Stung by rapidly escalating wages and other costs in China, American-owned medical plastics firm Guangzhou Fortunique Ltd. is planning to move some of its labor-intensive operations from China to a lower-cost Asian country like Cambodia or Myanmar.
Fortunique, which operates a factory on the outskirts of Guangzhou, was one of the first wholly foreign-owned factories in China and has been operating there for more than two decades, making plastic orthopedic products, polyethylene surgical gowns, coverings for ultrasonic probes and other health-care products.
But rapid increases in costs, like a 20 percent rise in wages in the last year, are pushing a firm that was an early adapter to China to find a new low-cost manufacturing spot, said company Director Charles Hubbs, in an interview at the company's factory.
It's the reality, Hubbs said. If I don't move this out, in three years I won't be cost-effective enough to keep the business.
During the last five years, wages have doubled, he said, as the rising Chinese yuan has raised some costs that have been hard to pass on to customers.
The company has five extrusion lines and a small number of injection molding machines in Guangzhou, where it employs 500 in a 200,000-square-foot factory complex.
The Fortunique factory sits near former shoe factories, once a mainstay of the local economy but now themselves victims of rising costs, and a massive train station built as a hub for the country's new 250-mile-per-hour, high-tech bullet train system.
Fortunique will keep its plastics operations in Guangzhou, but Hubbs said sewing and other assembly will have to move to a less-developed country in Asia like Cambodia or Myanmar, where factory wages are $50 a month, compared with $300-$400 for the same work in China.
It's a shift that's been going on for several years among shoe and textile manufacturers, and it's one that Hubbs believes will increase in labor-intensive segments of industries like medical.
Some observers believe it points to the need for a new business model for some manufacturers.
Export-oriented firms in China need to look seriously at moving high-labor-content production, with Southeast Asia as one target, while maintaining higher-tech production in China, said Vernon Hsu, a professor of managerial economics at the Chinese University of Hong Kong.
Chinese firms need to start to go out and take advantage of cheaper labor costs elsewhere, Hsu said in a Feb. 26 lecture in Guangzhou sponsored by CUHK. Whoever can do this very well will be the future winner.
Last year, for example, Hsu said Hong Kong-based sourcing conglomerate Li & Fung Group decreased its China purchasing by 5 percent and increased its procurement from Bangladesh by 20 percent, to seek out lower-priced labor.
Li & Fung is a $16 billion firm that employs 13,000 worldwide managing supply chains for brand-name firms and retailers.
Labor-cost increases like Fortunique's are common in Guangzhou and coastal manufacturing regions, although the company may be more vulnerable than some others, like larger injection molders, which can do more to automate and absorb the price hikes.
But the company is looking at other strategies.
It is boosting worker benefits beyond pay, and it's launching a sales effort in mainland China's growing health-care market, where it sees significant potential opportunity.
The vast majority of sales today are in Europe and North America, where Fortunique is one of the largest players in its niche markets.
Perhaps its most important response has been to develop its own branded products, under the name Premier Guard. Those products carry higher profit margins than Fortunique's traditional business of contract manufacturing for other firms, Hubbs said.
For now, only about 15 percent of the firm's sales are for its Premier Guard brand, with the rest contract manufacturing. But the company wants to grow those its branded products to 60 percent of sales within three years, according to Hubbs.
Fortunique will mostly keep its branded work and its core film extrusion-related projects in China, but generally wants to move other contract work, like orthopedic devices, elsewhere in Asia, he said.
Hubbs said he has business contacts in Myanmar and as a small manufacturer, favors setting up operations where he has some local support. But he said trade sanctions on Myanmar, also known as Burma, complicate that.
If the sanction issue were resolved, I'd be there in a couple of weeks laying down plans, he said.
Beyond rising wages, Hubbs said his firm's other major workforce challenge is not being able to find enough workers, as China's booming economy means migrant factory workers face less need to travel to the coastal cities to find jobs.
Fortunique, for example, is about 100 employees short of what it needs, he said, and so cannot take on new contract manufacturing work.
Hubbs said he looked at moving the company's manufacturing elsewhere in China, but he thinks wages in other parts of the country will rise quickly and within three years any advantage would disappear.
He said he also looked into moving his China factory to neighboring Guangxi Province, on China's southern border, and setting up a second companion factory for assembly next door in Vietnam, but thought the rapid influx of Japanese appliance manufacturers there also would quickly push up costs.