June Insight: When is Moving Day?

The impact of rising production costs on operations in China is reported widely within and outside of China.

The two key questions that international companies with manufacturing operations in China face are increasingly likely to face are when to move and where to move to.

A large number of leading end multinational companies in key sectors are currently based in or around Shanghai and Beijing.  

To locate a factory in an area like Pudong when it first opened up to foreign investment made more sense than it might today.   Now that Shanghai has advanced its position as a financial services hub, to establish new manufacturing operations in an area like Pudong will rarely make sense.  Manufacturing in Pudong now is the North American equivalent of Ford leaving Detroit to establish operations in Long Island City or the Jersey Shore.  

At the moment, the original 14 Coastal Cities and the Four Special Economic Zones along with Beijing, Shanghai and Guangzhou all face increasing price competition from second tier Chinese cities and many lower cost locations outside of China.  So how do you know when to move?

The most obvious parameters are financial.  Are your margins decreasing?  Are you losing domestic sales due to price?  Is your marketing operation increasingly unable to pass rising China production costs on to your international customers?

The subtle signs may start in advance of market focused financial benchmarks.  Is there an increase in staff turnover or labour disputes as your wages are kept low to compete?  Is end product quality slipping due to less management oversight of the production and packaging processes?  Can you now see high end villas, office and residential towers and golf courses from the factory windows?

Is the local government giving you a sign with more frequent inspections from the Environmental Protection Bureau?  Are the tax authorities more interested in revenue than job creation?  Is the senior level of the local government less willing to resolve disputes with working level officials in government agencies?

All of these are signs of a company that maybe is now in the wrong place at the wrong time.  Like moving to upgrade your house when you start a family, the question of moving is an individual one that each company must answer itself.  As these signs appear, it may be time for a foreign invested company in China to do a cost comparison of labour, land and government support available in other jurisdictions.
 

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