China's economy may be booming, but for many foreign firms, the country is no longer the haven for cheap manufacturing it once was. As the market develops, the cost of doing business in China is on the rise.
The American Chamber of Commerce in Shanghai released a study in March detailing manufacturers' fears about rising industrial costs. More than half of the surveyed manufacturers agreed that China is losing its competitiveness, as a manufacturing base, to other low-cost nations, the AmCham report said.
Driving that decline, according to 52 percent surveyed, is the rising cost of labor.
``The new labor law requires all employers to contribute social benefits for their employees,'' said Paul Pang, managing director for CMAI China Ltd. in Shanghai - part of Houston-based consultancy Chemical Market Associates Inc. ``Previously lots of medium and small companies didn't do that.''
Under the new law, social benefits can reach up to 44 percent of an employee's base salary, according to Pang.
``The law also makes it very difficult to lay off employees,'' he said. ``A company has to provide proof that the layoff is justified, and compulsory compensation is required regardless of the circumstances.''
In addition, the elimination of tax breaks for foreign firms means they will be paying more taxes in coming years. Tax incentives now focus on companies that bring technology and research and development bases to the country.
All this is happening while China's wages are already on the rise. According to the survey, wages for Chinese blue-collar workers have jumped 7.6 percent. Pang predicts that labor costs for medium and small plastics companies could increase as much as 30-40 percent.
Most affected by the recent changes in tax-breaks and the new labor law are business sectors with labor-intensive practices, he said. For plastics, that means low-end converters and downstream industries like electronics and textiles.
``In the past, some plastic companies could make money just because of cheap labor costs and tax breaks for foreign companies,'' said Pang. ``Now a lot of people are just breaking even, or losing money.''
Companies like Haier Group of Qingdao, China, and Siemens AG of Munich, Germany, already have responded to the changes by boosting their retail prices. Haier, a Chinese manufacturer of home appliances, recently announced price hikes of between 7 and 10 percent on refrigerators and washing machines. The company blamed rising wages and the high cost of raw materials, particularly plastics and iron ore.
Similarly, Siemens recently has announced its own price increases for the domestic Chinese market.
Some firms, however, are finding a silver lining in the situation. While Deswell Industries Inc., a Macau, China-based injection molder, has introduced price increases of its own, the company is seeing competition thin out as costs rise.
``The increased energy and labor costs have been forcing many small to medium-size competitors out of our region,'' said Deswell Chief Executive Officer Franki Tse. ``This should improve our new business opportunities.''
As their margins get squeezed, other companies are contemplating a move. Of the manufacturers surveyed in the AmCham Shanghai study, 17 percent already were making plans to relocate operations to other countries, the most popular being Vietnam and India.
But most firms are choosing to stick it out in China, their eyes on the country's growing consumer base. To mitigate costs, some are moving to less-expensive in-land provinces, Pang said.
As China's manufacturing costs continue to rise, the firms that stay will need to keep adjusting their practices, the study predicts. Companies that see China as a growth market, as well as a source of lower-cost labor and other manufacturing needs, are the most profitable, the study said.
``[Manufacturers] will have to focus on continually improving their competitiveness and devoting their resources to innovation,'' said Brenda Lei-Foster, president of AmCham Shanghai.