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China Still The Place For Manufacturing

Posted in China Business

There have been countless articles written on how the end of cheap China will mean the end of foreign companies going to China, but that has barely happened at all.  This article, “Analysis: Investors make $100 billion bet on China’s drive up value chain,” by Kevin Yao of Reuters, nicely encapsulates what is going on out there by way of foreign direct investment (FDI) into China.

Essentially, FDI has slowed a bit, but is still massive and all of the talk of companies going into places like Indonesia or Vietnam has been to a large extent just talk.  This is what I have been seeing as well and I have to admit that it is NOT what I have been predicting:

I am particularly surprised at how so few of my law firm’s clients have moved over to Vietnam, especially those in industries, like clothing, shoes, and pet toys where to me it makes complete sense for them to do so.  I am even more surprised at how few of our new clients going into Asia for the first time are looking to countries other than China for their manufacturing.

And I have a new theory as to why this is the case.  My theory, which may be less a theory than a fact-based observation, is simply that these companies do not know how to go into any country other than China. I will call this the “I would love to, but…” theory.

Let me explain.

My law firm represents a large number of clothing and shoe companies, most of which are fairly well known brands and have fairly high margins, but most of which are not massive.  In the last year or so, these companies have seen an increase in bad product from China. The typical scenario goes something like this:

  1. Chinese company provides US company with bad product.
  2. US company refuses to pay whatever is still owed for the bad product.
  3. Chinese company goes ballistic and threatens US company that it will do horrible things to it if US company does not pay.
  4. US company complains to me and I suggest that now might be a great time for US company to just walk away from China and set up manufacturing in a place like Vietnam.
  5. US company says that it has heard great things about Vietnam and it would love to go there but it has no clue how to do so.
  6. US company then strikes a deal with Chinese company and keeps producing in China, slowly diversifying to other Chinese manufacturers.

So why does the US company not go to Vietnam?  Simply because it lacks the people in its organization with any Vietnam expertise and because there is no clear and easy path for SMEs to get into Vietnam. The path is less than clear because Vietnam lacks a “soft infrastructure” of well known and highly regarded experienced consultants with offices in the United States. Vietnam also lacks a network of people (and even seminars) in the United States who can talk of their Vietnam experience.  There is at least a couple of how to do business in China seminars in every good sized American city every year, but one on Vietnam anywhere is a rarity.   Vietnam is simply too much of an unknown.

So for SMEs, there is this massive knowledge and fear gap regarding places like Vietnam and that gap is creating an “I would love to” Catch-22.

That’s my new theory.

What do you think?

  • http://www.qualityinspection.org/ Renaud Anjoran

    I see Vietnam as another Chinese province. Wages are rising really fast there, and they will catch up with those in mainland China within a few years.
    You are right about the lack of “soft infrastructure”. Canton Fair is in China. Most sourcing agents themselves have no clue how to source from Vietnam.

  • http://www.procurasia.com/ Etienne C.

    Dan,
    This is an interesting theory. A little sad, I must say but interesting.
    In spite of the wide coverage about China manufacturing cost increases and even reshoring, there are many different views on the topic. I held a workshop on the topic before the summer and I also started a few LinkedIn discussions on that topic. One of the group discussion generated lots of interesting comments and show to me that there are as may reasons for companies to stop buying from China as there are to not stop buying. You can see some of these views on the following group discussion: http://lnkd.in/DMgS_J

  • Hong Kong Ren

    Vietnam FDI percentage in manufacturing and construction is 76.4% of total FDI inflow this year to date, up from 54.1% in 2010. Good luck with your theory, you’ll need it.

    • twofish

      That’s an irrelevant number for what we are talking about here. When a US companies buys goods from an overseas company that’s not a FDI transaction.

      Also it’s not just the soft infrastructure, but the hard infrastructure. Vietnam just does not have the port facilities and expressways that Guangdong has, and a lot of the FDI is to improve Vietnam’s ability at that level. There’s also the soft infrastructure at the overseas end. If you want to build your own factory and create your own logistics chain from scratch, then there are lots of opportunities in Vietnam, Indonesia, and Laos. The trouble is a lot of companies, particularly SME’s, *don’t* want to build their own factories, and just want to pay money, provide specs, and get product.

      There’s also the “devil you know”. If you do business in China, you will get screwed. But that’s because if you do business anywhere new, you will get screwed. Once you get screwed, you’ll figure out how not to get screwed again, which basically involves figuring out who you can trust, and who you can’t. If you pack up and go somewhere new, you have to start that learning process all over again.

