Of course it is not nearly as bad as our headline makes it out to be, but I wanted to make a strong point to counter the crowd that acts as though China is and always will be the factory to the world.
All Roads Lead to China recently did a piece, It’s Not of the China Price. It’s the End of Cheap Crap, [link no longer exists] that contends China’s rising prices means only the end of “cheap crap.” All Roads argues that “China is, and will be for a very long time, the lowest cost producer globally for the vast majority of what is currently being produced here.” I somewhat disagree.
We are at a turning point right now on China and those who live in China are in many ways the worst positioned to see it simply because they are there. For obvious reasons, those in China get contacted by companies wanting to go into China far more than they get contacted by those thinking of going elsewhere or those thinking of leaving China. My being with an international law firm means we get contacted by companies seeking to go to China and by companies seeking to leave China or choosing other countries over China. And let me tell you, I am seeing an increasing number of companies leaving China or choosing to skip it entirely and these are not manufacturers of “cheap crap.”
Manufacturers are looking beyond China because China is no longer ipso facto the cheapest and/or best place to manufacture.
China manufacturing prices are rising due to its rising labor costs and increased Chinese government enforcement of its tax laws. In an FT.com article by Josh Noble, entitled, The end of cheap: China’s tipping point, a number of economists theorize that China’s demographics have changed such that we should expect China’s wages to continue rising and its manufacturing to decline. An FT article, Coach the latest to cut China production, [link no longer exists] highlights foreign companies reducing their China manufacturing:
Coach is the latest company to move production out of China as labour costs rise, with a plan to cut its manufacturing in the country from about 85 per cent of its total to 40-50 per cent over the next five years.
The US-listed leather goods company follows companies from Esprit to Canon which are shifting from using China as a manufacturing hub to seeing it as a major consumer market.
Lew Frankfort, chief executive of Coach, said rapid income increases in China meant the company is beginning to move production to less expensive Asian countries like India, Vietnam and the Philippines. Southeast Asian countries are increasingly used as cheaper alternatives for labour-intensive manufacturing.
I am then quoted on what I have been seeing regarding manufacturers leaving China due to its rising costs:
Dan Harris, a lawyer at Harris Bricken, said he is seeing more and more companies seeking advice about leaving China.
“We’re working with one company a month that’s leaving China these days, and probably before a year ago, we saw about one a year,” he told FT. “It is labour costs and it is taxes and pensions, which are also a part of labour costs. Rent and utilities are rising and the Yuan may not be appreciating rapidly, but slowly but surely it [the Yuan] is appreciating.”
Harris added that while other Asian countries were an obvious choice, some were relocating manufacturing back to the United States or to Mexico or to Eastern Europe.
“For some, the cost savings were just never there so they’re coming back to the US,” he said.
The article concludes by mentioning a recent Boston Consulting Group report that asserts “that by 2015, strong productivity and relatively low wages would help the United States move ahead of China as a base for making goods which will be sold in North America.”
Though my law firm gets around half of its revenues from foreign (mostly American, European and Australian) firms going to China, I have to confess that some of our clients that went to China were part of a bandwagon on which they never should have taken a ride. Fortunately, and as I wrote last year, in The Risks of Shutting Down Your China WFOE, my firm is now doing blockbuster business helping foreign companies shut down their China operations in a way that will not preclude them (and their executives) from ever being able to return to China.
Our legal work helping shut down WFOEs (and Rep Offices and Joint Ventures) has been on behalf of companies that probably should never have gone to China in the first place and on behalf of those who should have gone into China, but are now choosing to go elsewhere, like Vietnam or Mexico. We have even done some China shut down work for companies moving to Korea or Taiwan for “quality” reasons. The industries in which these companies are involved have run the gamut, but none of them made “cheap crap.”
In another FT article, Goodbye Guangdong, Hello Hanoi, [link no longer exists] on how so much furniture manufacturing has moved from China to Vietnam, writer Rina Chandran urges people to start noticing how their labels no longer always say “Made in China” on them:
Try this the next time you go shopping: check out the labels. Even a random walk down the shopping aisle will show not all of them bear the ubiquitous legend, Made in China.
Vietnam, Thailand, Indonesia, Malaysia, even Bangladesh are popping up more frequently on the backs of cameras, computers, TVs and shirts, as labour costs rise on the mainland, and as smaller southeast Asian countries get their act together to stake a larger slice of the global supply chain.
The article goes on to talk of how “Vietnam in recent years has attracted the likes of Mitsubishi Heavy Industries Aerospace, Kobe Steel, Microsoft, Intel and Canon, as well as Japanese cosmetics maker Shiseido.” Some of my firm’s clients that have gone to Vietnam have done so to stay closer to the multinationals they supply. Most of our clients that have followed “their” multinationals to Vietnam have kept their presence in China as well, but some have not. Interestingly, all report “preferring” Vietnam overall to China and more than a few of them have mentioned “never wanting to return to China, ever again.”
China will be a massive manufacturing presence for a long time, but common sense dictates that companies looking to manufacture there consider other countries as well.
What do you think?