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Why manufacturers are starting to leave China

Posted: 09 Dec 2015     Print Version  Bookmark and Share

Keywords:low-cost production  PCB assembly  production cost  manufacturing 

China is starting to lose its appeal as the world's centre for low-cost production as manufacturers all over the world find alternatives elsewhere.

While China's industrial base is expected to continue expanding in the near term, growth is slowing. The more tempered pace is also in stark contrast to the phenomenal growth China saw during the past few decades, which helped to catapult the country past Japan to become the world's second-largest economy.

Firms are increasingly shifting production outside of China for a "number of reasons," Lian Hoon Lim, managing director of AlixPartners, told EBN. The main impetus is increasing production costs. The need for manufacturers to reduce their dependence on China's production base and companies seeking more localised production play a role as well.

Recent high-profile moves among manufacturers opting to shift production beyond China's borders include:

Outside of the tech sector, China is also seen as a less favourable manufacturer location for garment manufacturing. According to a U.S. Fashion Industry Association study, for example, China is now deemed the least desirable location for U.S brands to source manufacturing among 27 countries.

The shift away from mainland China is largely due to rapidly rising costs, particularly for labour. According to Hong Kong-based Strategic Decisions Group (SDG), China's manufacturing costs have been rising at least 10 per cent every year.

China's status wanes

"There has been substantial growth in labour cost year on year now in China for over a decade," Peter Hopper, a partner and managing director for SDG, told EBN. "[Labour-intensive] industries are very limited in what they can do to remove labour and improve productivity so they need to look for other sources of production. Vietnam, Philippines and Indonesia are well trodden paths and the recent signing of Trans-Pacific Partnership will likely support this trend."

Much of the rising cost in labour can be attributed to China's "One Child" policy, which is intended to limit population growth in China. "The one child policy has led to a shortage of labour and a rise in living standards has prompted a desire for better paid occupations," Hopper said.

However, other factors besides rising labour costs are prompting manufacturers to move production outside of China. Production that is closer to the customer base often outweighs the disadvantages of higher production in China, especially in the technology sector, Lim said.

Production in Mexico, for example, is generally more expensive than it is in China, but the supply chain advantages of a comparatively short lead times of five to six weeks "outweigh the difference," Lim added.

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