China—Pricier, But Still OK

August 22, 2010

By Joyce Roque

Since 1999, the government has been trying to entice investors to look beyond the major cities and invest in its Western regions following its ‘Go West’ campaign. But some firms remain unconvinced by the policy.

‘The biggest problems I see with the movement to the West, although it’s a stated government policy, is that the government hasn’t clearly articulated the real incentives to do that, and the transportation logistics network is still not very sophisticated. Therefore there are higher costs,’ Evans says. ‘And it’s not so much the cost of trading the goods and inventory, because most companies will absorb that inventory cost. It’s the inefficiencies and the difficulties of the transportation network, be it rail or trucking.’

In fact, despite government efforts, many companies are still choosing to stay in developed cities where the infrastructure and labour pool is more developed. ‘Relocating to cities besides Beijing, Shanghai or Guangzhou is actually harder since it’s more difficult to find qualified people,’ says Philip Lao, chief financial officer of pharmaceutical company Shanghai United Cell Biotechnology.

So, is moving overseas a viable option instead? For Regal Beloit, which also has operations in Indonesia, Malaysia, Australia, Thailand and India, operations in China are still the most cost-effective.

‘One time we looked at Vietnam, but it seems that the supply chain in Vietnam isn’t ready yet and also the local market demand isn’t up yet,’ Yang says. ‘If you bring all your raw material to Vietnam…the savings in labour will easily be offset by transportation.’

‘It doesn’t make a lot of sense,’ he continues. ‘Some other firms are doing that because there’s domestic consumption. So in order to have good access to the market, sometimes its best to manufacture that product in the Vietnam market. In that case it makes sense.’

But the fact that China is still cost-effective hasn’t stopped foreign investors from raising other concerns over the cost of doing business in the country. In recent months, multinational executives have been more vocal in questioning Chinese policies on foreign investment, including senior executives from BASF, Siemens, General Electric, Google and Microsoft.

According to the Amcham-China Business Climate Survey released in March, the majority of US companies operating in China consider its regulatory environment to be the most problematic challenge they face, with ‘inconsistent regulatory implementation’ cited as a top concern

For Yang it is changes to labour laws that have proven to be the most challenging. ‘It’s not the direct salary increase that’s the issue. It’s the flexibility they took away,’ he says. ‘Business goes up and down and you need to manage the size of your workforce. A company hasn’t as much flexibility to do so as they used to.’

Evans says that for him, the most challenging aspect of doing business in China is keeping up with the overall speed of economic growth—and the changes it inevitably brings. ‘You have a regulatory environment that has gotten easier from the past and has gotten much more transparent,’ he says. ‘But it’s still not easy and it takes a long time to get through all the necessary processes.’