Escalating production costs in China’s coastal manufacturing hubs are pushing some suppliers to relocate to the central and western provinces.
The Pearl and Yangtze River Delta regions may soon lose their monopoly over China’s export manufacturing sector. Rising costs and the worsening labor shortage are driving companies in these coastal areas to relocate production facilities to the interior. Although the shift started mid-2004, the trend gained pace in 2007, when rapid economic growth in the west surpassed that in the east. Companies leaving Guangdong, Zhejiang and other coastal provinces are now setting up new production bases in Hunan, Jiangxi, Anhui, Hubei, Shanxi and Sichuan to take advantage of lower worker and land expenditure, among other benefits.
The cost of labor in Tianmen, Hubei province, for instance, is about 50 percent lower than in coastal regions. Electricity and land costs are 20 to 30 percent less. Such factors are what convinced Full River (Hong Kong) Ltd to relocate its manufacturing facilities from Shenzhen in Guangdong province to Liling in Hunan. The headquarters, R&D and marketing departments remain in Shenzhen. The monthly minimum wage in the inland city is 500 yuan ($75), while factory rental is about 8 yuan ($1.17) per square meter. In areas outside Shenzhen’s special economic zone, the rates stand at 900 yuan ($130) and 12 yuan ($1.75) per square meter. Expenditure is set to rise further, as a provincial mandate will lift worker salaries by as much as 21 percent beginning May 1. Although Full River has seen its transportation expenses go up, overall costs are still about 5 percent lower.
Material sourcing is unaffected, as the company’s suppliers are mainly in Zhejiang, Sichuan and Hebei, all of which are geographically closer to Liling than Shenzhen. Division of labor was one of the major objectives of Guangzhou Canttro Extension Electronics (Group) Co. Ltd, a maker of electronic connectors, when it established factories in Hangzhou in Zhejiang and Wuhan in Hubei. This forward-looking company anticipates labor recruitment to get increasingly difficult in the future. Setting up production facilities outside of Guangdong would ensure the company’s continuous development, as products will also be promoted in different provinces.
"It would be easier to recruit workers in small numbers," general manager Zheng Haibin said. "For example, employing 200 in Hangzhou and another 200 in Wuhan is much easier than finding 400 more workers in Guangdong, where we already have 500." Managing a small factory is also easier than a large one. "The challenge ahead would be on keeping the loyalty of the workers," Zheng said. "The new employees would be provided with company shares to motivate them."
Guangzhou Canttro’s factory in Hangzhou began operations in January 2010. The Wuhan factory is scheduled to open by May this year. The supplier is keeping its Guangzhou office for marketing, sales, R&D and for the manufacture of high-end products.
Local governments in inland provinces also provide incentives, including special land rates for investors that have a registered capital exceeding a certain amount. An initial expenditure of at least 50 million yuan ($7.3 million), for instance, can lower land purchase costs from 90,000 to 140,000 yuan ($13,200 to $20,500) per hectare to just 30,000 yuan ($4,400). Because of this, most transplanted factories claim to incur general savings of between 5 and 30 percent. This comes even as material and transportation costs are currently higher than in the coastal region.
Labor-intensive plants lead migration
Many of the high-profile transfers involve foreign-invested businesses that carry out manual processes extensively. Last year, Intel transferred its assembly and test plants from Shanghai to Chengdu in Sichuan. The move started in February and was completed in November 2009. In October 2009, Taiwan-based Foxconn finalized a $1 billion contract to construct a manufacturing base also in Chengdu.
Hewlett-Packard and Taiwan’s Quanta are establishing notebook computer production bases in Chongqing. HP’s new factory opened in January 2010. Quanta signed a contract in that month as well. In November 2009, Pfizer signed an agreement with the local government to set up an R&D center at the Wuhan National Bioindustry Base in Hubei. Attractive brainpower costs as well as tax and housing subsidies enticed the pharmaceutical company to establish facilities there.
Although minimum wages are lower in Wuhan, the research skills and English proficiency of workers there are said to be on a par with Shanghai, where Pfizer has had an R&D center since 2005. But locally owned enterprises are also in motion. Since 2008, a number of garment, fashion and footwear makers in Guangdong have been redeploying their production lines to Hunan and Jiangxi, while keeping their headquarters, design centers, and marketing and sales offices in the coastal province. In early 2009, nine garment makers moved their factories from Guangdong to Huaxian in Henan. More than 2,000 jobs were affected by the transfer. Textile companies in Hong Kong and Jiangsu are investing about $150 million in a denim garments processing park in Chongqing. Some 30 companies will be based in the park over the next three years.
Domestic expansion also a motivation
Apart from lower costs, there are other factors driving factory migrations. Some companies are merely attempting to be closer to their export destinations and save on freight costs. For instance, movers to Guangxi aim to shorten the distance to Vietnam, while investors in Xinjiang would be right at the door of Central Asia. Further, the large domestic market in the western and interior regions is an enticement. The China government has invested heavily in these areas since 2000, and the rapid development there has been boosting domestic consumption. Retail sales in rural regions increased 0.2 percentage points faster than in urban areas in 2009.
