In­vest­ment: Lower la­bor costs lure Chi­nese com­pa­nies

China Daily (Hong Kong) - - BUSI­NESS DIGEST -

That ac­counts for 90 per­cent of our pro­duc­tion,” said Wei Yongquan, gen­eral man­ager at Hua­jian In­ter­na­tional Shoe City (Ethiopia) Plc.

One or­der for high-heeled black san­dals, la­beled in the US as the fash­ion brand Guess, had just been com­pleted and was await­ing pack­ag­ing and ship­ping.

All of the work­ers in the busy work­shop were lo­cal young peo­ple.

“We em­ploy 3,300 lo­cal peo­ple. Their av­er­age age is 22,” said Wei.

For Hua­jian, the ma­jor at­trac­tion of Ethiopia is its cheap work­force. The av­er­age monthly pay­roll for a worker in Ethiopia is about 300 yuan ($50), com­pared with 3,000 yuan at its head­quar­ters in Dong­guan, Guang­dong prov­ince.

In ad­di­tion, be­cause an­i­mal hus­bandry out­put ac­counts for 20 per­cent of Ethiopia’s gross do­mes­tic prod­uct, Hua­jian is us­ing 30 per­cent of the lo­cal leather yield ev­ery year, which saves 30 per­cent in the cost of raw ma­te­ri­als.

How­ever, be­ing in an in­land coun­try lack­ing trans­porta­tion net­works, the shoe­maker has to pay for higher ship­ping fees.

“In gen­eral, we can save 18 per­cent to 28 per­cent in costs in Ethiopia com­pared with China,” Wei said.

“But the Ethiopian fac­tory makes up less than 10 per­cent of the com­pany’s global pro­duc­tion,” he added.

Still, Hua­jian’s am­bi­tion to move all of its man­u­fac­tur­ing to Ethiopia will not be that easy. Cur­rently, with­out skilled work­ers and high-grade pro­cess­ing meth­ods, lo­cal leather can only be used for mid­dle- or low-end prod­ucts and pop­u­lar col­ors and styles.

“Most of our work­ers have not seen a fac­tory be­fore. It al­ways takes us some time to de­velop sim­ple skills in them, let alone so­phis­ti­cated crafts­man­ship,” Wei said.

Be­cause of a con­di­tion ban­ning sales in Ethiopia, Hua­jian has been granted some sup­port from the lo­cal govern­ment such as duty-free ex­ports and ma­te­rial im­ports for five years.

Of course, on the other side, Ethiopia is wel­com­ing such in­vest­ment be­cause it is in ur­gent need of more for­eign cur­rency earn­ings and job op­por­tu­ni­ties.

How­ever, for Li­fan and East­ern Steel, which are sell­ing in the Ethiopian mar­ket, things are more com­pli­cated.

High tar­iffs and ex­pen­sive trans­porta­tion are heavy bur­dens, and their in­vest­ments are more cau­tious.

“The pol­icy is not very fa­vor­able in terms of high im­port tar­iffs and con­sump­tion taxes,” said Yin Tian­jun, di­rec­tor of Li­fan’s Ethiopian fac­tory.

Li­fan is ship­ping equip­ment and parts from China, and work­ers in Ethiopia just do the assem­bly work.

Li­fan can sell 1,000 au­to­mo­biles in Ethiopia ev­ery year. It is hir­ing 200 lo­cal work­ers who as­sem­ble seven cars ev­ery day.

Nev­er­the­less, the lower cost of la­bor is off­set by high du­ties. The price of a Li­fan car is al­most triple the price in China.

Faced with a squeezed Chi­nese au­to­mo­bile mar­ket dom­i­nated by over­seas brands, Li­fan en­tered Ethiopia in 2009. It is po­si­tioned as a mid­dle-end brand, in or­der to at­tract the ris­ing num­ber of lo­cal fam­ily car buy­ers.

“We can­not com­pete with brands such as Toy­ota in terms of qual­ity and price. But they just ex­port fin­ished ve­hi­cles here, while we fo­cus on the Ethiopian mar­ket,” said Yin.

Based on Li­fan’s cur­rent sales in Ethiopia, it is plan­ning to make a trial in shift­ing sev­eral pro­duc­tion lines to the coun­try.

If things go well, Yin said they are ex­pected to im­prove out­put to 5,000 ve­hi­cles an­nu­ally in five years.

“We hope to ex­pand into neigh­bor­ing mar­kets with the de­vel­op­ment of rail­ways and high­ways,” said Yin.

In a move to com­bat over­ca­pac­ity in the do­mes­tic mar­ket, Jiangsu- based East­ern Steel in­vested more than 100 mil­lion yuan in set­ting up a fac­tory in the zone, which was launched in October.

“Our pro­duc­tiv­ity is al­most five times com­pared with lo­cal mak­ers. Still, we have to pay 5,000 yuan in du­ties and fees for 1 ton of im­ported ma­te­ri­als,” said Miao Wen­wei.

The de­vel­op­ment of the in­dus­trial zone, which re­cruits 4,000 lo­cal peo­ple, was ex­pected to be faster.

“We have been talk­ing with the lo­cal govern­ment for seven years about an ex­emp­tion in in­come tax last­ing four years. We hope to get for­mal ap­proval within two months,” said Qian Guo­qing, deputy man­ag­ing di­rec­tor of the East­ern In­dus­try Zone Ad­min­is­tra­tive Com­mit­tee.

With an in­vest­ment of $80 mil­lion, the first phase of the zone is equipped with ba­sic op­er­at­ing re­sources, in­clud­ing wa­ter, elec­tric­ity, com­mu­ni­ca­tions and roads.

Qian said they are plan­ning to start con­struc­tion of the sec­ond phase. “But we are wor­ry­ing about fund­ing be­cause it is dif­fi­cult for us to find loans in this coun­try,” he added.

At the root of the is­sue is a long-run­ning de­bate about how many more in­dus­tries the Ethiopian govern­ment will open up and how much ef­fort it should make to fa­cil­i­tate trans­porta­tion to spur the econ­omy and ap­peal for more in­vest­ment.

Chen Guangzhe, coun­try di­rec­tor for the Ethiopia Africa Re­gion at the World Bank, said al­though the la­bor costs in Ethiopia are very low, la­bor costs ac­count for only about 30 per­cent of a Chi­nese pro­ducer’s to­tal costs.

“De­spite giv­ing more in­for­ma­tion to Chi­nese in­vestors about lo­cal busi­ness op­por­tu­ni­ties and poli­cies, Ethiopia should fur­ther im­prove its in­vest­ment en­vi­ron­ment and try its best to lower the price of lo­gis­tics,” said Chen. Con­tact the writer at yao­jing@ chi­nadaily.com.cn

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