of small to medium-sized manufacturers. Thus, the cost of setting up a new factory in Xinjiang is higher than keeping one in southern China.

It goes on to to quote Willy Lin Sun-mo, as did the previous article. This time, however, it quotes him to illustrate that  even for labor intensive industries that need to move, moving out to chase cheap labor may incur hidden or at least less obvious costs:

Knitwear maker Willy Lin Sun-mo, chairman of the Textile Council of Hong Kong said: “A sophisticated supply chain takes decades to develop, just like the Pearl River Delta, which took some 25 years to come to what it is today.”

Lin set up a knitwear plant in Jiangxi province about 18 months ago to take advantage of the labour market but said he had managed to employ only half the 3,000 staff needed. “Labour shortage is not just a problem in Guangdong,” he said. “Insufficient labourers mean higher wages, a big threat to manufacturers.”

Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said relocation made sense theoretically but doubted that many firms would make such a costly move…

Yes, labor costs have increased, and it will mean readjustments for many factories.  I’m still guessing, though,  that relatively few will move from the PRD’s  mature manufacturing infrastructure to “cheaper”  places with questionable transportation facilities and without the extensive network of integrated parts, materials and service providers to which they are accustomed.

By the way, a related SinoFactory posts from the past may be of interest: Coming to China, but NOT for cheap labor!

Share/Save

OK, for some at the very low-end of manufacturing in the Pearl River Delta, maybe it will force a change in strategy or location, but not for all.  Actually, not for most.  Sure, if labor accounts for a large portion of your overall manufacturing costs and if there are places (like Vietnam) where manufacturing the same products are done much cheaper, then you are probably in the wrong business and/or the wrong industrial environment.  But for most in this situation, the writing has been on the wall for a long time, and the recent labor cost increases are no shock.   In fact, if you run one of of those facilities, you are probably already operating outside of the Pearl River Delta, or are planning to move.

But for those of us who have not packed up and gone home (or elsewhere) the Pearl River Delta’s shifting  away from ultra-cheap labor– a shift away from the unsustainable, which has been going on for some years now– may be less damaging than conventional wisdom holds,  and may actually be, in some ways, beneficial for our bottom lines.

Some reality checks:

Reality check #1: Rising labor costs may not be that significant to your  business.  You need to asks what percentage of your manufacturing costs are direct labor.  If it’s 10%, and your direct labor costs increase 20%, your overall cost increase is only 2%.  If you were to pass this on, in it’s entirety, to your customer, he would suffer a price  increase of UNDER 2% (since your margin is not included in the calculation).  Seems elementary, but then again, I’ve been talking to lots of people who seem surprised at this type of analysis.

Reality check #2: Whatever the cost increase, you can probably offset this increase, in whole or in part, by reducing waste and  thereby adding value to your products and/or processes.

Reality check #3: If your labor costs are rising, your competitors’ labor costs are rising at the same time.  Assuming that  China is still the only game in town (for most of us it still is– see Reality check #4)  market forces should help to ensure that rising labor costs do not squeeze profits unduly in the long run.  The sky is not falling on you, it’s lowering on everyone.

Reality check #4: Yes, Vietnam (the only serious competition to China) has lower labor costs than China and for some, manufacturing in Vietnam will be more competitive than in China.  But not for everyone .   There are other costs incurred in Vietnam that offset low labor rates, such as lower productivity and the costs associated with a relative lack of infrastructure and maturity in the supply chain.

Reality check #5: Again, with regards to Vietnam.  What will likely happen when so many manufacturers  from Taiwan, Korea, Japan and China make the move to Vietnam and start “consuming” the finite labor supply?  Won’t market forces likely increase the labor rates there?

And the following leaps of faith:

Leap of faith #1: Better compensated workers will be more stable, and more willing to contribute to the company’s bottom line.  These workers will be more likely to see a future in your facility, and will be more likely to learn how to create more value for the company in order to advance themselves.

Leap of faith #2: A better compensated workforce may become more integrated into the local community, having finally shed itself of “migrant” status (a process which has already started).   It is likely that more of  these workers will be renting their own off-site apartments, eating their own food, and enjoying entertainment of their own choosing.  If this happens manufacturers could  spend less on “lifestyle” and concentrate more on improving worker compensation, working environment, and efficient operations.

