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Rising China costs get manufacturers moving

Big wage rises see costs climb, other nations rise as factory alternatives

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Several key notebook ODMs are apparently reconsidering their plans to locate factories in western China because of rising costs in the region which could hit profits.

Digitimes said that, according to industry sources, Quanta Computer, Compal Electronics, Wistron and Inventec among others had already relocated some plants to Chongqing and Chengdu.

However, they are reportedly getting cool on the idea after the local authorities failed to cough up with payments promised to the manufacturers to compensate them for the higher costs incurred by moving production to the two cities.

The report said that the relocation of production facilities would lead to a unit cost increase of $4-5.

Gartner analyst Roger Sheng argued that rising salaries are a key factor affecting the “RoI of factory moving” in China.

“Wage increases will be a major mission of the Chinese government in the next five to ten years now that its GDP has risen to number two in the world,” he told The Reg. “This is not a short term activity. The ODMs need three to five years to grow the affiliated industry in a new area.”

The Chinese government’s most recent five year plan states that firms must increase wages by at least 13 per cent every year but in certain areas the local authorities mandate much higher rises.

Despite still being too low for many not-profit groups monitoring pay and working conditions in Chinese ODM factories, workers’ salaries have come under increasing scrutiny from the tech giants who contract companies like Quanta and Compal to make their shiny kit.

Senior figures at HP and Dell both said they were monitoring the situation after notorious hardware maker Foxconn was forced to raise its wages by up to 25 per cent last month.

Earlier this month, Philippine trade secretary Gregory Domingo reportedly revealed that the south-east Asian nation is hosting more fact-finding missions from foreign firms than ever before, with rising labour and production costs in China one of the key drivers.

However, it’s not time for the Chinese government or big name technology vendors to hit the panic button just yet.

IDC analyst Helen Chiang told The Reg that China still represents the best option for most ODMs.

“Some of them tried to move outside of China because of rising labour costs but the truth is it’s very hard. They tried to move to Vietnam, for example, but the logistics were very bad there so they moved back,” she explained.

Chinag said that western China is still attractive for many ODMs because logistically it means kit can be shipped out to Europe by train, whereas in the east of the country it has to be done by air, potentially increasing costs seven-fold.

In the near term at least, wage increases aren’t likely to affect the sale price of notebooks produced in China as they are mainly high value, high margin items like ultrabooks, she added. ®

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