Tuesday, June 24, 2008

Western reports that investments have moved from China to Vietnam are overblown with devious intent

By China Watcher

Continuing the topic of my earlier article titled “Is it a wise decision to move investments from China to Vietnam?”, I have come across a good write-up by Mr. Alfred Romann on the relocation of factories in China to Indo-China, which is thoughtful and more importantly, there are lots of truth as compared to the many bias articles coming from anti-China media like the New York Times or Los Angeles Times.

Extract of the article:

“There is no sign of ‘evacuation’ from coastal provinces to date, and no market share losses in traditional labour-intensive sectors. In short, no indication at the macro level that exporters might be in trouble,” a consultant wrote in a recent note.

What’s more, Chinese exporters do not appear to be losing their edge. According to official data, which looks at bigger companies in a number of sectors, light industry reported an increase in profitability in 2007 as export manufacturers passed on costs by hiking prices. The share of exports out of Guangdong is dropping, but exports from neighboring provinces like Fujian, Zhejiang and Jiangsu are rising. The sum leaves the total share of exports from the region virtually flat at about 60 percent.

“Once we account for this fact, there’s very little support left for the idea that producers are fleeing the coastal areas in significant numbers,” the consultant added.

Timothy Kim is a good example. In the last decade, Kim has seen his company expand exponentially. A business that was once two people with a phone and a desk is now a multi-million dollar international enterprise with a large showroom in Hong Kong and a fully integrated factory in Dongguan, in the Pearl River Delta manufacturing hub that produces about 60 percent of China’s exports.

“Everybody says we have to go to Vietnam… Wrong. Stupid,” says Kim.

Kim’s Silver Star Kitchenware makes all kinds of metal kitchen products. His large showroom in the New Territories is jam packed with pots, pans, ladles, thermos, forks, knives, strainers and woks. The showroom is shining with metal. Kim makes every part of the product in-house.

“We make everything: The screws, handles, everything. This industry is a materials industry. Material is 70 percent. Labor is maybe 20 percent. Vietnam cannot compete,” Kim says. “This is a materials business and you can’t get good materials anywhere else.

“You want quality, you have to do it under one roof. Upstream and downstream are important,” he says. “Labour costs in Vietnam and China are about the same in real terms.”

Vietnam’s infrastructure is weak and its labor pool is not always cheaper than China’s. It has a population of 86 million and its US$2 billion economy is a fraction of China’s but up until last year, it was growing at more than 8 percent annually.

China may no longer be the cheapest manufacturing locale but manufacturers have boosted their efficiency to compensate and passed on some of the increased costs to suppliers. China also has a relatively good infrastructure, plenty of manpower and access to quality raw materials – whether domestically produced or imported in vast quantities. Companies are moving out of traditional manufacturing hubs like the Pearl River Delta but they are often smaller companies with little value-added. “China is actually keen to develop high-end production and also get rid of low-end production plants that are contributing to pollution,” said Sherman Chan, an economist at Moody’s.

Costs and regulations have been getting more onerous across China for several years, with officials often targeting high polluting enterprises. The issue came to the foreground before 2006 when the small South Korean operators started leaving China, often under the cover of night.

Kim, of Kitchen Star Silverware, has a long list of reasons why moving to other locations makes very little sense. Finding quality materials in Vietnam or Cambodia is very difficult, he says. Stability is measured in months, not years. Quality employees are not always easy to find and there is not the plentiful supply that can still be tapped in the Pearl River Delta. And, while inflation has hit China, it is nothing compared to what it has done to Vietnam.

Still, operating in China can be tricky and old models may no longer work.

“You must restructure your company into Chinese style combined with American or European style,” says Kim. “More scientific.”

In conclusion, China is still a good place for investments provided it is of the right type which fits into the government’s 10-year industrialization growth plan. Inflation occurs in every parts of the world and I confidently believe that the Chinese government has the determination and the expertise to micro-manage this particular hindrance to sustainable economic growth.

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