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China plus one strategy - part 1
As predicted, China is no longer the "low cost" manufacturer of the world. Rising inflation and wages means that the manufacturers will shift operations to lower cost countries, such as Vietnam and Cambodia.|
The increasing strength of the RMB vis the USA is causing some pain in USA, the Bush administration's fixation on this issue is back-firing.
On the positive side, many western executives tacitly and behind the door do agree that the nominally communist regimes of China and Vietnam contribute to internal stability in a way that multi-party democracy cannot. This stability ensures continuity of policies and lend confidence to executives planning to invest into China whereas multi-party democracies such as those in Thailand and the Philippines can suddenly change tack.
One factor in China's favour is the internal investment in infrastructure such as roads, telecommunication and ports which facilitates the movement of goods sometimes not possible in other lower-cost countries.
Labor Costs Rise, and Manufacturers Look Beyond China
Justin Mott for The New York Times
By KEITH BRADSHER
Published: June 18, 2008
When it comes to multinational manufacturing, Vietnam is fast becoming the new China. The electronics maker Samsung is building a factory in Yenphong Industrial Park, in Yenphong, Vietnam.
HANOI — Canon is no longer building or expanding factories in China, but the company is doubling its workforce at a printer factory outside Hanoi to 8,000.
Nearby, Nissan is expanding a vehicle engineering center. Hanesbrands, the underwear company based in Winston-Salem, N.C., is building two new factories here, as is the Texhong Textile Group from Shanghai.
China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.
A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.
More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.
Companies are using the China-plus-one strategy to mitigate the risks of overdependence on factories in one country.
Multinational corporations are “thinking about all the world and keeping a balance” between China and other countries, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory, which sells to Wal-Mart and Kohl’s, is building a factory in Vietnam to supplement its three factories in China.
Companies remaining in China are desperately seeking to control costs.
“We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest manufacturers of cotton and spandex fabric.
To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared to China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia.
In China, where rural villages are running low on able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour work week, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour work week that includes a full day on Saturdays.
Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs — on top of a 12 percent increase last year. New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.