Is China Losing Its Luster to Manufacturers?

June 11, 2012
In addition to wages, there are a lot of risk factors to consider.

With the many reports you have read about companies leaving China to come back to the U.S. , Darin Buelow , the national leader for the Real Estate & Location Strategy practice in Deloitte Consulting LLP says he isnt seeing a torrent of activity. What he is seeing are companies who are looking at the total cost of production instead of merely looking at the labor component.

Manufacturers are reviewing their options within their China-Plus-One strategy whereby companies that have a plant in China are now deciding whether or not to open a second one. The need for the second plant is mostly due to the expanding Asian market.

Where you choose to locate depends on the fixed costs of your business. Capital heavy companies need to look into the long term issues like energy consumption before investing in expensive machinery. Companies that are more flexible are actually going to Vietnam or Indonesia as they are finding lower labor costs relative to Chinas increasing wages, explains Buelow.

An especially interesting result of these increasing wages is that Chinese manufacturers are leaving the coast and looking at the interior as places to locate plants. Others are moving to Indonesia, Vietnam, or Thailand, Buelow says.

Both Vietnam and Indonesia have large production capabilities. Additionally Indonesia doesnt have the environmental compliance issues that China has. However it does have risks of its own including ports that are not as mature as other countries.

Another issue that has plagued manufacturers in China, and continues to do so, is intellectual property. This type of protection in China still is not equal to that of other countries and many manufacturers will not take a chance with their advanced products or processes thereby ruling out that second plant in China.

And as manufacturing moves from labor intensive work to energy-intensive work the analysis of costs is different. Companies are shifting from man-hours to kilowatt hours as humans are replaced with robots and drive utility costs up, says Buelow.

A corollary to this development is the talent paradox. There is a skilled labor shortage at the same time there are jobs going unfilled. This is causing manufacturers to cast a much wider net in seeking talent and determining where they set up shot to accommodate that talent.

Other factors to weigh when deciding whether or not to add another factory in China include overall risk analysis. Its not prudent to put all of your eggs in one basket, Buelow remarks. With long lead times and the high cost of energy, if China is the only plant producing your product you are taking a very high risk.

A further risk to production that is going to be a problem in the next 10-15 years, according to Buelow, is water scarcity. While some countries, such as Mexico, require manufactures to buy water rights, China isnt there yet. Yet it's a serious concern as manufacturers are huge consumers of water.

However, even with all of the risks mentioned above, there is a counte balance that outweighs these issues. Chinas middle class market is huge and there is going to continue to be demand for domestically produced products. It is the largest un-served market in the planet, Buelow says.

By 2030, China should have approximately 1.4 billion middle class consumers , according to the UN Population Division and Goldman Sachs.

An interesting twist about serving the domestic market is that many foreign nationals changed from joint venture status to wholly owned foreign enterprises after WTO, but these zones were restricted to export only. So now manufacturers are locating outside of China so that they can then sell inside the country.

Whatever the difficulties or challenges manufacturers face by locating within China or locating outside of the country, they will continue to produce for and sell to the domestic market, explains Buelow.

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