South China factories on the move – relocation has begun

April 11, 2008 Posted by China Briefing Reading Time: 3 minutes

Fujian, Zhejiang and Northern Vietnam main new destinations for low end sourcing / manufacturing

SHENZHEN, April 11 – South China, long the country’s epicenter of low-end manufacturing and sourcing, is seeing a massive slowdown in new investment as companies look to move further inland and elsewhere.

Dezan Shira & Associates, which has maintained offices in the region for 16 years, reports that its clients’ foreign direct investment (FDI) in South China has seen a steep decrease in the first quarter of 2008. The findings, part of the firm’s first-quarter national assessment of FDI in China, represent the first large-scale decline in the region, with Guangdong province among the hardest hit. Inbound FDI to Shanghai and the Yangtze River Delta, or the Beijing-Tianjin corridor, remains strong.

“What we are seeing in South China is a massive change in the nature of the business environment here,” says Chris Devonshire-Ellis, the firm’s senior partner.

The flagging investment, says Devonshire-Ellis, comes amid a government push to attract added-value businesses and more hi-tech industry, including the development of the Shenzhen Hi Tech Zone. However, new foreign investors in high-tech by and large haven’t yet seen the opportunities here and remain aloof, opting instead for Shanghai and Hangzhou.

At the same time, Guangdong province’s one-time strengths as a low-cost manufacturing hub are declining fast as the government works to deter such industries. Companies face stepped-up environmental controls, tightened applications approval procedures and steeper minimum registered capital amounts. The higher taxes foreign companies must now pay in China don’t help matters.

Some companies are mulling whether to leave China altogether. In a recent survey conducted by Booz Allen Hamilton and the American Chamber of Commerce in Shanghai, nearly one in five companies said they plan to move at least part of their China operations to other countries. Vietnam topped the list of alternative countries among 63 percent of these corporations; India was first among 37 percent. Almost 90 percent of these companies said lower labor costs originally drew them to China, but now they’re finding other countries offer cheaper labor and tax benefits. Other companies, however, cited China’s vast market as a main reason for staying put.

While foreign companies aren’t shutting their doors en masse, the firm is increasingly busy devising relocation plans for companies on the move. Among the top destinations are areas further inland, toward south coast cities such as Zhongshan, Jiangmen and Zhuhai, or further north-east to Fuzhou, Yiwu and Ningbo. Sourcing companies are heading to the east coast because of its easy and still inexpensive port facilities, while low-end manufacturers are moving somewhat more inland, north of Guangdong. Many of the firm’s clients – both foreign invested and Chinese companies – are looking to move from Guangdong to Vietnam, especially from Daxin on the Chinese side and to Dong Cang on the Vietnamese side.

“This trend is growing and we expect to see a lot of relocation and restructuring of such businesses during the latter part of this year and into next,” says Alberto Vettoretti, the firm’s managing partner for China.

With the government working to shift the country from old, low -tech industry to new, hi-tech industry, a slowdown in South China manufacturing might be expected. But Devonshire-Ellis notes that the region’s hi-tech sector isn’t growing quick enough yet to compensate for the loss of low-tech businesses.

He says Guangdong province, and Shenzhen in particular, is well suited for high-tech business, already home to U.S. and Japanese multinationals such as IBM. Other MNCs will eventually catch up with the changing business climate, though this could take time.

As Guandong province re-invents itself, Shanghai and regional cities in the Yangtze River Delta should take note: they could face similar challenges in two or three years.

“When the head office accountants back home start to compare costs of manufacturing business around Shanghai with elsewhere in China, blood will be shed, and the region will go through its own relocation evolution — just as Guangdong is doing now,” says Devonshire-Ellis. “It’s only a matter of time.”