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

China Daily (Canada) - - BUSINESS -

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 yu­ran@chi­nadaily.com.cn and shi­jing@chi­nadaily.com.cn

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