Production Relocation by Chinese Manufacturers has Limited Impact
2019-08-08    [Source:PUdaily]

PUdaily, Shanghai-- Against the backdrop of escalating trade war between China and the United States, capacity relocation by electronics, shoes and clothes producers becomes a hot topic in China’s manufacturing industry in 2019. With the advantages of low tariffs and cheap labor, Vietnam has become the destination for Chinese manufacturers’ production shift. However, this presents both opportunities and challenges to Vietnam.

1. Why the Chinese manufacturers choose to relocate their production?

Capital is always seeking profits. It flows to the places where it can earn the fattest profits. With China's sustained and rapid economic growth and changes in its internal and external environments, some favorable factors are disappearing or waning. Consequently, China is becoming less attractive to capitals.
First, since 2012 China's demographic dividend has been wearing thin, while labor costs have increased significantly.

Second, preferential taxes for foreign-owned enterprises are being abolished. The new Business Income Tax Law implemented on January 1, 2008 abolished the preferential income taxes for foreign enterprises. From then on, foreign businesses could no longer enjoy the previous policies of "exemptions from business income tax for the first two years and halved income tax for the following three years" and tax rebate for reinvestment.

Third, China is attaching greater importance to environmental protection. Attracting foreign investment at the expense of environment is no longer a viable practice.

The escalating Sino-US trade conflict that began in 2018 has accelerated the relocation of production by foreign enterprises and some Chinese businesses.

2. Why domestic manufacturers choose Vietnam and other Southeast Asian countries as their destinations?

The Chinese government encourages and supports the relocation of capacities from eastern region to the central and western ones. So why do some enterprises choose to relocate their capacities to Southeast Asian countries? the reasons are as follows.

First, the labor cost in Southeast Asia is low. Take Vietnam. It is reported that the average monthly income for Vietnamese workers has remained below 2,000 yuan over the past two years. The wages for workers in low-end manufacturing industry are even lower. In contrast, labor cost in China’s central and western regions is only slightly lower than that in the southeast coast. In 2018, the average monthly income for migrant workers in the central and western regions was reportedly between 3,000 and 4,000 yuan. Skilled workers could earn much higher wages. Thus, it can be seen that the labor cost in Southeast Asian countries is significantly lower than that in China’s central and western regions.

Second, Southeast Asia enjoys geographical advantage. Geographical position determines the production cost and the efficiency of distribution. Enterprises in coastal areas and maritime countries can import raw materials and export processed products by sea, the cheapest mode of transportation. Whereas their inland counterparts can only rely on highway and railway, which entail much higher transportation costs. By contrast, Southeast Asian countries are close to the Indian Ocean and the Pacific Ocean. Therefore, businesses there can transport goods more cheaply and conveniently than those in China's central and western regions.

3. Southeast Asia face both opportunities and challenges in the production shift

Vietnam attracts foreign investment mainly through the following means: The first is its low costs of labour, land and energy. The second is its policies of "exemptions from business income tax for the first two years and halved income tax for the following four years", and "exemptions from business income tax for the first four years and halved income tax for the following nine years" (for enterprises in high-tech industries). The third is that it enjoys "zero tariff" preferential treatment in the global trading system.

However, the Sino-US trade friction poses challenges to Vietnam while providing it with opportunities. Apart from setting up factories there, many Chinese companies from low-end manufacturing industries have moved to Vietnam in an attempt to circumvent America’s tariff barrier by labeling their products with "Made in Vietnam" and obtaining the certificate of origin. In this way, they can re-export their products to the United States via Vietnam. However, Vietnam, like China, is also suffering the impact of globalization and facing various internal and external challenges.

The United States is Vietnam's largest export market. Vietnam has a surpluses of tens of billions of dollars from trade with the United States. All the reasons cited by the U.S. government for imposing additional tariffs on imports from China and other countries are also applicable to Vietnam. The possibility that America puts forward "Vietnam threat theory" and imposes additional tariffs on Vietnamese imports cannot be ruled out.

In addition, recently there were new developments. Some manufacturers that had relocated their production to Vietnam returned.

Despite the great pressure from the Vietnamese government, Chinese manufacturers are determined to shift their production back to China due to the "inefficiency" of Vietnamese workers. Representatives of these manufacturers said that the biggest problem in Vietnam is the performance gap between Chinese and Vietnamese workers. In addition, most Vietnamese workers are not skilled, which may result in low production efficiency and delayed delivery. But most small businesses cannot afford to invest a lot of time and money in training these workers.

In a word, an enterprise may face many difficulties in moving abroad. They have to consider many factors, including operating costs, workers’ skills, supporting supply chains, transportation and even corporate culture. Recently, the National Development and Reform Commission made it clear that the data shows that the scale of production relocated by Chinese manufacturers is limited, and the manufacturers are mainly those from low-end and medium-end industries. Thus, the impact on China's economic growth, industrial upgrading and employment is limited.

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