Sunday, September 14, 2008

Shezhen Investing $200 Million in Vietnam

For the past year a lot of factors have been hurting Shenzhen factories manufacturers.

1. Huge increases in the cost of commodities, from plastics to iron and everything in between
2. Inflation in China
3. Appreciation of the RMB - making products less competitive when exporting to the US
4. New worker standards in China = higher wages for the same jobs
5. The inability to pass the rising costs to the clients overseas
6. Tax breaks and customs tax rebates to Chinese companies exporting internationally have been repealed

All of these factors have severely hurt once profitable businesses into lagging money-losing enterprises. The owner of my new apartment i'm renting in Nanshan is a part owner of a factory who does business with western clients like Walmart. He said that every month he loses 400,000 RMB on workers salaries and factory overhead costs. However, if he actually worked on any orders, his loses would INCREASE to 600,000 RMB. He loses money if his factory makes product. This means that the factory stays idle while he and his partners look for new sources of income.

In the west, companies are already exploring other sources of low cost labor. Vietnam is supposed to be the Next Guangdong province. A lot of foreign companies have already left China for greener pastures in Vietnam. Realizing this trend, Shenzhen is taking action. In a recent Thanhnien News article, Shenzhen is reportedly investing $200 million in a economic trade zone.

The park, 125 kilometers from the Vietnamese capital, aims to attract 170 Chinese manufacturing companies in the clothing and electronics industries to take advantage of the country’s cheap labor and the government’s preferential policies and tax incentives...

So it seems, not only are western companies leaving Shenzhen for more inland provinces and other southeast asian countries, so are Shenzhen factories themselves. Maybe in a few years, the same factories will be doing business with the same clients only in Vietnam instead of Shenzhen.

1 comment:

Chris Carr said...

Very interesting post and development.

Can you tell me more?

For example, are the well run and managed firms in Shenzhen still profitable, their higher overhead notwithstanding?

Or, is it mainly the poorly run and poorly managed firms in Shenzhen that are taking a hit and are having to move inland and/or into Vietnam?

I hear differing reports on this back in the USA.

If the latter -- poorly run firms are shutting down -- would this not be a good medium and long term development for China and its industries?