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Moving To China’s Interior. The Pros And The Cons.

Posted in China Business

In February, I wrote a post, “China Manufacturing: “We’re Bringing It Back Home,” talking of how my law firm had been seeing a massive uptick in companies shutting down their China operations and returning to the United States. A very recent (and very widely discussed) Economist article, entitled, “Moving back to America:The dwindling allure of building factories overseas,” talked of pretty much the same thing:

When clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr. Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalization are changing fast.

Sirkin goes on to say that by “around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America.” 

In a recent post, entitled, “Don’t Leave China, Just Move!” Jack Perkowski of Managing the Dragon Blog cites to the Economist article, but calls on companies looking to leave China to simply move to a cheaper city inland. Perkowski argues that “there is still a strong case to be made for China,” including its huge population and economy. He then sets out the following “five reasons why companies should consider setting up operations in less travelled parts of the country”:

  1. Improved infrastructure. China’s road and train system has radically improved. 
  2. Lower costs. “Other than perhaps transportation to the country’s ports, costs are decidedly lower in second and third-tier cities in the interior. Labor, land, construction, management, supplier and overhead costs are all significantly lower than in the larger, more established cities in the coastal areas.” 
  3. Strong Local Government Support. “I’m a big proponent of the “big fish in a little pond” approach to site location. In China’s smaller cities, your factory may be one of the largest and best companies to work for in the area. As a result of its importance, it will receive strong support from the local government. The party secretary and city mayor will welcome your investment, large or small, and will bend over backward to help you develop your business. This can take the form of streamlined approvals, access to bank loans, less red tape and less hassle from local bureaucrats.”
  4. Lower Management Turnover. “If you offer attractive employment opportunities to the local residents, they will have little incentive to look elsewhere.”
  5. Enhanced Insight Into China’s Vast Local Market. “Locating at least some of your operations in less developed parts of the country will provide your company with valuable insights into China’s much larger local market.”

To which I say, “yes, but.”  

Before I counter the advantages Jack cites to locating in China’s interior, let me state the obvious. Jack Perkowski indisputably knows way more about manufacturing in China than this desk-bound lawyer.

Now for my counter, based not on any direct experience, but on what I hear from my law firm’s manufacturing clients:

  1. Improved Infrastructure. China is in the midst of what the State Grid Corporation of China is predicting will be its worst power shortage ever. I would bet that the old manufacturing standby locations will do far better in getting power than the inland upstarts, for reasons of both physical infrastructure and politics.   
  2. Lower Costs. I do not disagree with a single thing Jack says on this, but I have heard some of my clients bemoan lower worker productivity in China’s smaller cities. And though I cannot back this up with anything approaching scientific evidence, I get the feeling that the more remote one goes, the greater the risk of having insurmountable (and expensive) legal difficulties with Chinese partners, buyers, and vendors.  
  3. Strong Local Government Support. Yes, this can be great while you have it, but Beijing is increasingly cracking down on improper local concessions and, more importantly, local government support can quickly disappear. My firm gets a disproportionate amount of work involving ventures that have gone wrong in China’s more remote areas and I cannot remember a single case where I would say that the local government favored our foreign client over the Chinese local. In places like Guangzhou or Suzhou, the local government is more likely to remain neutral.  
  4. Lower Management Turnover.  I have no basis to dispute this, but I have also heard from many clients that one also has to deal with lower management quality.  
  5. Enhanced Insight Into China’s Vast Local Market. True enough, but for many manufacturers, small city sales might be years or even decades away.  

Perkowski ends his post with advise with the following advice on which I completely agree:
“In the end, you need to evaluate your company’s particular circumstances in making location decisions.” 

China manufacturing. Go inland or go home? And when? What do you think?

  • Shanghai Ty

    Dan,
    Fully agree with your caveats to Jack Perkowski’s post. And I’d add to point 4 that low management turnover is a bit of a double-edged sword. The people you hire there are less likely to leave (because there are fewer competing options in smaller cities), but it’s harder to find those people in the first place — especially if your company needs managers with specialized skills.
    It’s much easier to lure a good QC manager, for example, to Shanghai from Danyang, than to Danyang from Shanghai.

  • Chinamike

    I agree that for certain companies in certain product categories (whether consumer or B-2B) moving back top the US to manufacture makes sense. Then again so might Indonesia, Mexico or Belize.
    Yes the costs and hallmarks of globalized production are undergoing big changes.
    I agree with Mr. P in that there is a lot of untapped potential in the interior and I will disagree with you on one point Dan. The Chinese gov. still has a HUGE interest in developing the interior and they are not expecting to create 200 million engineering jobs out there.
    As Guangdong, Fujian, Jiangsu and Zhejiang factories close their dirty, low-margin enterprises the economic growth will come from high margin, “clean” manufacturing, service sector jobs and increased consumerism.
    I also belive that the big investment in commercial rail will eliminate a lot of the corruption, cost and inefficiencies of moving product from interior factory to port.
    If the move inland does not happen it is a blow to China’s development for the next five years or so. I think their “crackdowns” in the hinterlands will not amount to much.