      And then there is the “grass is greener” effect. There are a lot of (true) horror stories about doing business in China, and if you just read the horror stories, you end up concluding that China is this cesspool of corruption and inefficiency. However, if you do business in another developing country, you quickly find find relative to other developing countries, China is a pretty clean, friendly, and efficient place to do business. The horror stories you hear are invariably from people for which China is the first international business deal, and if you talk to someone that’s done business in another developing country, they’ll laugh at how trivial your headaches are.

      And the bottom line. How much money are you going to save. People moved factories into China because the costs are 5 times less than the alternatives. If the costs are less by factors of 5 or 10, then it’s worth going through some heck to move. If the costs are less by 30%, it’s usually not worth it.

  • ThaiGuo

    It is easy to be optimistic when you only have one option. But there are now many options and China is just one of them. Despite what you say China manufacturing capacity is moving to Vietnamese and other Asian based operations and a google of services firms for Vietnam will pull out many prominent players. As for the Canton Trade Fair, the recent October buying fair had its lowest attendance for ten years.

    Concerning wages, Vetnam wages are increasing but so will China’s. Youre not going to see wage parity between Vietnam and China any time soon, and the bean counters will determine where investments go. China is just one of many options and I wouldnt put all my eggs in one basket as you seem to suggest.

  • Hong Kong Ren

    “Vietnam as another Province of China”
    That’s going to win you a lot of friends in Hanoi.

  • TheBugisStreetWarrior

    I think this is waaaay off the mark. Labor intensive, low end manufacturing is leaving China in droves and not even China’s own FDI policies support your theory. You’re about 15 years behind the times. Why did Obama go to South-East Asia and not China? If you can’t see hints like that there’s no hope.

  • http://www.intouch-quality.com/ InTouch Quality

    Manufacturing is not moving out of China in masse as some say, and it’s due to both infrastructure (soft and hard) AND supply chain. The ease of manufacturing in China comes in large part from the supply chains that have set up around the final product manufacturer (i.e. the leather supplier to the shoe company). Now whereas the more simple manufacturing (textiles, footwear) don’t require complex supply chains, makers of something like an automatic coffeemaker need a wide range of components and parts, from a relatively complex supply chain (not just plastic pellets, but PCBs, LEDs, glass, etc.). Vietnam and other developing countries’ supply chains are far less developed than China’s. That means inflated prices of components to go along with the normal growing pains mentioned below. All that considered, a company needs to be of a certain size to efficiently capitalize on going outside of China. And where Nike and The Gap may be there, other brands (even well-known ones) likely just don’t have the volume.

  • Hong Kong Ren

    @InTouchQuality: Stay in China. Good luck with that factory and staff you have in Ningbo or Guangzhou where wages are coming very close to those in South Korea.
    China’s supply chain was built in 15 years you think the same won’t happen elsewhere? And where investment laws and taxes are even better? It is never the infrastructure, it is always the money that makes manfacturing move, just as it did in large parts of the US. Or do you think Detroit will recover auto supramacy? China just can’t afford to keep manufacturing in China, just like the US couldn’t either and when wages across Asia are far lower and upcoming free trade agreements dispense with customs duties the writing is on the wall. It’ll take three years before you’re all dead in the water unless you relocate.

  • sp miller

    Well, I have worked for and with companies that source in China and Vietnam and although quality in Vietnam is in some ways superior to that in China, production lead times can be much longer, frustratingly long. I have had clients that diversified and went to Vietnam but after a few months there they were turning all their attention to China once again. One person told me that in Vietnam the workers only showed up at the factory when they needed money. I would add that my own experience of working directly with SE Asian vendors is that they are nice but laid-back and very slow in replying to emails. In China they reply to you immediately or not at all. In SE Asia they reply to you in a week or not at all.
    I also agree with In Touch Quality below. China has some of the busiest ports in the world and the transportation networks to get goods to those ports. In places like Vietnam or India there are many more transportation bottlenecks becuase the roads are not as good. China’s infrastructure is world class in some ways.
    I honestly think a lot of this talk about companies leaving China is kind of trendy talk. Sure, some companies ARE leaving. But many others are staying, or if they are leaving, the are returning to China for the reasons above.

  • Hoang Thi Anh

    Vietnam is catching up fast.
    Or beleive in China, no-ones forcing you. Stay there if you dont like Asia. China is not Asia, we are different.
    Written in Hanoi.

  • Hoang Thi Anh

    If you compares today then fair enough, China better. But VietNam is investing a lot in infrastructure – also noticed here below – and by 2015 and the ASEAN treaties I thing will competing much more with China for manufacturing and selling to the Chinas consumptions.