Don’t Leave China — Just Go Inland

One of the bigger news items this year has been the rising level of wages in China. Higher labor costs, in combination with well publicized strikes and incidents of labor unrest at several foreign-owned factories, have prompted many companies to think the unthinkable — moving manufacturing from China to seemingly greener pastures in countries like Vietnam.

In an article I wrote for the recent edition of BusinessForum China, a leading magazine on China in which international managers and academics analyze the country’s business environment, I made the argument that rather than leaving China, companies should instead consider moving to the country’s inner provinces. I gave five reasons why:

1. Improved Infrastructure: China’s impressive investment in its transport infrastructure over the past 15 years now provides access to even the most remote cities and provinces.

2. Lower Costs: Other than perhaps transport to the country’s ports, costs are decidedly lower in second and third-tier cities in the interior.

3. Strong Local Government Support: I’m a big proponent of the “big fish in a little pond” approach to site location. In China’s smaller cities, even a relatively small factory may be one of the largest and best companies to work for in the area.

4. Lower Management Turnover: For the same reason that IBM located factories in small towns in upstate New York, locating plants in interior Chinese cities can help reduce management turnover.

5. Enhanced Market Insight: Locating at least some operations in less developed parts of the country will provide valuable insights into China’s much larger local market.

An online edition of BusinessForum China is now available, and I encourage you to read the article, Don’t Leave, Just Move in its entirety.

A number of companies appear to be already taking this advice. After suffering a wave of suicides at its massive factory in Shenzhen in the south of China, Foxconn, the Taiwan contract manufacturer, announced plans for a $100 million factory in populous Henan province, which will ultimately employ more workers than its 400,000 employee factory in Shenzhen. Likewise, companies such as Intel and Hewlett-Packard have recently opened new plants in Chengdu and Chongqing.

It seems that the old American saying “Go West” is rapidly taking on new meaning in China.

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