Is Southeast Asia really cheap?

The low labor cost in Southeast Asia is the first impression of many people. With the rising manufacturing cost in China, especially in the coastal areas, many Chinese manufacturers choose to transfer their production lines to these low labor cost countries. And many international brands have also shifted their sourcing destinations to these countries.

But the low-cost advantage that looks beautiful, can companies investing in factories really enjoy it? Are there other hidden costs holding them back? We can get a glimpse of it from a recent report by China Business News Daily: (excerpt)

While the costs are partially reduced, these companies also have to face strikes that may occur at any time in these countries. According to Xinhua News Agency, on December 24, 2013, Sam Rainsy, the chairman of the Cambodian opposition party, called on Cambodian workers to strike for higher basic wages, and the Cambodian garment and shoe factories were completely shut down, which eventually led to the police and strikers. January 3, 2014 Bloody clashes broke out in industrial areas near the capital Phnom Penh.

Van Sou Ieng, president of the Cambodia Garment Manufacturers Association, said that the illegal strikes by workers in garment and shoe factories in Cambodia for more than ten consecutive days have caused losses of about 275 million US dollars to the entire industry. According to estimates, the reduction in sales revenue of the factory caused by the stagnation of production during the strike is estimated to be US$200 million, while the direct economic losses to the factory caused by lawbreakers attacking the factory and destroying equipment during the strike is about US$75 million.

“After negotiation, a number of shoe factories and garment factories agreed to increase the monthly salary of workers from US$80 to US$100 starting from February 1. In the past two days, workers who have been on strike in Cambodia have returned to their factories one after another. This is still a lingering fear for many Dongguan shoe companies investing in Cambodia, and the prospect of production line transfer has become uncertain. The frequent strikes in Southeast Asian countries have increased the risk of Chinese shoe companies going out.” Yesterday, the Asian Footwear Association Secretary-General Li Peng said in an interview with a reporter from China Business News.

AFP pointed out that throughout last year, Cambodian textile workers launched hundreds of strikes, making 2013 a record-breaking year for strikes in the country.

The person in charge of a Taiwanese-owned shoe factory in Dongguan said that the local land price in Cambodia is cheap and the labor cost is much lower than that of Dongguan. The monthly salary of Dongguan shoe-making workers is about 500 US dollars, and there are often labor shortages. On the surface, Cambodia's manufacturing operations The cost is much lower than that in mainland China, but in fact, the profit of shoe-making enterprises in Cambodia is almost the same as that in Dongguan. On the one hand, Cambodia’s production efficiency is low, and there are no local raw and auxiliary material manufacturers, so the materials required by the industry are all There are many unforeseen costs to ship by sea and land. On the other hand, the buyer calculates the cost of each link clearly. In fact, the preferential tariff policies of Europe, Canada and other countries are not available to the factory, only the buyer. In enjoyment, the buyers kept the price of the order tightly, and once there was a strike and the delivery was delayed, the factory would lose money, and the Cambodian shoe-making enterprises had a very difficult life.

At present, there are more than 40 Chinese shoe factories investing in Cambodia, many of which are Taiwanese shoe factories transferred from mainland China. And international brands such as Nike, Adidas, H&M, ZARA, Uniqlo, etc., completed their layout in Southeast Asia a few years ago, and now domestic listed apparel and textile companies have begun to transfer orders.

A few days ago, Lu Thai A (000726.SZ) announced that it plans to invest 8 million US dollars to build a new shirt processing factory with an annual output of 3 million pieces in Cambodia. Previously, Blum Oriental (601339.SH) and Huafu Color Spinning (002042.SZ) had already invested and set up factories in Vietnam. The Bank of China Cashmere (000982.SZ) also set up a factory in Cambodia by acquiring a 91% stake in Cambodia Xinwang Knitting Co., Ltd.

A person close to the world's largest shoe maker, Baocheng Industrial Co., Ltd. (9904.TW, hereinafter referred to as "Baocheng"), told this reporter that the shoes are made for famous sports brands such as Nike and Adidas. After cutting down many production lines in the Pearl River Delta such as Dongguan and Zhongshan, the giant Baocheng is gradually transferring production lines to the mainland and Southeast Asia. In the past few months, it has bought land and built a factory in Cambodia, mainly for Adidas. The recent strike in Cambodia had some impact on Baocheng's local factories.

With the rising manufacturing costs in mainland China, Baocheng has cut 51 production lines in mainland China in 2012, and has gradually transferred some production capacity to Southeast Asian countries such as Indonesia and Vietnam. Since 2013, although Baocheng's revenue has generally remained stable, the continuous increase in labor costs, coupled with the transfer and adjustment of production capacity in line with the order allocation of brand customers, have posed challenges to operating performance.

Li Peng said that the transfer of the footwear industry in the Pearl River Delta is the general trend. He personally believes that the risk of shoe companies moving to Southeast Asia is greater than moving to the mainland. At present, labor costs in Southeast Asia are rising in the frequent strikes, and companies may not have better opportunities to fly southeast. In contrast, the development opportunities of internal relocation may be more.

Industry insiders said that it doesn't make much sense for Chinese brands to move to Southeast Asia now, because the time difference between rising labor costs has gradually shortened, and in a few years, Southeast Asia may lose this advantage.

Guangdong Chuangxin Footwear Chairman Wu Zhenchang said yesterday in an interview with a reporter from the "First Financial Daily" that the gap between the wages of workers in Southeast Asia and the Pearl River Delta is still large, and some shoe companies around are still preparing to move to Southeast Asia. The rising rate of labor costs in Southeast Asia will accelerate in the future. The shoe industry transferred to the mainland may not develop well. During this period, some shoe factories transferred to Jiangxi and Hunan have been closed one after another. Blindly reducing labor costs through transfer is not a long-term solution. This year is still a very difficult year for the shoe industry. The way out is to rely on enterprises to cultivate their internal skills and continuously improve their competitiveness.