Challenges for manufacturers eating away profits in China 

The multitude of issues facing manufacturers in China has started factory owners to begin looking at ways to reduce their cost not only in the short term, but also several years down the road. For China manufacturers, one of the key decisions to make is whether to move their factories to locations t

by Rod Fleming Friday, May 13, 2011
The multitude of issues facing manufacturers in China has started factory owners to begin looking at ways to reduce their cost not only in the short term, but also several years down the road. For China manufacturers, one of the key decisions to make is whether to move their factories to locations that might be lower cost or less restrictive. This is a long-term approach that many manufacturers are considering as there appears to be little likelihood that costs will go down in the near future.

Manufacturers in China looking to relocate their factories have two clear alternatives; move to lower cost regions in China or move to other lower cost countries. In fact, both courses are being taken by manufacturers, depending on their industry.

There are several advantages for a manufacturer to move to a lower cost region in China, which are typically located in the far west of the country. While a change like this won’t affect raw material costs, it will usually mean lower overhead and lower labor costs. Often, townships in western China will be willing to subsidize costs such as land purchase and utilities because they are keen to attract manufacturing, which increases employment. Some cities even go so far as to subsidize the cost of the factory itself vie low cost or interest free loans. These incentives are difficult for manufacturers to turn down.

There are some drawbacks to this approach however. In addition, smaller towns are less consistent in their application of regulations and it may be harder for the manufacturer to adhere to clear standards on the environment and other issues. For these reasons, many manufacturers might locate some of their production lines for lower-end products to these regions while keeping corporate offices and some of the higher-end production lines along the east coast.

Another option for manufacturers is to relocate outside the country. This is happening quite frequently for products such as garments, where lower cost countries such as Thailand, Vietnam and Bangladesh have the labor force and industry experience that is necessary for garment production as well as government support. In these cases, the China manufacturers supply the capital and the know-how required for large scale operations. They set up large factories to handle overflow orders from the original factories and may even move their operations entirely. This works because the China manufacturers already have the buyer customer base in hand and therefore have a strong advantage over local operations in those countries.

In many cases, the China manufacturers will already have ties to the country and perhaps even relations living there, which can ease problems they may face with integrating their operations. That said, while moving their factories to a low-cost foreign country may save money it can also introduce its own set of problems. For instance, in the past manufacturers have faced issues in countries where there is conflict or other forms of instability that have disrupted operations. In addition, it can also be difficult for manufacturers that rely on close relationships with their own local supply chain to try and mimic the same environment in a foreign country. In successful cases, it is not surprising to find many of the subcontractors and component suppliers also moving to the new location shortly after the key manufacturer makes the leap.

General | Categories: aerospace
0    submitted by Rod Fleming
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