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China Factories Moving In Droves To Cambodia/Vietnam/Myanmar/Malaysia. NOT.

Posted in China Business

Ever since the New York Times did an article, Wary of China, Companies Head to Cambodia, on how companies are leaving China for Cambodia, there has been a whole host of media and blog play and real life discussion about how “everyone” is leaving China for places like Cambodia or Myanmar or Vietnam or Indonesia. The article itself was much more balanced.

First, let’s look at the New York Times article, which does have some bon mots that could lead people to believe a massive China exodus is taking place, including the following:

  • “Foreign companies are flocking to Cambodia for a simple reason. They want to limit their overwhelming reliance on factories in China.”
  • “Every couple days, I’m getting calls from manufacturers who want to move their businesses here from China,” said Bradley Gordon, an American lawyer in Phnom Penh.
But let’s look deeper at this NYT article and at then at the realities on the ground.

The article makes clear that only certain types of companies are leaving China entirely and even most of those are staying:

Only a smattering of companies, mostly in low-tech sectors like garment and shoe manufacturing, are seeking to leave China entirely. Many more companies are building new factories in Southeast Asia to supplement operations in China. China’s fast-growing domestic market, large population and huge industrial base still make it attractive for many companies, while productivity in China is rising almost as fast as wages in many industries.

“People are not looking for exit strategies from China, they’re looking to set up parallel operations to hedge their bets,” said Bretton Sciaroni, another American lawyer here. Among Japanese makers, Sumitomo is making wiring harnesses for cars, Minebea is assembling parts for cellphones and Denso is about to start production of motorcycle ignition components.

The article also makes clear that China is still “killing it” when it comes to foreign direct investment:

Foreign investment in China nonetheless slipped 3.5 percent last year, after rising every year since 1980 except 1999, during the Asian financial crisis, and 2009, during the global financial crisis. Still, at $119.7 billion, foreign investment in China continues to dwarf investment elsewhere.

By comparison, investment in Cambodia rose to $1.5 billion. But last year was the first time since comparable record-keeping began in the 1970s that Cambodia received more foreign investment per person than China.

And though foreign investment is rising in “Vietnam, Thailand, Myanmar and the Philippines,” conducting business in those countries is usually not as easy as in China:

Tatiana Olchanetzky, a manufacturing consultant to companies in the handbag and luggage industry, said that she had analyzed the costs in her industry of moving operations from China to the Philippines, Cambodia, Vietnam and Indonesia. She found that any savings were very small because China produces most of the fabrics, clasps, wheels and other materials required for the bag trade, and these would have to be shipped to other countries if final assembly moved there.

But some factories have moved anyway, at the request of Western buyers who fear depending exclusively on a single country.

While moving to a new country with an unproved supply chain is a risk, Ms. Olchanetzky said, “They think there’s a risk in staying in China, too.”

 The article actually does an excellent job at setting forth exactly what my law firm is seeing among its clients, which include the following:

  • Small clothing and shoe companies that seriously looked at moving operations to Vietnam or Cambodia but then chose not to do so because it would be “too difficult” to set up a supply chain in those places.  Just as described by Ms. Olchanetzky above.
  • Mid-sized and large clothing and shoe companies that have put their toes into Vietnam or Cambodia by doing a bit of outsourcing from those countries or by setting up small factories there.
  • Many companies of all kinds sending people to scope out Vietnam or Cambodia and, more recently and to a lesser extent, Myanmar.
  • Many companies looking at adding facilities or offices in Thailand or Malaysia or Indonesia, believing that those three countries are going to thrive in the next decade as ASEAN’s economic importance rises.
I think that my own law firm’s Asian plans are the norm, at least if our conversations are a good yardstick. Our clients are always asking us about our plans for more offices in Asia and we tell them something along the following lines:
Right now, our Vietnam, Cambodia, Thailand, and Myanmar work is all being done out of our existing offices by our traveling to those countries and working with the people we know there.  Much of our work in those countries involves the basics like helping our clients contract with existing companies there and helping our clients register and protect their intellectual property there.  As more of our clients establish a permanent presence in some of these countries, we will look more seriously at opening a new office to serve that region.

The response to the above is invariably, “that makes complete sense and is pretty much how we are approaching things as well.”

We are convinced that Singapore will be the financial and legal center of ASEAN (no surprise there, I know) and that Saigon/Hanoi, Bangkok, Kuala Lumpur, Jakarta, and Manilla will become (already are?) Regional centers.  We think Bangkok (and to a lesser extent Kuala Lumpur and Saigon/Hanoi) will become the center for small and mid-sized Western companies that do not need a full-blown center like Singapore and its attendant high costs.  Bangkok is already becoming the center for Myanmar and to a lesser extent for Cambodia and Laos as well, and we see that continuing.

