While some smaller foreign manufacturers in China have built factories in interior regions as a lower-cost escape from coastal cities like Shanghai and Shenzhen, the reality of those moves has not always matched their expectations.
Those mismatched expectations have included unexpectedly high labor rates or more difficulty with logistics or supply chains inland, prompting some firms to say they're not sure they'd make the same decision again.
But other analysts argue that moving inland can still make sense, particularly with costs expected to increase again quickly in those coastal regions when the world economy improves.
Cosmetics industry injection molder HCP Packaging opened a new factory in Huai'an in 2008, hoping to capitalize on lower shipping and labor costs compared with its factories in Shanghai and Suzhou. But it has only partially realized those expectations.
“We felt that supply and demand conditions in that harbor would lead to lower export costs from that harbor [and] we have seen some of that,” said Steven Levine, president of the company's U.S. unit, HCP Packaging USA Inc. in Shelton, Conn.
But the arrival of other businesses into Huai'an quickly pushed wages up and negated some anticipated savings.
“The labor rates in Huai'an, quite honestly, are not very much different from Shanghai because there was a large influx of telecom and computer companies that went in there and have driven the rate to roughly the same we see in Shanghai and Suzhou,” he said.
That result can be typical. Companies in light-industry sectors like plastics often have not found moves to the interior to be everything they had expected, said Roland Rohde, the Hong Kong-based delegate for Germany Trade and Invest, the foreign-trade arm of the German government.
Many firms made the decision to move inland before the economic crisis, when costs were rising quickly in traditional Chinese manufacturing hot spots, and there did not appear to be an end in sight.
Companies have found logistics and shipping costs higher than expected, and some light industrial firms have found rising labor rates and a shortage of qualified workers in interior provinces bordering the industrial hub of Guangdong, Rohde said.
As a result, the push to relocate to cheaper climates has slowed down during the economic crisis, he said.
But Rohde predicts the same cost pressures and relocation push will return once the economy picks up.
Areas like the Pearl River Delta — the manufacturing zone from Hong Kong to Guangzhou — will again face rapidly rising costs, along with added pressure for more pollution control equipment and higher fees to help clean up the local environment, he said.
Some PRD cities, for example, are increasing their industrial water rates by 60 percent, Rohde said.
“What [companies] forget now is the costs in the PRD will increase after the crisis,” he said.
As a result, while the moves have not yielded the short-term gains anticipated, Rohde said they can still be good decisions in the long term.
Hong Kong plastic toy maker Galey Industrial Co. Ltd. opened a new molding factory in 2008 in Hezhou, as costs in its Dongguan plant were rising.
The move has had mixed results, said General Manager Frankie Cheng.
The firm found lower labor costs, and the new factory gave it flexibility to fill orders in peak times, he said.
But distance has made the Guangxi factory harder to manage, and transportation has proved more difficult than expected. He said he was not sure the company would make the same decision again, particularly considering the economic slowdown.
“Labor costs are cheaper, but it was being offset by the transportation costs back to Guangdong,” Cheng said.
The firm now has less trouble finding labor in Dongguan than before the crisis, Cheng said, although he praised Guangxi workers, saying they can be faster than the Dongguan workforce.
Moving farther away from the established manufacturing zones can bring problems that cities with better infrastructure have already solved, like transportation, supply chains and better workforces, said Ralph Fohr, CEO of consultancy ECS Europe China Solutions GmbH of Roetgen, Germany. ECS works with European small and medium-size companies on China entry strategies.
Still, it can make a lot of sense for companies to look at smaller cities, like Ningbo and Hangzhou in east China and Zhuhai in South China, which can offer labor and land savings but still provide good government support, he said.
“The question is not, should you go into the lowest-cost areas, but can you go into areas with salaries that are significantly lower but still there is enough support from the local government,” Fohr said.
He said if a Western manufacturing company is based in smaller cities in its home market, it should also look at smaller locations in China.
Fohr said cities like Ningbo can offer solid transportation and much cheaper salaries and rents compared with Shanghai, and the government can be more responsive because there are fewer foreign firms. But those cities might pose more adjustment challenges for foreign staff, he said.
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