Foxconn, the Taiwanese electronics manufacturer and, famously, assembler in China of Apple’s iPhones and iPads, is planning to set up a $5 billion-10 billion plant in Indonesia, another sign of China’s ebbing role as the low-cost workshop to the world. Work will start in October on the new factory that will initially produce 3 million mobile phone handsets a year, rising to 10 million units after 2013.
Earlier this month, Vancl, a popular online clothes retailer, said it had started to shift production overseas to cut costs. The company says that, allowing for increased shipping costs, it could save 5%-10% of its total costs by making its glad rags in Bangladesh, where labour rates are a quarter of those in China. It is also looking at manufacturing in Cambodia and, like Foxconn, in Indonesia.
The two companies are the latest in a line of manufacturers moving production elsewhere in Southeast Asia to offset rising domestic material and wage costs. It would be premature to talk of the hollowing out of Chinese manufacturing. Cost is never the sole determinant in such calculations. Quality of available labour and speed to market remain important factors. Yet many foreign companies that contract for basic manufacturing of goods such as shoes, plastic toys, textiles and low-end electronics are reducing their buying or production in China and switching sourcing to elsewhere. Others are moving it inland as Beijing fosters provincial wage competition as part of a strategic shift toward an internally driven economy and a desire to reduce the growing wealth gap between the coasts and the interior. Adding to wage pressures, manufacturers across eastern China say they are struggling to find workers despite higher pay, because younger workers want white-collar, not factory jobs.
That is causing pain for both Chinese and foreign firms based on the coasts. It is there that China’s manufacturers have been leading the shift towards more sophisticated exports for some years, driven by the official sponsorship of high-tech zones. Lower-tech jobs will move away. It is a rite of passage for all developing economies.