We have recently been engaged in an email conversation with Daniel Feldman of TSS Group, a Japan-based factory automation company.  Dan has been working on a project examining China’s future role as producer, as compared with SE Asia.  He was kind enough to allow us to post his “Five off the cuff predictions,” as per the below:

  • Manufacturers in China will need to diversify and balance production throughout Asia, specifically Southeast Asia, in order to share risk and increase efficiencies. Fortunately China and Southeast Asia are complementary.
  • China will need to upgrade technically with automation to compete on anything other than scale, supply chain depth, and market demand. There will however be insufficient time to do so, as hot money flows from Japan and the US, supercharged by undervalued currencies, will push China’s 198% debt to GDP ratio over the edge, destabilizing the economy.  With depressed exports, dysfunctional private companies, monetary policy weakness, and excessively low interest rates, China will become a large South Korea, where over half the population will lack the ability to afford advanced education and housing. Even if China were to begin reforming its state-directed economic model earnestly by supporting small innovative businesses and reforming monetary policy, it is unfortunately too late.
  • FDI flows into Southeast Asia will increase at faster rates than rates into China, assisted by an undervalued Japanese Yen and US Dollar, and by disgust with China.  The infrastructure and expertise in ASEAN will improve significantly.  Productivity rates in Thailand and in Malaysia will continue to outpace China as they adopt mechanization rapidly.
  • In Southeast Asia, competitive electronics companies will establish themselves firmly in Thailand and Malaysia due to their high productivity and growing middle classes. Vietnam, the Philippines, Taiwan and possibly Indonesia will be secondarily important.
  • As the secondary hub in ASEAN, Bangkok will increasingly challenge Singapore’s supremacy as the marketing and sales hub, aided by it’s geographic centrality, and rapidly growing market and middle class. Singapore will retain its status as the finance hub, but its importance in manufacturing will wane rapidly as it faces natural limitations on land and labor.

I am not nearly so pessimistic as Daniel about China, but I am at least as optimistic about Thailand and Malaysia and Vietnam.  I see China manufacturing continuing to upgrade over the next ten years.  We wrote about that just the other day in the context of how those Chinese factories that have developed (or will develop) to suit Western needs will thrive and those that don’t won’t:  The New Role Of Written Contracts For Product Purchases In China. I also see China continuing to develop as a consumer and product market and that alone (Dan implicitly concedes this above) will influence the decision to manufacture in China.  But on the flip side, I am a raging bull when it comes to ASEAN.  I spent considerable time in Thailand and Myanmar this summer and I am convinced that if those two countries can solve their political issues (and I think they will), they will boom together. Here are my notes from that trip:

Bangkok.

The Good:  Bangkok is booming economically and if it can deal with its political problems and its pocket of violent Muslim extremists  in the South, there is little doubt it will continue to thrive.  ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam) is going to become one common market by 2015 and many multinationals are already looking to take advantage of this. Singapore will be where the largest and wealthiest of the multinationals set up their ASEAN headquarters, but I see many a smaller company choosing Bangkok because it is so much cheaper, and yet still a fairly easy city for foreigners. I have a friend who lives in a very nice, 2 bedroom, 2 bath condo, right off Wireless Road (one of Bangkok’s nicest areas) and pays only USD$1200 per month. Bangkok even has excellent healthcare. And the food is off the charts incredible, if you (like me) love spicy.

The Bad: Thailand is rightfully proud of its history of withstanding colonization and that means it often does things its own ways.  In practical terms, that means Bangkok’s street system is like just about nowhere else. Get used to hot and humid.

The Random: Seems more flights land late at night in Bangkok than anywhere else. I am told not to complain about this because late night landings are the best way to avoid the traffic. As fewer and fewer people continue believing China’s economic growth-line will perpetually point straight up while its costs remain flat, the concept of a China Plus One strategy is gaining considerable currency. ASEAN is becoming the plus one.

 Yangon.

The Good: The people. The food. The sights. The new. The temples.

The Bad: The business climate.

The Random: A surprisingly decent local wine. The world’s most (only) patient cab drivers. Twice I got stuck in horrible traffic due to accidents/rain and this was after having negotiated ridiculously low flat fees (USD$1.80). If this had happened in Beijing, I probably would have been tossed out of the car in the middle of the freeway in the pouring rain. Instead, the cabbies were polite as could be the whole time. Both times I doubled down on the fares and both times the drivers were just as gracious as could be.  I know it makes me sound like a complete hick to say that the people are nice, but dammit, the people are nice.

