China inspections

As a “China alternative” in overall production efficiency and quality, there is no doubt that Vietnam is up-and-coming, but industry and market development play a key role in the decision to move to Vietnam. For industries such as clothing and toy manufacturing—for which low-cost production is a chief concern—the labor market would be more responsive to any wage rate increases, thus requiring cutting down on factor inputs such as land and labor. For large multinationals it may make sense to set up production bases in Vietnam to complement expansion into the Vietnamese market.

Some analysts see China’s continued wage increases as significantly impacting the global labor market and affecting foreign companies’ production decisions in China. Others predict a more muted scenario, where there will be some impact but that China will retain much of its competitive advantage.

According to a report by Caixin, Chinese real wage increases have not fundamentally changed the labor market cost structure. In fact, it points out, “real wages, after accounting for inflation and labor productivity gains, are lower now than they were in 2001.”

China remains a strong international competitor, and the wage increases are “not likely to alter that key conclusion,” writes Stephen S. Roach for China Daily. This agrees with recent evidence that in response to labor protests in China, companies may be inclined to compromise on demands for higher pay rather than shift countries (Honda and Foxconn Technology are two examples).

A shift of production from China to Vietnam, it seems, is not likely to be a panacea for the wage increase and other labor issues in China. For foreign companies with years of presence in China, shifting production to Vietnam would mean opportunity cost considerations in areas such as infrastructure and workforce quality. Moving to Vietnam must factor into a company’s longer-term strategy and will require familiarization with Vietnam’s regulatory and legal systems. So the main question is whether the savings in production costs would offset any potential challenges to be encountered in Vietnam.

For other companies that are less elastic in response to wage changes or require high-skilled labor, it may be more pragmatic to stick with the production base with which they are familiar. Rising wages are one element of production, and China’s prowess in infrastructure and skilled labor may be enough to keep the foreign companies there for the short and medium-term. For China, labor costs aside, favorable factors still include a wide supply network, high efficiency, and experience with production and manufacturing. In fact, a 2010 article in the Economist suggests that the “next China” of low-cost production may very well be moving away from coastal areas into inland provinces, rather than automatically abroad to Vietnam. So, to some it appears that the best “China alternative” may still be China—just look inland. This is something we covered extensively in our March edition of China Briefing Magazine titled “Operational Costs of Business in China’s Inland Cities.”