Like many Chinese manufacturers, injection molder VS International Group Ltd. is feeling the pinch from rising costs and a stronger Chinese yuan, and seeing customers shift work to other cheaper manufacturing locations.
The electronics and appliances molder in Hong Kong said sales fell 8 percent and profit dropped 40 percent in the six months ended Jan. 31, ``largely due'' to business leaving its Chinese plants for cheaper countries.
``It's definitely challenging,'' said VS spokesman TK Chang.
Scenarios like VS International's are prompting a debate: Has China lost its appeal as the world's low-cost workshop?
The challenges are severe.
One industry estimate said about 20,000 of the 65,000 Hong Kong-owned factories in South China's Pearl River Delta manufacturing zone could close, according to an article in Hong Kong's South China Morning Post newspaper. And last month China saw its slowest growth in manufacturing in almost three years, as inflation, higher labor costs and weakness in some export markets took their toll.
But a look at some of the largest plastics companies' public financial filings and interviews with industry officials shine a different light. Those sources suggest many firms and sectors are adjusting and maintaining their growth.
In fact, factors like a well-developed infrastructure may keep China's place as a manufacturing center. And firms with resources to invest in technology, or that are focused on growing sectors such as automotive or telecommunications, are faring much better than those in lower-end markets like toys.
Ningbo Haitian Group Ltd., China's largest injection molding machinery maker, said its exports rose 31 percent last year. A senior executive said so far rising costs in China have not hurt the firm's export business. Overall sales and profit rose more than 20 percent.
Helmar Franz, executive vice president, said the situation is complex, with some of Ningbo, China-based Haitian's customers greatly affected by the rising costs.
Franz said he does see China losing some of its competitiveness to places like Thailand. Chinese companies contend not only with global challenges, like rising plastic costs, but also with several unique challenges to China, such as new tax and labor laws, and measures designed to stop the economy from overheating.
But Franz said the impact should not be overstated.
``I don't think Chinese competitiveness in the international market is much affected,'' he said. ``There are some extraordinary impacts on the Chinese industry from the government trying to cool down the economy. Everyone is facing those issues, and some industries can absorb it and some cannot.''
VS International, which saw its injection molding sales fall 17 percent, to HK$501.4 million (US$64 million), said China retains advantages against its Asian neighbors, even with rising costs.
``I don't think China is losing competitiveness generally,'' said Chang, who is VS group financial controller for Johor, Malaysia-based affiliate VS Industry Bhd.
``Costs are rising, yes, that's a fact, but the support industries are there,'' he said.
China has support industries that rivals may lack, such as a well-developed domestic machinery business, he said. It also has infrastructure, a sizable domestic market and more political stability than some neighbors, he added.
``In terms of cost, China does not really enjoy much benefit compared to Malaysia, Thailand, Indonesia and Vietnam,'' Chang said. ``The strengths of China are political stability and infrastructure and market.''
Countries touted as rivals, such as Vietnam, have been experiencing their own economic problems during the past six months, he said. And China's tax system is much clearer than Indonesia's, for example, according to Chang.
VS Industry set up a molding plant in Vietnam, and is seeing growth in that country from the movement away from China, the company said. Parent VS International employs about 15,000 in factories in China, Indonesia, Malaysia and Vietnam.
Chang said any decision about where to locate must weigh many factors beyond cost. Some manufacturing that left Malaysia 10 years ago came back, just as some plants leaving China for Vietnam may return in time, he said.
Changes in China
One auto industry analyst in Thailand said he is noticing renewed interest in Southeast Asia.
``We're starting to see, by no means a flood, but a trickling of interest in Southeast Asia that is a reaction to what's happening in China,'' said John Bonnell, an analyst in Bangkok, Thailand, for Automotive Resources Asia Ltd. ``Thailand and Southeast Asia sort of lost the attention of the auto industry when China took off.''
The Chinese auto industry continues to grow, though. Chinese auto parts maker Minth Group Ltd. reported that, even amid rising costs in China, its sales rose 47 percent last year, to 1.4 billion yuan (US$205 million), and profit rose 33 percent.
Ningbo-based Minth said it boosted spending on research and development 54 percent, and expanded globally, buying a plastic trim plant in the United States and establishing a metal and plastic joint venture in Thailand.
The conditions in China have worked to the advantage of Minth and other large firms, weeding out smaller companies, it said.
``The increase in labor cost, fluctuation in raw material price, and the expedited pace of new automobile model launches ... together with other facts raised the entry barrier of the industry of auto parts manufacture,'' Minth wrote in its 2007 annual report. ``The [original equipment manufacturers] have represented their intention to purchase from suppliers with decent scale, concurrent design capabilities as well as high-standard quality and cost-control capabilities.''
One plastic industry analyst said it's the lower-end firms that have been particularly hard-hit.
``The low-value-added converters, like the toy makers and makers of shopping bags, they are hurting the most,'' said Bingli Wang, polyolefins director in the Shanghai office of Chemical Market Associates Inc. of Houston. ``Their costs rise very much, so many converters are in the red now.''
Hong Kong-based toy maker and injection molder Kader Holdings Co. Ltd. reported that its investments in better production methods resulted in greater profits in 2007, even as the toy industry faced product recalls and serious problems from rising costs in China.
``An improvement in sales together with higher production efficiency enabled the group to overcome these hurdles and improve overall net profit and profit margins in 2007,'' Kader said. ``The group will continue to develop higher-value-added products, further integrate technology with toys and modernize and scrutinize production methods.''
Injection press and equipment maker Cosmos Machinery Enterprises Ltd. of Hong Kong reported that sales increased modestly, about 3 percent, in its machinery business last year, amid the tough conditions. And a Cosmos official said the company is seeing similar results this year.
Cosmos said the strengthening yuan, rising plastic costs and China's reduction in its tax rebates for exports of plastic products made the industry much more conservative in buying machines and did cause significant pain in lower-end markets, where Cosmos sells its commodity-oriented general-purpose injection molding machines.
But the company said it has invested in new technology in recent years, such as developing its ``green line'' energy-efficient servo injection molding machines, foam injection molding presses and direct compound molding machines.
Sectors such as automotive, household appliances and telecommunications are showing satisfactory growth, while more price-sensitive markets like toys and daily-use products are much harder hit, said Simon Ho, director of Cosmos' marketing and international trade departments.
``We can see that China will still be the factory of the world,'' Ho said. ``Compared with other cheap places, China still has the political stability, infrastructure and logistics.
``The Chinese plastics industry will up shift to a higher level and remain competitive.''