Hardly a day goes by without one of our clients expressing an interest to us regarding Myanmar or Vietnam or Cambodia. Perhaps the best “leading” measure of that interest is the trademark registrations we do for Asian countries other than China.  This makes for a great leading indicator because so often companies register their trademarks when they become serious about a country, but before they actually start doing business with it.  For why this is the case, check out WHEN To Register Your China Trademark.  I estimate that in the last year, my law firm has registered at least double the trademarks in Asian countries other than China than it did in the preceding year.  So yes, southeast Asia is hot. But, contrary to Dan, I see spiraling synergies between southeast Asia and ASEAN on the one hand and China on the other, not a zero sum game.
What are you seeing out there?
What do you think?
  • Bobserver

    The article omitted any mention of Hong Kong as a competing accounting, banking and financial competitor to Singapore or as a residual entreport and transhiper for goods and services in and out of China?

  • Emilio Pucci

    They may not all be moving, it is true. But you still miss the point. They are NOT adding capacity. Additional manufacturing capcity IS being added in Cambodia, Vietnam etc and NOT China.

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

      Oh, really? So how come China’s exports (in volume) keep rising?
      The reality is different from one industry to another. In electronics, countries like Cambodia or Myanmar are not even on the map. Same thing for complex garments to be made in large quantity. The reality is complex, let’s avoid general comments like this…

      • Sammy

        Possibly Chinese government backed companies (i.e. all Chinese companies) are increasing the exports. These Chinese backed companies can be losing millions but the government will not let them fail because they want to saturate the world with Chinese brands. It’s hard for a private company of any country to compete with a company that is backed by government dollars.

  • Robert Walsh

    In our office in Yangon, we’re seeing plenty of people coming in to look around and kick the tires. Most of the companies looking into Myanmar are low-margin manufacturers requiring not-so-skilled workers, and lots of them. Overwhelmingly the companies moving manufacture from China to Myanmar are Taiwanese, Korean, or even Thai.

    The single largest barriers are still the lack of electricity and the nosebleed prices to get a lease on industrial land in & around Yangon. Few are seriously considering setting up factories in areas remote from Yangon and its ports, even though there are industrial zones in the making in Hpa An, Pegu, and even Bassein. The government’s priority is to get Thilawa port and industrial zone off the ground (with liberal Japanese help). The remote areas have laborers, but they have a habit of suddenly disappearing during harvest times.

    A lot of companies are washing up in Myanmar after performing the same exercise in Vietnam and Cambodia. The frequent comment on Cambodia is that the country appears to have absorbed all of the factories it possibly can, and setting up a factory requiring 15-20,000 workers is a non-starter.

    Our thumbnail advice to people coming in to look at Myanmar is that it’s a good time to get engaged and start planning; the real estate bubble will pop, the US will finally decide to vote on favorable tariff schedules for Myanmar-manufactured products (they haven’t yet), and perhaps more electricity will be coming to a more robust grid.

    Some companies will come in and make money, but at the moment, the Myanmar government isn’t in a hurry to make it easier for foreign companies to do so than it would be for locals.

  • Evan Schmidt

    You will see this change moving out of China and the ASEAN tax benefits and lower taxes soon in Vietnam will make this happen. Dan if you are not in this countries then how can you tell? China is getting more expensive, and other countries are cheaper and younger. When price difference is enough to justify the lower productivity it is the end for China’s export manufacturing because they will move and it already started in fact. China Law Blog sells China, you have no choice. Other people have choices both with and without China.

  • Clay Mehl

    BOYCOTT MADE IN CHINA!!!! BUY MADE IN USA!!!!!

    • Philip Cook

      I work in Thailand but it costs me more to buy things like shoes, socks, fruit, snacks, etc which are made in Asia but cost 40-60% less when I buy them during trips home to the US. Maybe the reason Chinese products are taking jobs away in the US is because YOU ARE LETTING THEM!!!! Impose duties for gods sake!!! Countries in Asia like Thailand have import duties that buffer the local producers to some extent, why can’t the US do this????

      • jay

        Wouldn’t it defeat the purpose of cheap goods for America?

  • Philip Cook

    I mostly agree with the article. Having lived and worked in Thailand since late 1996, I have watched the growth literally. The optimism about Thailand is noted but there are issues bubbling on the surface to watch out for aside from politics. The unemployment rate is extremely low, labor unions are negotiating and getting huge bonuses(> 6 months), the AEC is coming in 2015 which could cause low cost labor to flood over the borders and impact Thai workers, students are getting bachelor’s degrees and master’s degrees but factories need skilled labor, plenty of unemployed who don’t want to work. After 17 years here I do agree its bustling, but not everyone is smiling here in the land of smiles, storm clouds appear on the horizon.