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.

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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.

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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.

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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!

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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?

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]]> 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!

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]]> 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/cnn-mexico-is-the-new-go-to-place-for-manufacturing-u-s-bound-products/ http://www.sinofactory.net/blog/2009/11/cnn-mexico-is-the-new-go-to-place-for-manufacturing-u-s-bound-products/#comments Sat, 07 Nov 2009 14:38:22 +0000 David http://www.sinofactory.net/blog/?p=611 According to a CNN report,  NAFTA, proximity to the U.S. market, and lower costs (largely the results of inverse currency fluctuations of the peso and yuan)  have tipped the scales in favor of Mexico (and against China) as the new manufacturing destination of choice for U.S.- bound products.

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]]> http://www.sinofactory.net/blog/2009/11/cnn-mexico-is-the-new-go-to-place-for-manufacturing-u-s-bound-products/feed/ 0 http://www.sinofactory.net/blog/2009/11/foreign-manufacturers-dongguan-at-least-still-wants-some-of-you/ http://www.sinofactory.net/blog/2009/11/foreign-manufacturers-dongguan-at-least-still-wants-some-of-you/#comments Sat, 07 Nov 2009 13:24:07 +0000 David http://www.sinofactory.net/blog/?p=595 ...Read the Rest]]> There is talk that the Beijing and and Guangdong governments are starting to play hard-to-get with foreign investors, downplaying their importance in upgrading China’s manufacturing, R&D and local market offerings.

However one report in The Japan Times indicates that Dongguan, at least, is still welcoming foreign investment.

A vice mayor of the Chinese industrial city of Dongguan urged Japanese manufacturers Friday to expand on its turf and exploit its domestic market to help the city recover from the global economic crisis and fall in exports.

“We are looking for more Japanese manufacturers to build R&D (research and development) centers in our city and create domestic brands, securing distribution routes,” Jiang Ling, vice mayor of Dongguan in Guangzhou Province, said at a news conference in a hotel in Minato Ward, Tokyo.

In many ways, what Jiang is saying is in lockstep with what the central and Guangdong governments seem to be promoting– focus on domestic consumption, R&D and high-tech manufacturing.

But what makes Jiang’s comments interesting are that he’s actively courting foreign investment, stating clearly that it essential for the area’s recovery.  Moreover, he’s speaking on behalf of Dongguan’s townships and villages, and these are the organizations which will be interpreting and implementing whatever policies flow down from Beijing and Guangzhou.

While this doesn’t mean that Dongguan is a good place to set up labor-intensive manufacturing, it does indicate that Dongguan, at least, is still Foreign Investment friendly.

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]]> http://www.sinofactory.net/blog/2009/11/foreign-manufacturers-dongguan-at-least-still-wants-some-of-you/feed/ 2 http://www.sinofactory.net/blog/2009/11/guangdong-manufacturing-2-0-if-your-low-tech-dont-get-too-comfy/ http://www.sinofactory.net/blog/2009/11/guangdong-manufacturing-2-0-if-your-low-tech-dont-get-too-comfy/#comments Wed, 04 Nov 2009 18:59:34 +0000 David http://www.sinofactory.net/blog/?p=592 ...Read the Rest]]> This China Daily article quotes Guangdong governor Huang HuaHua and Guangdong Party Chief, Wang Yang making it very clear that the pre-downturn initiatives aimed at moving the province’s manufacturing base up the value chain will continue.

With the outline of the reform plan for the Pearl River Delta formally approved by the central government at the end of last year, the delta scheme has now been adopted as part of the nation’s overall development strategy. This will see the nine cities in southern China’s Guangdong province transformed into advanced manufacturing and modern service centers.

The article doesn’t talk about what they plan to do about the low-value exporting factories currently operating here, but Huang was quoted by People Daily in April saying:

…the province will step up efforts to achieve a change in development pattern by evolving self-innovative industry and upgrading industrial structure, while boosting the transfer of labor-intensive industries in the delta region to less developed regions and transferring labor forces from the agricultural to the manufacturing sector as well as from the rural area to the delta region.  [italics mine]

For me it raises the following questions:

• How will they encourage/force the transfer of labor-intensive industries out of the province?
• How will they define “labor intensive”?
• How fast will they move?
• How will they deal with the most local government and semi government bureaucracies who are still benefiting from those labor-intensive industries operating in their villages and industrial zones?
  

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]]> http://www.sinofactory.net/blog/2009/11/guangdong-manufacturing-2-0-if-your-low-tech-dont-get-too-comfy/feed/ 0 http://www.sinofactory.net/blog/2009/04/southern-china-the-unemployed-have-not-become-violent-what-else-is-new/ http://www.sinofactory.net/blog/2009/04/southern-china-the-unemployed-have-not-become-violent-what-else-is-new/#comments Wed, 22 Apr 2009 15:06:31 +0000 David http://www.change-junkie.com/blog/?p=472 ...Read the Rest]]> A post on the Financial Times “Dragonbeat” blog helps to rectify the “migrant workers gone wild” media fest of the past few months.  These guys are getting it right.  Anyone interested in this topic should read the FT article. (h/t to Danwei)

My comment on the post:

[There] was never an apparent trend toward violence on the part of unemployed workers in Southern China. There were a few protests, and very little violence, by workers who were abandoned without severance pay. As these few anecdotes echoed between blog and newspaper and back again, it seemed as if the trend toward worker violence was growing. Actually, it was the same few recycled anecdotes over and over again.

Those of us who live and work here in Southern China (I run a factory in Dongguan) could see first hand how distorted and repetitive the media story was.

Yes there are many unemployed. No, they are not threatening anyone and never were. Not news to anyone living here.

The real news here is how so many of the media outlets, new and old alike, have lazily copied and amplified one another’s inaccuracies.

Newspapers complain about free content on the internet pushing them out of business.   Maybe it’s just poor quality ruining their business.

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