New Zhongyuan Ceramics Co. Ltd supports the China government’s campaign to develop the economy of Western China. The company has plants turning out a wide range of ceramic and sanitary ware in Guangdong, Sichuan, Jiangxi and Hunan. The supplier is building two more factories in Faku, Liaoning province, and Dangyang in Hubei. Aside from benefiting from the lower labor and land costs at the new sites, the expansion enables New Zhongyuan to create a national network and further its aim of becoming the top ceramic manufacturer in China.
Coastal areas to remain major production bases
Despite the high-profile movements, the coastal provinces are not yet in danger of losing their economic power. Many small and midsize companies that have weighed the advantages and disadvantages of moving inland have decided that the coastal areas’ strengths continue to offset the benefits of the interior. The supply chain inland is not yet as mature as in the Pearl and Yangtze River Delta regions. Some are turned off by the expenses for finding a suitable location, worker training and new sources of raw materials. Fears of insufficient skilled labor likewise persist.
In the gift industry, for instance, demand is seasonal so efficient employees are highly valued. It may take some years before the level of productivity in the interior can reach the same level as that in coastal regions. Evergreen Garment (China) Co. Ltd, a maker of promotional shirts with 300 workers at its Shenzhen factory, said it is still easier to find skilled labor in the coastal than inland regions.
"Most midsize and small factories think it is not necessary to move inland," general manager Zhang Bilian said. "Labor costs are rising all over the country."
The company also cited Shenzhen’s well-established supply chain and proximity to Hong Kong that facilitate exports, R&D and participation in trade exhibitions. The China government, however, is aware of the skill and efficiency disparity. The educational infrastructure in Western China has been undergoing an upgrade over the past few years in order to close the gap. To ensure further that there would be sufficient skilled workers and engineers in the area, China’s State Council has announced a full refund of tuition fees for college graduates who decide to work in central or western provinces. Various other incentives are given to migrant workers to convince them to head west instead of the south and the east. Hong Kong-invested Orient Source Mfg (HK) Co. Ltd, a supplier of dolls and action figures, describes the labor cost in Huizhou, where it has a plant, to be more acceptable than in other Guangdong cities. The company appreciates the convenient information exchange and transportation link between Hong Kong and Huizhou as well. Having been in Huizhou since 1986, Orient Source values its good relationship with the local government and local suppliers, which would be costly to rebuild in other areas.
In Shenzhen, among interviewed companies without immediate plans of relocating are RDI Technology (Shenzhen) Co. Ltd and GOSCAM/Gospell Smarthome Electronics Co. Ltd. "Shenzhen is the most important production and export hub for many electric products," RDI assistant general manager Mike Yuan said. "With more than 30 years of development, Shenzhen has a well-established supply chain and industrial environment, and an efficient transportation network." The baby monitor company has 700 workers at its factory.
Doll maker Shantou City Chenghai Yinyu Industry Co. Ltd is also content with its current location. "The labor cost in Shantou is not as high as in the other cities of the Pearl River Delta region," sales manager Raymond Xu said. "Shantou is the largest production hub for plastic toys in China. Various companies from different backgrounds have set up base in the city for its great industrial environment and abundant supply chain."
Factory movements not all interior-bound
Shenzhen LYD Technology Co. Ltd is not yet ready to leave the coastal region, but it plans to transfer its baby monitor factory from Dongguan in Guangdong’s southwest to Huizhou in the provincial center. The move is prompted mainly by the lower cost of labor in the central city. The minimum monthly wage in Huizhou is 670 yuan ($98), compared with 770 yuan ($113) in Dongguan.
Meanwhile, the transfer to Qingdao of Qingdao Cale Optoelectronics S&T Co. Ltd’s factory from Shenzhen is part of a long-term strategy. Chairman Zhang Lianxin said Shenzhen’s LED illumination industry is wedged at low-end manufacturing that the local government has no plans to advance. Qingdao Cale makes high-end and midrange LED illumination products. Qingdao, known as the white goods center of the Bohai Bay Rim Economic Region, offered several incentives for the company to become one of the city’s leading enterprises for LED illumination products. These included low land rent, an R&D fund grant, an investment subsidy and a purchase order worth more than $500,000. The city’s white goods industry gives Qingdao Cale access to an ample supply of skilled manual workers. The supplier can also take advantage of the hundreds of manufacturing service providers to which it can subcontract some processes whenever necessary.
Due to the mature supply chain in Foshan, manufacturers such as Foshan Vigorboom Ceramic Co. Ltd prefer to stay in the city or in the surrounding districts instead of migrating inland. This Guangdong city has long been a production hub for ceramic tiles. But ceramic manufacturing has been a traditionally high-polluting industry, and the Foshan government has been reforming practices and pushing local makers to leave the city center in recent years. Foshan Vigorboom’s factory is in Shunde, a district in the outskirts of the city.
Enping Rungo Ceramics Co. Ltd, meanwhile, moved recently from Shunde to Enping in southwest Guangdong. Local government efforts to develop environment-friendly industries, however, have resulted in diminished resources for ceramics manufacturing.
News reports indicate that by 2011, 80 to 90 percent of Foshan’s ceramic enterprises would have moved inland. Tile and sanitary ware supplier Guangdong Dongpeng Ceramic Co. Ltd, for instance, is relocating from Foshan to Hunan. About 800 million yuan ($117 million) has been invested in the new factory, which will not be fully constructed until 2015. Once operational, the new plant will have an annual production capacity reaching 1.5 billion yuan ($220 million).