Leap of faith #3: As workers become more a part of their community, the industrial districts in which they work may see an improvement in their overall environments.  People are less likely to litter where they live, and are more likely to ensure that local governments ensure security in the areas where they live and have put down roots, especially those whose children live there also.  That will improve the working conditions for everyone.

I’m not saying that China will stay the manufacturing king-of-the-hill in perpetuity.  Of course everything changes, in ways both predictable and surprising.  I’m just saying that the there is more— a lot more– to competitive manufacturing than “cheap labor”.

For some more background and commentary, please check out this post on China Law Blog.

For a contrary view (one example of many) check this out.

Share/Save

The question…

What goals in business are truly worth pursuing? What goals – when at the end of your career and you look back at it all – are those about which you can say, “now that was worth the fight… we changed the course of some little piece of history and left a legacy.”?

My answer…

If you want something you can look back on as a satisfying legacy, I would say improving profits is necessary but not sufficient. The business leader is actually empowered to change peoples lives.

When you’ve looked back and seen how those who were in your organization grew professionally or personally as a result of your how you mentored or how you ran the place, you will feel that satisfaction.

I like to say our organization needs to consistently strive to add value for:
-shareholders
-customers
-employees
-partners
-community

I may be writing more on this theme in the near future.    I can remember in the past that here in china,  this type of thinking was considered naive in, especially in industrial leadership circles.

When I started leading in China 10 years ago, I was too stupid to know it was a naive concept.  My experiences in the past decade have made me even stupider.  I no longer believe in this concept…. I’ve grown to love it.

Share/Save

Share/Save

HONG KONG—Sovereign-wealth fund China Investment Corp. aims to tap rising demand for clean energy in the country by investing as much as $1.21 billion in two companies in the renewable-energy sector, people familiar with the matter say.

The transactions are among the US$300 billion sovereign-wealth fund’s first equity investments in a domestic power producer and underscore China’s support for renewable energy.

Hong Kong-listed GCL-Poly Energy Holdings Ltd. said CIC would buy a 20% stake in the co-generation power-plant operator …

So what did the US do with the trillions it had to spend on stimulus funds? Did it invest in lots and lots of clean energy projects which would spur near immediate demands? Did it invest in encouraging and developing lean energy technologies which would add value to the economy?

Share/Save

]]> http://www.sinofactory.net/blog/2009/11/chinas-getting-greentech-jobs-because-china-invested-in-them-the-us-didnt/feed/ 1 http://www.sinofactory.net/blog/2009/11/us-cleantech-jobs-to-china-whattaya-gonna-do-compete-or-complain/ http://www.sinofactory.net/blog/2009/11/us-cleantech-jobs-to-china-whattaya-gonna-do-compete-or-complain/#comments Sat, 21 Nov 2009 06:33:41 +0000 David http://www.sinofactory.net/blog/?p=640 ...Read the Rest]]> American politicians and pundits should stop complaining about successful Chinese competition for greentech and other “good”  jobs.  Rather than complain, they should get off their soapboxes and work towards incentivizing and encouraging US industry.  They should be asking following question:  ”The Chinese have their plan, what’s ours?”

This article from yesterday’s Industry Week cites a congressional panel which concludes that China’s government is aggressively encouraging the foreign investment in, and development of, key industries– this to the detriment of those industries in the US.  From that article:

China employs a variety of incentives, including subsidized land, energy and water, to foreign companies that relocate their operations there. China uses tax incentives and preferential loans, the report notes, to further reduce the cost of investing in China.

The report says China is selectively targeting industries such as auto parts, machine tools, information technology, optics, photonics and clean renewable energy. This policy, it warns, is contributing to the loss of jobs in the upstate New York area even as the state seeks to become a global leader in the renewable energy field.

The report adds that it is not just manufacturing jobs that are moving to China. “Advanced technology companies in the region that have been moving their manufacturing operations to China are now relocating their research, development and innovation operations there as well,” it finds.

The Chinese have been doing what they should do by building a platform for development by private companies, both local and foreign.  They invest in the development of the industries and they get the jobs associated with those industries.

And here’s an example of the Chinese government’s “can do” approach to clean energy from a report by Reuters posted on November 15th:

China selects 294 solar power plants for subsidy

(Reuters) – China has identified 294 solar power projects with total generating capacity of 642 megawatts (MW) in its first pilot program.

