Emphasis for low-cost manufacturing shifts to India and Vietnam

Sep 13, 2011 12:00 AM

The days of getting the cheapest stuff made in China are coming to an end. The increase in wages resulting from China’s effort to promote social security among its entire 1.3 bn people, coupled with the surge in property prices, is making the market a less ideal option for low-cost manufacturing.
Instead of China, other countries such as India and Vietnam are beginning to become more attractive alternatives where costs of manufacturing operations appear to be much lower.

Chris Devonshire-Ellis, principal of Dezan Shira & Associates, recently calculated and compared the manufacturing costs in the three countries. According to Devonshire-Ellis, if an employer based in China’s Dongguan hires about 300 workers, and pays off various monthly overheads such as welfare costs and rental, his/her annual expenditure will stand at around $ 2.28 mm. In contrast, a similar type of factory in Vietnam’s Ho Chi Minh City will only cost an employer about $ 650,400 annually, and the annual operation costs of the same factory in India’s Chennai will even be lower at $ 345,782.
“It’s a big enough gap to consider. It is financially more attractive to manufacture in India than in China,” Devonshire-Ellis says.

While the boom of China’s manufacturing sector has been widely known as one of the major drivers of the country’s strong economic growth, the frequently-heard quality failure stories have also announced the challenges facing the industry. In his book Poorly Made in China, Paul Midler collected a series of challenges he was faced with while working in China’s manufacturing sector.
These challenges include stories of last-minute price increases and “quality fade”, the process during which cost-cutting measures are sometimes introduced gradually and can only be noticed later -- often when it is too late.

Nowadays in China, more business opportunities are residing in the increasingly consumer-driven market as the country’s middle class is on the rise. A business person will surely find money to make if he/she can develop the market segment where the wealthier middle class is willing to spend money.
In India’s case, businesses will see more opportunities in the country’s infrastructure sector. While India may provide great cost effectiveness to manufacturing operations, the country’s underdeveloped infrastructure system does not offer the same level of efficiency for the transportation of goods. For example, it takes about 8 hours to turn a ship in Shanghai’s harbour, but about 20 hours in Mumbai, according to Devonshire-Ellis.

The dire need for better infrastructure is spurring the Indian government to offer attractive public-private partnerships, as well as favourable tax policies, in a bid to attract big-ticket infrastructure investments. Investors will also likely find a wide range of projects on which they can invest, such as projects related to air, rail and road infrastructure improvement.
Vietnam, poised as a member of the Association of Southeast Asian Nations (ASEAN) and which enjoys a Free Trade Area agreement with the rest of the ASEAN members, is also attracting more and more foreign investors.

In addition to sharing a piece of the profits in the local market, investors into Vietnam have also seen the business potential in the whole ASEAN market, whose annual GDP was estimated at $ 1.8 tn last year.
It would also be good news for investors that “ASEAN is expected to sign free trade agreements with China, India, Japan, South Korea and Australia by 2013”, says Devonshire-Ellis.

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