ecns [expanded by feedex.net]: Twin-pronged plan for growth

ecns [expanded by feedex.net]

ecns

Twin-pronged plan for growth
http://www.ecns.cn/business/2014/01-06/95640.shtml
Jan 6th 2014, 05:01

2014-01-06 14:01


Although reshoring is largely confined to European and US companies, some Chinese companies are using reshoring and offshoring to maintain steady growth.


Li Shaoxing, chairman of Huaxia Machinery Plastics Co Ltd, a plastics products maker, says his company is looking to move into newer regions to offset the dwindling price advantages in China and other neighboring countries.


The company, based in Zhengzhou, Henan province, says it expects to maintain its 20 to 30 percent annual growth in net profits by moving some production from Vietnam to regions such as Africa.


Li says that while offshoring is still a relatively new term for many companies, his company had contemplated the move to Vietnam in 2000. He says that it seemed to be most logical solution because net profit growth at that time was around 5 percent and set to decline even further.


"We realized that the advantage of cheap manufacturing would soon disappear from China. I was forced to shut down the company in Zhengzhou and restart it in Bac Giang province in the north of Vietnam," says Li, one of the first Chinese businessmen to set up a unit in Vietnam in 2003.


Benefiting from the preferential policies announced by the Vietnam government in 1988 after it started frequent trading with China, Li opened his first factory with four production lines spread across more than 3 hectares in Vietnam in 2003. Land acquisition costs were just $250,000 and included a 50 percent discount spread over five years, he says. "We started by making and selling plastic woven bags in Vietnam and then started exporting them in 2008."


Vietnam, with an average annual economic growth rate of about 7.5 percent, has managed to attract investment from many Chinese enterprises keen on making higher profits.


After moving to Vietnam, Li's company managed to obtain nearly 30 percent net profit before 2008 and soon set up another factory with 20 production lines to cater to the growing demand from overseas markets.


"The business expansion was smooth in Vietnam with orders coming in from the domestic and overseas markets in the first five years," Li says.


However, the competition turned out to be tough with more Chinese companies flocking to Vietnam in search of cheaper labor costs compared with the rapidly increasing expenses of workers' salaries and materials in China.


In the meantime, inflation has risen in Vietnam, while salaries have seen frequent adjustments. The lowest monthly income in five major cities in Vietnam is $70 this year, 20 percent higher than the previous year.


"The labor costs in Vietnam have risen rapidly to about 6 million Vietnamese dong ($282) per person on average," Li says, referring to monthly wage.


He says that the net profit of the company dropped to about 5 percent in 2011 and fell to 3 percent in 2012 as the former advantages of cheap labor also disappeared.


From Li's viewpoint, the falling profits were a sign for him to transfer production to a place offering cheaper labor costs.


At the same time, Li planned to keep the factories in Vietnam running to produce items for local buyers and regular clients from Europe and the US. These clients do not switch to competitors that easily and are also willing to accept price increases, Li says.


Huaxia Machinery is setting up a new factory in Ethiopia next year to make products for smaller European countries.


"Like China, Vietnam will also soon lose its advantages such as cheaper labor costs. That means it is time for labor-intensive companies to move on," Li says.


Data provided by the Ministry of Commerce show the actual used amount of foreign capital in 2012 was $111.7 billion, a 3.7 percent year-on-year decline, while the manufacturing industry used foreign capital of $48.9 billion, down by 6.2 percent over the same period in 2012.


"The slight drop was created by the normal move out of medium and large-sized manufacturing enterprises from China to find a better solution for making lower-cost products," says Shi Jinchuan, dean of the College of Economics at Zhejiang University.





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