Many foreign manufacturers sourcing from China for their markets in the US or Europe are considering closing down their China facilities and relocating their plants back home, according to a recent survey of multinationals operating in China.

“The emerging consensus among those who are manufacturing in China principally for export is that the economics of such manufacturing has become unviable when compared to relocating their manufacturing facilities closer home,” says Chris Devonshire-Ellis, Beijing-based senior partner at Dezan Shira & Associates, a leading FDI consultancy that services MNC clients in China, India, Hong Kong and Vietnam.

The survey, of component manufacturers in the auto and aviation industry, was carried out by China Briefing, a premium business guide for multinationals and other businesses that operate in China. Its findings reveal that this dramatic rethink of the future of many China-based plants has been prompted by a variety of considerations: the rising cost of production in China, along with a host of other China factors that are making the decision to continue with export manufacturing economically and politically risky. 

Last year was a particularly challenging one for foreign manufacturers in China. For one thing, notes Devonshire-Ellis, China did away with tax incentives for foreign investors and passed legislation that effectively pushed up corporate tax rate for foreign manufacturers to 35% (including a surcharge on profits repatriation). “That has been seen negatively,” he adds.

In addition, China introduced a new labour contract law, which “is seen as imposing unacceptable levels of burden on companies if they wish to downsize as a result of a downturn in the market,” says Devonshire-Ellis. “It ties companies to fairly serious financial consequences.” All this, the survey notes, has raised the cost of doing business in China closer to levels seen in developed markets.

Other China-specific factors have proved equally critical in shaping the decision of foreign manufacturers to relocate their plants away from China. Among these, the survey notes, are the continuing quality control problems, with “Chinese partners seemingly unable to prevent the inclusion of toxic materials into products, a judicial system that does not recognise the damage done to foreign companies when substandard products are delivered, and a general attitude of cutting corners in an administration that seems unable to legislate or effectively monitor it.”

“There hasn’t been sufficient recourse in China to match damage caused to US companies buying Chinese components or having Chinese components in their supply chain,” says Devonshire-Ellis. “When things go wrong, there has not been sufficient recourse, and that’s a concern.

At the same time, labour unions in the US and Europe are increasingly prepared to be “more reasonable” over salary demands, the survey revealed. “Workers in the US and Europe are coming around to the fact that they cannot insist on huge salary increases,” notes Devonshire-Ellis. “US workers have seen so many jobs lost over the years to emerging markets that the unions are being more reasonable as regards workers’ rights and the wage increases they’d like to see…. The feeling is that it’s a natural trend for US workers to be less aggressive in asking for increases because they are seeing the results of what happens if they take the opposite tack.”

Asked if US companies operating in China were also responding to the election of Barack Obama, who campaigned the platform of keeping US workers’ jobs from being shipped overseas, Devonshire-Ellis said “it didn’t seem linked to any political issues.”

Nevertheless, he notes, these are signs that multinationals are finding the additional and seemingly never-ending burdens of export manufacturing in China to be not worth the increased effort in basing production in the country.

“I’m not sure if they are leaving China for good,” says Devonshire-Ellis. “It’s more that there comes a tipping point where the analysts and economists back home think this is not feasible in the short- to medium-term.” Particularly when China “is not offering added value to its production facilities… On the contrary, it is lowering value: you have problems with quality, you have higher taxes, and you have difficulties with the labour contract law. Taken together, these perhaps negate the benefits of moving manufacturing facilities to China in the first place.”

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