Rising Factory Costs Erode China’s Edge: Yada, Yada, Yada.

International Manufacturing Contract lawyers

New rule on this blog. If I am emailed the same article by three different people, I will write something about it, whether I want to or not.

Four people emailed me this article and none said much more about it beyond, “have you seen this?” I am not even sure what the big deal is, but here goes.

The article is an AP article, entitled, Rising Factory Costs Erode China’s Edge and it speaks to how the price of China’s exported products are rising due to wage inflation, China’s new labor contract law, higher overall costs, and a decrease in export subsidies (like VAT cancellation). Nothing new here.

The article goes on to talk about how companies are leaving China:

To adapt, many multinational manufacturers – including Intel Corp., iPod-maker Hon Hai Technology Group and Japanese companies like Canon Inc. and Sony Corp. are expanding operations in Vietnam.

Auto parts makers are decamping for the Middle East and Eastern Europe, textile-makers to Bangladesh and India.

And how some companies that might have in the past gone into China are now looking elsewhere:

Despite those strategies, prices for Chinese-made products will probably continue to rise in the next few years, causing some companies to invest elsewhere, says UBS economist Jonathan Anderson.

“Over the medium-term, where are you going to invest if you’re building a factory? Maybe not China anymore. Maybe Bangladesh, Vietnam, Mexico, Indonesia. Maybe India.”

My views on this are that manufacturing outsourcing to Vietnam and Indonesia and Mexico and to China will continue increasing. Obviously, there will be many companies that choose Vietnam or Mexico for their manufacturing who would have chosen China a few years ago. There will also be many in China now who will choose to expand their manufacturing operations in Vietnam instead of China. But China will remain the overwhelming choice for manufacturing and few companies manufacturing in China now will up and leave for Vietnam or

Mexico unless there is some compelling reason to do so.

But please do keep the articles coming.

7 responses to “Rising Factory Costs Erode China’s Edge: Yada, Yada, Yada.”

  1. I’ve heard this kind of spiel about Vietnam being the new China before, but the new China is still the old China! Sure, prices in Guangdong or the Yangzi delta might be making those location less tempting, but don’t tell me that Fujian, Yunnan, or any of the other of the poorer coastal provinces aren’t equally as poor and equally as populous and accessible as the Red River delta of northern Vietnam. Sure, Vietnam may very well have advantages over China when it comes to finding people proficient in English/French and with a more western outlook, but the higher possibility of political instability, the greater level of repression and the weaker rule of law in Vietnam are also things worth considering. Even when the whole Coastal littoral of China has been fully industrialised (and what an environmental catastophe that will be), there will still be the interior.
    In a larger sense what China has to offer manufacturers is a large, mobile population who are willing to accept low wages, with 800+ million Chinese still tilling the land on postage-stamp-sized farms this is not going to disappear any time soon. Vietnam is a good bet for companies wishing to diversify into similar markets, but neither it nor any of the other places touted as replacements for China are going to be knocking China of the top spot for low-wage high-volume production in the near future.

  2. Manufacturing is required as a tool to provide the masses with jobs. Something a service industry cannot do.
    On the other hand a large portion of these masses should remain in agriculture to feed the rest.
    China is a very big place with a variety of economic and social “zones”.
    As a result of the rising inflation, salaries, food etc. at some of these zones (which can be countries in European sense) will see Manufacturing slowing down. This process has been going on for awhile.
    Now, naturally it should flow into other “zones” taking the place of agriculture which in turn would increase again inflation and so on.
    Of course it will pop sooner or later.

  3. I just finished a blog post on this exact topic (Dan–our associates must hang out at the same coffee houses as I am getting these articles sent to me as well), and found it amusing to see the title of your post when I decided to read the latest on your blog. There are so many issues to consider when ascertaining where a given company should source from. I’ve taken a stab at a number of these in my latest post here: http://www.product-global.com. Bottomline, at this stage of the game, many companies and industries will be better off predicating their sourcing decisions on their own particular circumstances, that of their suppliers, and their competitive positioning in the marketplace. It’s important to watch these macro-economic trends and plan for the long term, but becoming reactionary over newspaper articles like this will most likely get companies into trouble.

  4. China / Vietnam / Cambodia / Sri Lanka . . . .Obviously manufacturing is on the move there is much more than just China now. Asia is the new China.

  5. It seems that what with a firmer legal system, there’s less risk involved in doing business in China. With less risk, there would seem to be less to gain.
    Could the problem be merely that China has grown too fast to train workers for the next stage of development, with more skilled workers?
    As always, I’m suspicious of companies that think they can break into China’s markets. They’ve been wanting to do that since the 18th century and have never succeeded. The past is not necessarily a predictor of the future, but still, one should be careful. The point about Starbucks is noted, but I prefer Panera.

  6. @Fishmonger – How exactly do you defend this phrase: “With less risk, there would seem to be less to gain.”? Business and gambling are two different things, a business will almost never succeed from pure dumb luck, whereas a gambler very possibly might.

  7. The China Price: More Evidence of its Demise
    An AP story confirms what the Businomics Blog reported one day earlier: the end of the China Price. (Hat tip to the China Law Blog.)… American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 to

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