The impact of rising production costs on operations in China is reported widely within and outside of China.
The two questions that international companies with manufacturing operations in China now face are: When to move and Where?
It made sense to locate a factory in Shanghai
before it became an international financial center
Photo: Kohls Kohls
A large number of leading multinational companies in key sectors are currently based in or around Shanghai and Beijing. To locate a factory in an area like Pudong in Shanghai, when it first opened up to foreign investment, made more sense than it would today now that Shanghai has advanced its position as a financial services hub. China’s original 14 Coastal Cities and the Four Special Economic Zones, along with Beijing, Shanghai and Guangzhou, face increasing price competition from second-tier cities within China and many lower cost centers outside of China.
So how do you know when to move? The most obvious warning signs are financial. Is your margin decreasing? Are you losing domestic sales due to price? Is your parent company increasingly unable to pass along your rising production costs internally or to international customers?
The subtle signs may start in advance of financial benchmarks. Is there an increase in staff turnover or labor disputes because your wages are kept low to compete? Is production quality slipping as management gets sent back home or because fewer numbers of mid-managers are permitted in the budget? Can you now see high-end villas, offices and residential towers or golf courses from the factory window?
Are you seeing more frequent inspections from the Environmental Protection Bureau? Are the tax authorities more interested in revenue than job creation? Are senior members of the local government less willing to resolve disputes in government agencies?
All these are signs of a company that could be in the wrong place at the wrong time. Still, the decision to move is one that each company must answer individually. But as the indicators become more obvious, a foreign company invested in China would be wise to do a cost comparison of labor, land and government support available in other jurisdictions.
Editor’s Note: Check out our Global Opportunity Tool for cost comparisons of doing business in 55 countries.
John Gruetzner is managing director of Intercedent, an advisory firm with offices in Beijing, Hong Kong, Singapore and Toronto. The firm executes cross-border trade and investment projects focused on Asia. Its clients include Fortune 500 firms, SMEs and government agencies. Mr. Gruetzner has lived and worked in China for more than 28 years.