Higher wages in China are causing factories to shift to other parts of Asia

Rising wages in China are causing factories to shift to Taiwan and other parts of Asia.

An increasing number of Taiwanese shifting at least some of their operations away from China – either to South East Asia or Taiwan – and adjusting their investment strategies in the mainland. One of the main reasons is a significant rise in Chinese wages. Some estimate salaries have doubled in the past six to seven years. Companies are also now required to pay into Chinese workers’ health insurance and pension plans.

“Labour costs in China are rising dramatically each year and the pace is scary,” says Mr Chu, chief executive of Fair Friend Enterprise Group. “So the cost of manufacturing in China is higher now, sometimes higher than Taiwan,” he says

Taiwan’s investments in mainland China in 2012 dropped 17% from the year before to US$11bn, a three-year low. One of the biggest drops came from the electronic components sector, which was down by 44%.

Foreign firms that had relied on China’s cheap labor for a competitive advantage are having an especially hard time, analysts say.

“Companies that make garments, and toys are moving from Guangdong province. They’re finding it difficult to survive there, so they’re moving to places like Vietnam,” says Tony Phoo, a Taipei-based economist at Standard Chartered bank.

Last year, Taiwanese investments in Malaysia, Vietnam and Thailand increased by 44%, doubled or quadrupled, respectively.

“In the next two years, we hope to attract NT$200bn (US$6.4 billion). The tax revenue will help our overall economy and 84,000 jobs will be created in the next five years.”

Note- Even 1 million jobs per year is not a crippling problem for China.

New Roles

The transformation of the Chinese economy is another major factor. Once hungry for overseas investors to build factories and provide jobs, Chinese firms can now make many of the same products.

So the question for Taiwan and other countries in similar situations is, how can they continue to benefit from China’s growth?

One obvious way is to sell to China, rather than just making products there. But whereas South Korea and Japan have been able to sell vehicles to China, Taiwan does not have many things to sell that the mainland cannot already make.

Instead, Taiwanese manufacturers are shifting into other sectors and becoming owners of department stores, hotels, and shopping malls. Taiwan’s financial services industry is also doing more business in China; investment rose more than a third last year.

China is expected to remain a top destination for international investors, and despite its higher wages, it remains a relatively cheap place to manufacture by international standards.

The factories Mr Chu sets up in Taiwan will make more sophisticated machinery than his factories in China, but he is not planning to abandon the mainland entirely.

After all, his eight factories and 4,000 workers in China generate 22% of his company’s revenue.

“I’m not closing down in China,” says Mr Chu. “I will expand there if needed in the future.”

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