Beset by rising costs, the labor shortage and policies discouraging low-value industries, China’s export manufacturers are setting up production lines in Southeast Asia. But relocation has its disadvantages.

An increasing number of China companies are constructing factories overseas, mostly in Vietnam and Indonesia, to take advantage of lower costs and more favorable trade policies there. Although the exact number of factories that have established offshore factories is not available, many enterprises manufacturing household appliances, automobiles, TV sets, footwear, textiles and apparel have made the move in recent years.

The Texhong Textile Group, for instance, set up a textile factory in Vietnam in 2006. The large supplier of cotton textiles rakes in $570 million in combined sales annually. A year later, one of China’s major LED lighting suppliers, Neo-Neon LED Lighting International Ltd, built a 2,000-worker factory in Vietnam. In 2008, China’s largest manufacturer of air conditioners, Zhuhai Gree Electric Appliances, Inc., constructed a production facility with an annual capacity of 200,000 units, also in the Southeast Asian country.

Pegasus Footwear Co. Ltd is now considering building a factory in Vietnam or Indonesia, citing lower production costs as the main reason. Vietnam has a relatively mature footwear industry and some parts of the supply chain are well-developed. Since shoe manufacturing does not require sophisticated technology, the low cost of labor in Vietnam is an enticing reason to transfer production there.

According to Aroma Consumer Products (Hangzhou) Co. Ltd, which has a candle factory in Vietnam, monthly salaries in the Southeast Asian country are just three-fifths of those in China. In fact, an assembly-line worker in Vietnam earns roughly $101 per month, 53 percent lower than in China, said Khiem Vu, Vietnam-based project manager of Kearny Alliance, a nonprofit organization that helps in trade, business education, training and applied research.

Monthly salaries in China have increased nearly 27 percent over the past year in many industries, particularly for skilled workers. In some rural areas, wages have risen 15 percent for assembly-line staff, which resulted in a 5 percent increase in export quotes.

“If you look at the statistics of labor costs in China between 2006 and 2010, you would see an explosion of costs from around 600 yuan per month in 2006 to 1,200 yuan per month in 2010,” said Danny Friedmann, IPR consultant in China and editor of IP Dragon, a blog about IP issues in the country. “The strikes at factories such as the Honda suppliers and the suicide drama at Foxconn pushed up labor costs further.”

Economist Tom Orlik believes that as labor and other costs increase in China, the appeal of the eastern coast as a location for factories will decline. That means there will be more investment overseas and in less expensive inland provinces. Orlik also writes for China Translated, a blog discussing the country’s economic and political situation.

More than just lower wages

But there are other factors driving companies to build offshore factories. For instance, despite higher monthly salaries, the labor shortage remains a problem in China. The pressure to find sufficient manpower is one of the reasons Neo-Neon decided to relocate some production lines to Vietnam. Apart from being able to find enough workers, the company was able to save on electricity costs as power charges in Vietnam are 40 percent lower than in China.

The yuan’s appreciation is also intensifying the pressure to keep manufacturing expenses low in China. The currency started strengthening in April and makers are concerned it will continue to climb up in value in the next few years.

Business professor and China Challenges blogger Brian Schwarz believes avoiding trade sanctions is another reason that has led suppliers to relocate some manufacturing offshore. China is the biggest target of anti-dumping investigations from various importing countries. This year, the EU imposed a 16.5 percent duty on China-made leather shoes. Footwear exported from ASEAN-member countries, meanwhile, are only levied 10 percent.

To avoid EU trade sanctions, Dongguan Huabao Shoes Co. Ltd set up a shoe factory in Vietnam five years ago, back when the country did not have to pay anti-dumping duties. The facility now produces 80,000 pairs monthly.

The push to relocate does not only come from the pressure to keep costs low and avoid trade sanctions, but also from Beijing itself. The national government is encouraging suppliers to expand their business overseas, particularly those engaged in low-value manufacture, and highly polluting and energy-consuming industries.

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