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 media and blog play and real life discussion about how “everyone” is leaving China for places like Cambodia or Thailand or Vietnam or Mexico or Indonesia or Taiwan.
First, let’s look at the New York Times article, which could lead some 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:
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 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 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, “There’s a risk in staying in China, too.”
The article does an excellent job setting forth what my law firm is seeing among our 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 moved 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 and Thailand and Mexico, and more recently and to a lesser extent, Myanmar.
- Many companies of all kinds looking at adding facilities or offices in Thailand or Malaysia or Indonesia, believing these three countries are going to thrive in the next decade as ASEAN’s economic importance rises.
- Many companies of all kinds looking at Mexico and Poland, due to their proximity to the United States and the EU and because it would diversify them away from “just Asia.”
We have recently been engaged in an email conversation with a international manufacturing consultant who been working on a project examining China’s future role as a 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, to share risk and increase efficiencies. 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.
- FDI flows into Southeast Asia will increase at faster rates than 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 its geographic centrality, its cost structures, and its 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 share this optimism about Thailand and Malaysia and Vietnam. But I also see China manufacturing continuing to upgrade over the next ten years. In The New Role Of Written Contracts For Product Purchases In China, we just the other day wrote how those Chinese factories are changing to suit Western needs will thrive and those that don’t won’t. I also see China continuing to develop as a consumer and product market and that alone will influence decisions to manufacture in China. But on the flip side, I am a raging bull when it comes to ASEAN. I recently spent considerable time in Thailand, Vietnam, and Myanmar and I am convinced that if those countries can solve (or even just improve upon) their political issues, they will boom. Here are my notes from a portion of those trips
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, 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 things like Bangkok’s street system are 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.
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 paid them double on the fares and both times the drivers were 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 in Vietnam or Mexico or Thailand. Perhaps the best “leading” measure of that interest is the trademark registrations we do in countries other than China. This makes for a great leading indicator because companies will often 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 Apply for a 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?