Why China is so hard to leave

You just can’t get the same scale or depth or infrastructure anywhere else

HONG KONG: For all the hand-wringing over the rising cost of sourcing from China, the country’s scale of manufacturing operations, the depth of its supply base and its famed infrastructural advantages make it a difficult country for manufacturers to leave for elsewhere, say economists, business consultants and businessmen.

“Where else but in China can you source the huge quantity of goods that Wal-Mart needs, for instance?” asks Jing Ulrich, chairman of China equities at JP Morgan Securities. Countries like Vietnam and Bangladesh may be able to take some marketshare from China in some industries, but they’re not going to be able to replicate the huge scale of manufacturing that China has built up over the past 30 years, she adds.

China still offers cost advantages in many verticals, points out Richard Brubaker, managing director of China Strategic Development Partners, a Shanghai-based business consultancy. “It’s hard for many manufacturers to leave China because there is no business case to move.”

China’s supply base is huge, and entire industries - such as automobiles and computers - have Tier 1-3 suppliers in place in China, observes Brubaker. “If a particular group decides to move out of China, for whatever reason, it loses out on the scale of support.”

Hong Kong-based garments manufacturer M Arunchalam, who sources from China for the world markets, agrees. Earlier this year, he moved a fifth of his supply lines from China to Vietnam and Bangladesh citing rising wage costs and tighter enforcement of pollution control laws. But even he acknowledges that it is hard for him to go to India, for instance, and replicate his China model, given the limitations of infrastructure there.

“If I want to make 2 million pairs of jeans and I have the fabric, I may go to Chennai, but I cannot wash it because there is no water,” says Arunchalam. “The entire processing industry is dying in India because of inadequate infrastructure.”

Ulrich notes that China remains a competitive producer of many goods, but that it feels the need to exit low-end manufacturing industries such as textiles, garments and shoes, which operate on thin margins. “In low-end manufacturing, which is labour-intensive and materials-intensive, China is not going to be as competitive as it once was.”

China, she adds, is looking to move up the value chain into machinery manufacturing, including high-end goods and telecommunication equipment. “This is where the bright spots will be.” And in these high-end industries, especially machinery equipment, China is beginning to command higher marketshare globally, she points out.

“If you take a look at China’s overall composition of exports, nearly 50% of it this year will be in the machinery sector. This is clearly where China’s overall competitiveness lies.”

Going forward, she says, she expects China to take on global players in their home markets. “Who knows, years from now, Chinese high-end machinery equipment may be sold in Germany, the US and Japan, not just in emerging markets.”

In that context, says Ulrich, moving elsewhere is not a solution for manufacturers.
In any case, Brubaker points out, many firms are not manufacturing in China solely for export. “Many of them are now manufacturing for the China market and are doing very well in that endeavour. For them to move to another country would not only add costs to bring those goods to the China market, it would also create higher barriers.”

And then, says Brubaker, there’s the comfort factor. “China is a known place: firms have already negotiated and closed their deals here. To start over in a country like India or Vietnam would be a long-drawn process where relationships would need to be established, deals negotiated, staff hired and capacity developed.”