Companies going overseas turning to widening world of opportunities
As the economy continues to slow and excess capacity builds up, many private firms find no choice but to look abroad, report and in Shanghai
Chinese manufacturers that have been grappling with decelerating economic growth and tougher operating conditions are increasingly concluding that going abroad is an effective way out.
But there’s more than one way to go abroad, and not every company has exactly the same set of reasons.
A survey by the American Chamber of Commerce in Shanghai found that 70 percent of United States-based companies don’t plan to move their production facilities out of China this year. But 20 percent of those companies aim to improve the productivity of their operations in the nation.
Among companies seeking to relocate production, fewer than 5 percent plan to move their facilities to low-cost countries within the Asia-Pacific region. The same proportion plans to move them back to the US.
Thirteen percent, however, plan to relocate within China.
While labor costs are rising in the nation, Mark Hutchison, president and chief executive officer of GE Greater China, said labor represents a rather small percentage of their costs.
“We don’t make decisions on labor costs alone. I’m not worried about the labor cost, as long as we continue to grow the waywe have grown here.
“China is a huge market. You always have to employ people here just for the Chinese market. But it has to continue to move up the value chain so that it is competitive globally,” he said.
Not every executive is so sanguine. Chesapeake Bay Candle shifted its production home in 2011. Its new facility inMaryland is actually its first in the US.
David Wang, co-founder and co-owner, said there were many reasons for the move, including speed to market, branding value, quality control and inventory management.
He added that many factors have weakened the competitiveness of Chinese manufacturing: currency appreciation, a surge in labor costs (including the cost of labor laws that are more strictly enforced), a shortage of workers and higher costs for land, energy, transportation and financing.
There’s probably more domestic competition, too.
“Both the Chinese government and Chinese manufacturers are definitely trying hard to move up the value chain,” Wang said.
The China Filament Weaving Association said the average wage for a filament weaving worker rose 7 percent in 2013 alone.
“Foreign companies that have chosen to reshore operations to their home countries are changing their strategies and moving labor-intensive work out of China, as labor costs are increased rapidly,” said Sun Lijian, vice-dean of the school of economics at FudanUniversity in Shanghai.
Sun said that reshoring won’t increase much, though, because foreign companies are adjusting by centralizing even more of their operations in China— sales departments, R&D centers and the like.
The strategy of moving facilities overseas isn’t unique to foreign companies.
Driven by rising labor costs in China, textile and garment producer Youngor Group, Hong Kong Union Times Group Ltd and an industrial park operator in Guangdong province have jointly invested in an industrial park valued at some 1 billion yuan ($165 million) in Vietnam.
Youngor attempted to transfer its production base three years ago. It acquired a shirt factory inHanoi for more than $4 million in 2011. LiRucheng, chairman of Youngor Group, said in a previous news report that the investment environment is getting better in Vietnam.
Launched inWenzhou, Zhejiang province, in 1991, Hazan Shoe Co Ltd was once a small factory with one production line, where several dozen workers made about 300 pairs of shoes per day by hand.
“We focused on being the original equipment manufacturer for international brands for the first three years. I decided to bring Hazan as a Chinese brand to Italy as the first step out ofChina in 2004,” said Chairman Wang Jianping.
Wang bought a 90 percent stake in the brand Wilson Shoes Srl, a manufacturer based in Milan, to acquire its design expertise.
Hazan now has a research center in Italy tomake sure the design of the shoes always stays ahead of the market. It also has two modern production lines in Nigeria that turn out 3,000 pairs of shoes a day.
Having operated a factory in Vietnam for five years, Ningbo Powerway Group retained its research and design center, sales department, major production lines and management teams in China.
The company, leading global supplier of nonferrous alloys, only moved a few minor production lines to Vietnam.
“We still have eight factories in China that act as OEMs for well-known brands. Our factory in Vietnam can be a backup production base for our company to expand the market,” said Zheng Xiaofeng, a senior manager.
Powerway Group doesn’t have any long-term plans for a
Four companies pulled domestic bond sales and yields on speculative-grade debt jumped the most since November after Shanghai Chaori Energy Science & Technology Co warned of what would be China’s first onshore default. Suining Chuanzhong Economic Technology Development Co, Taizhou Kouan Shipbuilding Co and Xining Special Steel Group have postponed bond sales because of fluctuations in the market. Qunsheng Group Co has scrapped its offering because of a lack of demand. significant expansion in Vietnam.
“Vietnam will only be a temporary stop for our enterprise to expand around the world. We will continuously focus on building our brand and improving our product design in China to attract more overseas clients,” said Zheng.
In2012, theNationalDevelopment and Reform Commission and 12 other government agencies issued a statement on policies that encourage and support private companies to invest in the overseas market.
“Such private investorfriendly policies have made more and more private investors actively participate in overseas investments,” said Jessie Tang, a merger and acquisitions partner at the Jones Day lawfirm in Beijing.
“The rising labor cost indeed drives some private enterprises overseas. For instance, in the manufacturing industry, given the rising costs of production elements such as labor, energy and raw materials, Chinese companies are gradually losing their cost advantages to many other emerging countries such as Vietnam, Pakistan and Cambodia.
“This partly causes domestic manufacturers to outsource their plants,” she said.
Tang said there are other reasons to go abroad: seeking new markets, building international brand names, gaining advanced technology and becoming more competitive.
Many Chinese private companies have reached the stage of development where “going out” is a necessary and effective way to upgrade and transform their businesses. This is usually done in the form of obtaining advanced technology and seeking foreign target market, said Tang.
For instance, in July 2012, the Zhejiang-based China Youngman Automobile Group Co Ltd bought a 74.9 percent stake in German bus maker Biseon Bus GmbH. The motive for Youngman was to upgrade its production to world-class standards.
“It appears that Chinese manufacturing companies accounted for a significant number of outbound M&A deals inChina during the past fewyears,” Tang said. Contact the writers at firstname.lastname@example.org and email@example.com