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On The Demise Of China Manufacturing….Kidding. Part II

Posted in China Business

For the only barely related part I of this post, go here.  

I just got back from a very long and very fruitful trip to Tokyo. I was there with co-blogger Steve on behalf of the Sea Shepherd Conservation Society, assisting with the trial of anti-whaling activist Peter Bethune. If you want to see some television interviews of my on this case, click here or here. Then, pretty much out of the blue, I ended up staying in Tokyo (with Steve having to run off to Manila) to assist on a Japan vessel arrest. A little known fact about Steve is that he is fluent in Japanese as a result of having worked a number of years with one of Japan’s leading law firms at the beginning of his legal career.

My staying in Tokyo did give me a number of great opportunities to meet with clients and potential clients who I had not seen for years. With the Honda strike in China getting so much news, we found ourselves talking a lot about where manufacturing would be going as China continues to get more expensive. The consensus regarding various countries seemed to be as follows:

1. Thailand. No. Not cheap. Politically unstable.

2. Indonesia. No. Too corrupt. Too much poverty. Too much violence. 

3. The Philippines. See Indonesia.

4. Sri Lanka. For the most basic of clothing manufacturing and the like. Maybe.

5. Mexico. See Indonesia and the Philippines.

6. Vietnam. Great place to visit. Great demographics. Good labor force. But, horrible logistics and just not quite there yet. Oh, and much smaller consumer market. Great place for some things though, like furniture.

7.  Malaysia. See parts of Thailand and parts of Indonesia, above.

8.  Cambodia. Come back in ten years.

9.  Laos. Come back in twenty years.

10.  Haiti. “You are not being serious, are you?”

In the end, the consensus was China, even with increased costs. “If you are going to make something that requires sourcing components from other facilities, it almost has to be China.” China is just so established for that. It just works. Yes, we are going to look at going inland in China but the more you do that, the more it starts looking like Vietnam and the more you start facing the same sort of problems.

David Wolf over at Silicon Hutong just wrote a very interesting post on these same sort of conversations by clothing manufacturers. His post is entitled, “Not So Easy to Replace,” and its conclusions do not differ much, if at all, from those here.

So is the next place the present place? I think it is, and I have to say that not a single one of my firm’s clients has even mentioned leaving China because of rising wages there.  But I do remain bullish on Vietnam. But for how much longer will China be THE factory to the world?

Let’s get your views….

  • chris

    Yep, Vietnam is probably the only contender.
    And, of course, India for certain textiles.

  • SV

    Once China gets more expensive, places like the Southern U.S. will be competitive again. Say, when Chinese wages rise and the hidden Chinese tariffs and subsidies (cheap loans, yuan rate, VAT rebates) are offset by U.S. tariffs.

  • Inst

    Bangladesh? India?
    Bangladesh I believe does a reasonable level of textile exports, so I’m surprised you didn’t mention them.

  • outcast

    To be fair the logistics infrastructure in inland China is getting better, with the completion of new highways and raillines.
    @inst
    Someone wrote up a piece that was reposted here a few months ago about sourcing in India. Had quite a bit of not so good things to say about it.

  • LFI

    Nice post. Keep up the good work. All the best.

  • http://chipmunkninja.com Marc

    @chris — I know some people in the textiles industry in India and they do most of their manufacturing in China!!
    Effectively, due to regulations in India designed to boost employment (and increase tax revenue?), to create a coloured, embroidered, and patterned piece of cloth in India, they’d have to open four factories. One to create the plain cloth, and then one for each of the additional steps.
    However, you can call up any number of plants in Guangdong or Zhejiang and they’ll do all four steps for you at the same cost as one in India. So, even though there _is_ domestic textile manufacturing capacity, a good chunk of it seems to be restricted to specific upscale products.

  • Inst

    outcast:
    Yes, but that was one data point; and there were contradictory reports. Another poster replied that Indians were honest (strange, since I recall reading something in Maximum City about graffiti claiming “11 out of 10 Indians are dishonest. Still, I love my India”, which is not to be taken literally, but the sentiment suggests that clean business at a premium comparable to China) and that when you ordered goods from an Indian company, you didn’t get the profit zero (start the relationship with good and zero profit products, then make money by cutting costs. See Paul Midler’s The China Game) run-around.
    (Also, same outcast as the Gene Expressions blog?)

  • Daniel

    Outsourcing and manufacturing around the globe did not start 10 years ago in China. It started long time ago and it worked just fine in other countries, including many which are on the list. It moved to China for the main reason that China was CHEAPER. Period. The moment China becomes more expensive compared to many other countries, including those in south america and eastern Europe, the migration will start for many industries and in fact it has already started for those in export. Yes, those other countries have plenty of issues (the post conveniently ignores many weaknesses, risks and “hidden costs” in China itself) but when the price difference gets big enough everything “will be forgiven” just as it was years ago when the flow to China started.

  • NM

    Dan – fascinating post as always. Keep up the good work! One striking claim your clients seem to be making is that they perceive China as Less corrupt than a number of other lower-middle income countries (Indonesia, Phill., Mexico, etc.). Given China’s generally abysmal rankings in Transparency Internatl’s Corruption Perception Indexes, that is very interesting. You may well have posted on this already, but it would be very interesting to get your sense of how much corruption there actually is in Cn these days, how this might differ from earlier days you’ve experienced, and in what kinds of contexts corruption shows up, and in which it doesn’t.

  • Inst

    Daniel, you’re off. China’s key advantage as a manufacturer vis the developed states is price, but vis developing states it’s a combination of infrastructure, education, and business climate. Compared to many of the competitors on the list, China has better basic education (population literacy and the ability to add 2 and 2 together), more developed infrastructure (ports, intra-city transportation, although hinterland transportation is not up to par), and relatively less corrupt government (not Scandinavian social democracy, but as the following CLB post indicates, you’re not being knocked around for a bribe every 30 minutes). At some point, increasing China prices will force the Chinese out of the low-end global market, but their alternative advantages will let them stay there longer than mere price would justify.