By: Steve Toloken
April 10, 2014
HO CHI MINH CITY, VIETNAM — Interest in Southeast Asia as a global manufacturing alternative to China is growing, as multinational companies look for a safety valve to China’s rising costs.
At least that’s the word from regional analysts and Asian plastic companies at the recent Plastics & Rubber Vietnam show.
It’s not a mass migration from China. Rather, Asian manufacturing experts say that factories in China are gradually retooling to handle China’s growing domestic demand, while those looking for export factories are putting more focus on Southeast Asia.
Malaysian plastic packaging manufacturer Lee Soon Seng Industries Sdn Bhd, for example, said it believes that shift within Asia is a major reason why sales and profits jumped 50 percent between 2009 and 2013.
Wages in Chinese and Malaysian factories are roughly equal, LSS said, a change from a decade ago when Malaysia was two to three times pricier. So the company is investing $5 million in a new extrusion and thermoforming facility to open later this year in Malaysia, said C.L. Tai, business development manager with the Johor -based firm.
“We can see a lot of investors from the U.S. and Europe, they start to focus on ASEAN,” he said, referring to the 10 nation Association of Southeast Asian Nations bloc. “Previously they bought from China but now they shift. … It’s a big reason our business is going up.”
Both Lee Soon Seng and Vietnamese plastic tube maker Truong Thinh Plastics said there was a lot more interest from buyers in the United States, in particular.
Publicly-listed LSS in its 2013 annual report specifically identified the U.S. market as a new market where it has seen growth, and an executive at Truong Thinh, Vietnam’s largest maker of tubes for cosmetics and personal care, said he believes global firms are looking more at Southeast Asia.
“Recently the United States buyers have been increasing volume a lot,” said Jay Tran, executive vice president of Truong Thinh, in an interview with Plastics News. “They never share where they shift their purchases from, but I can judge from many factors that these were previously ordered from China.
“They are finding alternative suppliers, not only in Vietnam but in Thailand and other Asian countries,” he said. “So we are getting what China is losing.”
Chinese firms said they were exploring Vietnam for the same reason.
DWJ Masterbatches Co. Ltd., in the southern Chinese manufacturing center of Dongguan, was making its second trip to Vietnam this year and looking for local agents because it’s seen Chinese manufacturers, including some of its customers, look at setting up in Vietnam.
General Manager Wang Yan said in an interview at the Vietnam show, which was held March 4-6 in Ho Chi Minh City, that her company invested 20 million Chinese yuan ($3.23 million) in new equipment at its factory since 2009 to automate and stay competitive with rising wages in China.
Guangdong Shunde Shunyan New Material Co. Ltd., a compounder of nylon, polybutylene terephthalate and PET materials in Foshan, Guangdong province, was direct when explaining why it’s looking to Southeast Asia.
“More and more companies, no matter from Japan, Taiwan and the Chinese mainland, they are more and more willing to open a factory in Vietnam,” said David Deng, export manager. “It is easier to open a factory and the cost, in salaries, in rent and other costs, compared to China is much less.”
More labor intensive industries like toys and shoes are showing the most interest, while those that are automated are more likely to remain in China, Deng said.
A February study from Singapore-based Dezan Shira & Associates, which advises global companies on foreign direct investment, said the combination of rising wages and Chinese tax law changes have removed advantages for foreign firms. Those changes are “now making the overall cost of manufacturing in China less competitive than the major [ASEAN] economies,” it said.
“Yet a mass departure of foreign investors from China has not occurred, although there has undoubtedly been some leakage,” Dezan Shira said. “The reason for this is the upside to the increasing labor costs of China — the development of a considerable middle class consumer market.”
The company said China’s middle class is projected to grow from 250 million now to 600 million people by 2020, and so factories in China are changing their focus.
That makes it more attractive to position new manufacturing capacity in other places, including Southeast Asia, the report said.
Another factor shifting production is the free-trade agreement that China signed with the 10-member ASEAN bloc, which has been phased in since 2010, Dezan Shira said.
By removing tariffs among the 11 countries and their nearly 2 billion people, that will create incentives for manufacturing in Southeast Asia, including for export to China, Dezan Shira said.
“China’s Free Trade Agreement with ASEAN dictates that the main beneficiaries of this will, over the next decade, be Indonesia, Malaysia, Philippines, Thailand and Vietnam,” the report said.
The picture is not simple. One Chinese equipment maker, Ningbo Fangli Group Co. Ltd., said that China still has a very competitive mix of salaries and solid engineering skills needed in the industry.
“In this industry we don’t need that many workers, we need skilled workers,” said salesperson Joanne Zhou. “The skilled workers are difficult to find in developing countries like Vietnam and in developed countries they are very expensive.”
At the beginning of last year, Fangli invested in a new headquarters factory in Ningbo, Zhejiang province, that boosted its capacity substantially, she said.
Any losses by China need to be put in perspective, as China remains the world’s largest market for plastics equipment.
Figures released last year’s by global machinery maker Engel Holding GmbH, for example, showed that China’s market for injection molding machines would drop from 45,000 in 2012 to 35,000 in 2020. Engel projected that the rest of Asia would grow from 22,000 machines a year in 2012 to 24,000 in 2020.
As well, there’s strong upward pressure on wages in Southeast Asia, mirroring China.
Malaysia put in place its first minimum wage policy in 2013, and that pushed up wages by 30 percent for about 20 percent of the manufacturing workforce. Factory managers in Vietnam, as well, say wages have risen by 10-plus percent annually to cope with very periods of very high inflation.
But in broad terms, the gap has narrowed with China, Dezan Shira said: “[For] foreign manufacturers in China, the tax benefit as well as the cheap labor benefit have now disappeared.”