Branching Out
At first, Ellyson dealt with Chinese factories owned by Taiwanese or Hong Kong-owned companies. But after several years, he realized that he could obtain a 10% cost savings by dealing with wholly owned Chinese entities. Since then, East West Manufacturing has also entered into some joint ventures in China and has built its own factory in Vietnam.
In fact, while the vast majority of East West's business remains in China, the company has deliberately begun a process to diversify its manufacturing operations outside that country. The primary reason has been rising costs in China. Ellyson said the increased valuation of the yuan, higher VAT-related taxes, rising labor costs and new labor laws, and higher freight costs have combined to make China less attractive than in the past.
Ellyson discussed the increase in labor costs. "In the early days, we were paying folks $700 to $800 a year in salary. Today in our motor factory, we are paying folks $4,000 a year," he says. "On top of that, labor laws have become a lot stricter so you can't hire and fire at will. If you have someone on your staff for more than three months and you want to let them go, you're going to pay them a year's worth of salary."
Ellyson is quick to note that the infrastructure in China is unsurpassed and a huge supplier base makes it much simpler and cheaper to obtain materials and components for complicated products. For example, he manufactures a condensate pump for the air conditioning market in Vietnam. One of the components is a UL-approved circuit board. In southeast China, there are probably 250 suppliers for that board, but he could find only one supplier in Vietnam and their price was too high. As a result, he continues to buy the boards in China and ship them to Vietnam for assembly.
For simpler products, however, countries such as Vietnam are quickly becoming lower-cost alternatives. Ellyson is also exploring expansion to South America, most likely Brazil, and Indonesia. He also recently has had talks about Ethiopia, a country with low labor costs, high literacy and good access to ports. "That is probably a 10- to 20- year plan. If we did something there, it would be very simple," he says.
Ellyson has also made a number of trips to examine manufacturing in India, but so far has shied away from making a commitment there. "In India, we haven't been able to come up with costs that are much more competitive than what we can currently get out of China," he says. "It is usually a wash and when that happens, we say it's not worth it."
