So You Want To Save A Yuan By Moving Your China Operations To __________.

Excellent article by David Dayton up on Smart China Sourcing, entitled, "China prices: Moving not necessarily a solution to rising prices." (h/t to BizCult) The article very nicely sets out some of the key things (beyond labor and real estate costs) to look at in determining where to locate your business. Just because everything is cheaper in Peoria than in Silicon Valley does not mean Apple should be moving to Peoria any time soon.

Here are Dayton's top five:

1. Confirm that needed industrial services are on handAssuming you have already found the primary factory you are going to be working with, you need to scout the local support and secondary factories (sub-assemblies, components, packaging). Just because big first-movers are in a city you like doesn't mean all the resources you need are there yet.

2. Ensure a good selection of educated employees. Smart people gravitate toward opportunities, and the majority of opportunities are still on the east coast [of China]. The standard of living is better, the facilities are better, most international companies have a presence there and so there are more jobs there. The educated in China are still mostly centered in the large cities of Beijing, Shanghai and Guangdong province. You're not going to find as many well-educated and experienced job applicants in China's second-tier cities.

3. Determine how wired you will beCommunications infrastructure, specifically Internet access and other physical services, is not always up to speed -- literally. Don't be misled by the fact that the hotel you are staying in has relatively good access. Not all office buildings or industrial zones (or individual factories) have the same physical wiring. And domestic providers are not held to the same standards as international hotels. Further, just because the local office of China Telecom ADSL or cable is telling you how fast their services may be, if your building or area is not wired correctly it may be like drinking Red Bull through a baby bottle rather than the wide-mouth can they are advertising.

4. Be comfortable with the available professional services. While you can access lawyers from just about anywhere via the Internet, the other physical services you may need (notary public, copy centers, translators, IT, etc.) will be harder to find -- not impossible, but again, harder than in the coastal export centers.

5. Become well-versed in relevant interprovincial tariffs. This is something to look at with China's inland, rather than when considering other countries. Interprovincial tariffs are an often overlooked problem in China. The country is much more like a group of loosely affiliated states than a unified United States. There is a great deal of regional and provincial protectionism. This translates into fees and transportation limitations on many products moving between provinces. Some items -- wood, some foodstuffs and even electronics, for instance -- are more sensitive than others. I don't know all the laws or all the restrictions, but your factory should be able to tell you what they can or can't ship to where and at what cost. Make sure you know this before you ever place an order.

I am going to expound on items 2 and 4.

One of the things we are always telling our clients is that successful China business requires close monitoring both by people on the ground in China and by people back at the home office. It is always good to have the people on the ground be people who started out at the home office. Will your employees be more reluctant to relocate to Shanghai or to Linfen? In which city do you think they will actually stay, without quitting or begging to return home? Which will be easier/more pleasant for people from the home office to come and visit, operations in or around Shanghai or in Linfen?

If you go to Linfen, who will do your accounting? Who will do your legal work? I doubt there are any accountants in Linfen sufficiently versed in international, China, and US (or England or German or Italian or whatever) accounting to handle the taxes for a foreign owned entity. Yes, you can use someone in Shanghai or Beijing for your accounting work, but what will that do to the savings you hoped to achieve by going into Linfen in the first place? David is right that much legal work can be done outside of the city in which you are located, but some really should not be. Much real estate law is local. Much employment law is local. Some taxes are local. You can use a lawyer out of Shanghai or Beijing for this stuff, but that lawyer is going to need to get up to speed on the Linfen way and that lawyer is going to have to go to Linfen occasionally, and that lawyer will, in some circumstances, need to retain a Linfen lawyer to assist. It can be done, but again, what will that do to the savings you are seeking to realize by locating in Linfen?

Not saying you should not locate your business in Linfen (or Peoria for that matter, though I do hold a grudge against that city for having received a speeding ticket there once), but, as David says:

Reasons to move should not include any version of "Because we heard it's cheaper" or "Because other companies are doing so." Before you say, "Of course I'd never do that," you need to be honest with yourself. Have you done your homework and is it really cheaper?