Beijing has said it will subsidies  [sic] at least half of the investment cost.

The capacity will be nearly 30 percent more than the minimum target Beijing set in July when it launched the unprecedented “golden sun” plan, which was part of China’s drive to catch up in a global race to find alternatives to fossil fuels.

One would expect that the Chinese solar panel manufacturer Suntech, or it’s Chinese competitors will get a lot of orders out of this initiative.  Speaking of Suntech,  two days before the above-mentioned article appeared, Reuters ran an article about China’s solar rooftop program:

Suntech to develop 20 pct of China’s Solar rooftop plan

Nov 13 (Reuters) – Chinese Solar panel maker Suntech Power Holdings Co Ltd (STP.N) said it expects to develop about 20 percent of the 91 megawatts of solar projects under China’s solar rooftop program.

The solar rooftop program was launched in March to increase the efficiency of buildings through photovoltaic (PV) solar systems.

Once again it seems that Chinese pols are actually doing something about encouraging clean energy and developing the industries to support it.  (Suntech, by the way, is plowing some of it’s gains into job creation in the USA– t is building a solar power panel factory in Arizona.  Everything’s connected!)

It reminds me of Taiwan in the 90′s. The government targeted computer manufacturing as key industry for development.   They created research institutes devoted to technical and market development, and helped steer local companies into the field.  They gave development loans to the 4 key players and Taiwan’s computer industry developed quite nicely.

Now I know it’s not that simple. There are trade agreements which need to be taken into account, and it might be desirable to establish job-creation metrics which would be tied to government incentives or assistance.

All of which leads me to Charles Schumer and his rant about Shenyang Power Group getting the lion’s share of the jobs associated with a huge wind power project in Texas.  Schumer’s rant fails to mention that:

• Shenyang Power got the lion’s share of the jobs, but it also invested the lion’s share of the money for the project.  (Yes, there is an application for stimulus money made by the American side, but it’s only for a pretty small minority shareholding).
• The turbines which will be made by Shenyang will all use a key component made by GE.  I’m guessing it will use other imported (maybe from the US?) components as well, but I don’t know.

So the Chinese government invested and encouraged the turbine industry, and invested in a project in the States that uses turbines.  They are putting up the money and taking risk, and stand to make money and get jobs out of it.   Also,hundreds of thousands of US homes will get cleaner electric power.  GE will get orders for their components.  See how everything’s connected?

Yes, the Chinese government have  focused on being competitive in key industries.  That’s called leadership and that’s what they should be doing. It’s what the US should have been doing as well.

Stop complaining and start competing!

Share/Save

]]> http://www.sinofactory.net/blog/2009/11/us-cleantech-jobs-to-china-whattaya-gonna-do-compete-or-complain/feed/ 0 http://www.sinofactory.net/blog/2009/11/gobal-times-china-still-in-play-for-outsourced-manufacturing/ http://www.sinofactory.net/blog/2009/11/gobal-times-china-still-in-play-for-outsourced-manufacturing/#comments Fri, 13 Nov 2009 00:44:36 +0000 David http://www.sinofactory.net/blog/?p=635 ...Read the Rest]]> Consider the source, but according to an article in today’s Global Times (a fairly new English-language paper published in the PRC) western manufacturers are increasing their outsourcing activities in China:

Foreign countries have started outsourcing to China again after a brief slowdown last year.

The first nine months of the year saw 3,287 new enterprises providing services that have been outsourced to China launched, offering 585,000 new jobs. International service contracts won by Chinese enterprises in the first nine months are valued at $12.7 billion, up 212 percent from the same period last year, according to Ministry of Commerce (MOFCOM) figures released Tuesday.

As of the end of September, there were 8,060 enterprises with 1.4 million employees operating in the outsourcing industry.

The rest of the article cites the existing and potential threats to China’s outsourcing business, namely India with it’s large English speaking population, but others as well.

For those of us operating the the Pearl River Delta, where most of this outsourcing is being performed, it might mean that the PRD is still an attractive place to set up export-oriented manufacturing.  At the very least, since we assume that the GT writes what Beijing wants written, it means that the authorities are still interested in making China an attractive destination for western export manufacturing.

Share/Save

]]> http://www.sinofactory.net/blog/2009/11/gobal-times-china-still-in-play-for-outsourced-manufacturing/feed/ 0