While some smaller foreign manufacturers in China have built factories in interior regions as a lower-cost escape from coastal cities like Shanghai and Shenzhen, the reality of those moves has not always matched their expectations.
Those mismatched expectations have included unexpectedly high labor rates or more difficulty with logistics or supply chains inland, prompting some firms to say they’re not sure they’d make the same decision again.
But other analysts argue that moving inland can still make sense, particularly with costs expected to again increase quickly in those coastal regions when the world economy improves.
Cosmetics industry injection molder HCP Packaging opened a new factory in Huai’an, Jiangsu province in 2008, hoping to capitalize on lower shipping and labor costs compared to its factories in Shanghai and Suzhou. But it has only partially realized those expectations.
“We felt that supply and demand conditions in that harbor would lead to lower export costs from that harbor [and] we have seen some of that,” said Steven Levine, president of the company’s American unit, HCP Packaging USA Inc., in Shelton, Conn.
But the sharp influx of other businesses into Huai’an quickly pushed wages up and negated some anticipated savings.
“The labor rates in Huai’an, quite honestly, are not very much different from Shanghai because there was a large influx of telecom and computer companies that went in there and have driven the rate to roughly the same we see in Shanghai and Suzhou,” he said.
That can be typical. Companies in light industry sectors, like plastics, have often not found those moves to the interior to be everything they had expected, said Roland Rohde, the Hong Kong-based delegate for Germany Trade and Invest, the foreign trade arm of the German government. He advises companies in South and West China and in Hong Kong.
Many of the firms made the decision to move inland before the economic crisis, when costs were rising quickly in the traditional Chinese manufacturing hot spots, and there did not appear to be an end in sight.
Companies have found logistics and shipping costs higher than expected, and some light industrial firms have found rising labor rates and a shortage of qualified workers in interior provinces bordering the industrial hub of Guangdong in South China, Rohde said.
As a result, the push to relocate to cheaper climates has slowed down during the economic crisis, he said.
But Rohde predicts the same cost pressures and relocation push will return once the economy picks up.
Areas like the Pearl River Delta, the manufacturing zone from Hong Kong to Guangzhou, will again face rapidly rising costs, along with added pressure for more pollution control equipment and higher fees to help clean up the local environment, he said.
Some PRD cities, for example, are increasing their industrial water rates by 60 percent, Rohde said.
“What [companies] forget now is the costs in the PRD will increase after the crisis,” he said.
As a result, he said that while the moves have not yielded the short-term gains anticipated, Rohde believes they can still be good decisions in the long-term.
Hong Kong plastic toy maker Galey Industrial Co. Ltd. opened a new molding factory in 2008 in Hezhou, Guangxi province, as costs in its Dongguan, Guangdong province, plant were rising.
It’s had mixed results, said General Manager Frankie Cheng.
The firm found lower labor costs, and the new factory gave it flexibility to fill orders in peak times, he said.
But distance has made the Guangxi factory harder to manage, and transportation has proved more difficult than expected. He said he was not sure the company would make the same decision again, particularly considering the economic slowdown.
“Labor costs are cheaper but it was being offset by the transportation costs back to Guangdong,” Cheng said. “Transportation costs were higher than expected.”
He said the company now has less trouble finding labor in Dongguan than before the crisis, although he praised the Guangxi workforce, saying they can be faster than the Dongguan workforce.
Moving farther away from the established manufacturing zones can bring problems that cities with better infrastructure have already solved, like transportation, supply chain and better workforce, said Ralph Fohr, chief executive officer of consultancy ECS Europe China Solutions GmbH, with offices in Aachen, Germany and Ningbo, Zhejiang province.
The firm works with European SMEs on China entry strategies.
Still, it can make a lot of sense for companies to look at smaller cities like Ningbo and Hangzhou in East China and Zhuhai in South China, which can offer labor and land savings but still provide good government support, he said.
“The question is not should you go into the lowest cost areas, but can you go into areas with salaries that are significantly lower but still there is enough support from the local government,” Fohr said.
He said if a Western manufacturing company is based in smaller cities in its home market, it should also look at smaller locations in China.
Fohr said cities like Ningbo can offers solid transportation and much cheaper salaries and rents compared to Shanghai, and the government can be more responsive because there are fewer foreign firms. Those cities may, however, pose more adjustment challenges for foreign staff, he said.