China looks abroad for convenient manpower

China, in our imagination, has always been the place where we (westerners) transported the production of our cheap (translated: Made in China) consumer goods. It seems as if this chapter is closed, and it seems like the Chinese are having some trouble with the overlap between the internal production market and the internal consumer market. What this means is that the foreign (export) market is not big enough for the amount of China Made goods and that, therefore, they want to sell them to their own people. Nevertheless the average Chinese seem not to earn enough to buy their own products. What to do? Transport the production of goods to South-East Asia, where manpower is cheaper, making products affordable to the Chinese consumer.

Chinese consumers... Rather than producers!

Basically they want to do with South-East Asia now what we did some time ago with them! The difference is there were many Chinese to exploit and few of us exploiting, while now there are a few South-East Asians and 2 billion Chinese.

Frank Leung, owner of New Wing Footwear, a Hong Kong based company that produces women’s shoes, flew from Dacca (Bangladesh) to Addis Abeba (Ethiopia) looking for new production bases, as an alternative to the one in Dongguan, in southern China.

The need to move abroad is ever more urgent. In the last two years the cost of manpower in China has increased by 20%, reducing profit margins and straining, especially in some areas, the economy of China. The increase in prices and the strong Yuan has obliged Leung to reduce the number of his employees form 8.000 to 3.000.

In Bangladesh, says Leung, the salaries of the workers are 4 times cheaper than in China and the legal working hours are 48 instead of 40. Moreover the government offers a tax holiday, a 10 years tax exemption. “But the roads are blocked by traffic and the electrical power system is unreliable. Logistic problems that prevent an efficient production”, says Mr. Leung.

A couple of weeks after his trip to Dacca, Frank flew to Addis Abeba. There the salaries are even lower than in Bangladesh, but there is a total lack of supporting industries, like the factories of shoe soles of cardboard: “Ethiopia is not suffocated by traffic but it is out of the world”.

Vietnamese producers... Rather than consumers

Factories in Vietnam

The situation of Guangdong has lead many factory owners to move their production centers to South-East Asia. In November the consulting company Gavekal Dragonomics has forecasted a slowdown of in the growth of the Chinese exports, that next year shall rise by only 9%. In the first three trimesters of 2011 the volume of the exports has increased by only 12%.

Many entrepreneurs, like David Liu, owner of a handbag producing company, had thought to move to countries like Vietnam, but then preferred to remain in Dongguan because the network of suppliers and the productivity of the workers are better.

He went to the province of Hunan, in central China, several times thinking of opening a factory there. He then found that the supporting industries and the factories that produce machinery are too far away. Therefore he decided to stay in Dongguan and keep his expert labor force.

His profit margins have fallen from 10% to 3%, so that he was obliged to apply a 10% premium to the European resellers on the prices of luxury handbags.

He is the rule, not the exception. The unit price of the Chinese exports in the EU has increased, between January and August, by 10%.

Some companies have decided to have factories both in China and in other countries. From 2007 to today Texhong Textile has opened new factories in Vietnam, where, this year, it has generated 2.000 new jobs.

In Vietnam the average salary is 140 Euros, in China it is 230 Euros. The Vietnamese factories are more automated and require less manpower. Today Texhong gives 10.000 jobs in China and 4.000 in Vietnam. Most importantly, we should note that 9/10^ths of its production is sold in China.

The previously mentioned Gavekal has found out that also many other industries with high employment of manpower are (textiles, clothing, toys) are transferring their production to South-Eastern Asia.

In 2011 the price of Chinese products increased by 20%. According to the economist of Credite Suisse Dong Tao, they can do it because no other developing country has the efficiency of China. The huge manpower, the productivity and an excellent network of ports and highways make Beijing a power without rivals.