Many of our clients have asked us questions about moving their manufacturing out of China. It is true that China has become less competitive in recent years, but before we analyze some alternatives (in our next several blogs), let’s have a quick look at how China became the world’s factory.
From 1992 to 2002, China implemented a series of VERY attractive incentives to attract foreign companies to China’s growing manufacturing sector.
The first and biggest incentive was tax exemptions. Foreign enterprises were completely exempt from income tax, whereas Chinese-owned companies had to pay a 30% tax.
A rebate system on import and export VAT taxes was also created that gave foreign companies a partial or complete exemption from the high Chinese VAT rate of 17%. This made the import of equipment and raw materials for foreign companies essentially tax free and strongly supported the export of finished goods. Due to this rebate system, certain products made in China, like Nike shoes, were actually more expensive for consumers in China than in many other countries.
Pre-Built Industrial Zones with No Regulation:
Second, the Chinese government often provided foreign companies with pre-built factories at reduced costs or even at no cost. These industrial zones came with reduced rates on utilities like gas and electric, assistance with hiring a labor force, and help with filing all required government operations documents.
After foreign companies moved into these zones, they were allowed to operate without virtually any regulation. This meant foreign companies could ignore regulations on worker wage and working hours. Since the competition between other industrial zones was fierce, it was easy to find a zone that would give foreign companies everything they wanted. There was also no regulation on the type of manufacturing that came into the industrial zones. As a result, low-value-added, low- tech, and high-employment manufacturing dominated.
China: The World’s New Factory (early 2000’s)
Because China made good on all of these promised incentives, companies from around the world flooded China with manufacturing. By the early 2000’s China outpaced the United States in factory output.
However, in 2005, China began gradually dismantling the system that originally brought them so much foreign business and investment. Today, China is high-tax, expensive, and heavily regulated. They have also shifted to prioritize high-value-added and high-tech manufacturing. As a result, China was no longer an attractive place to many manufacturing operations even before the trade conflict with the US started in 2017.
With several other countries in South East Asia offering manufacturing incentives similar to those offered by China in the 90’s, lots of companies are pulling out of China in pursuit of cheap production.
If you are thinking about moving your production out of China, make sure to investigate the types of incentives you could get in other countries first. As your global supply chain manager, we are here to help you find the best deal, in China or elsewhere. If you have any questions about moving your supply chain out of China, contact us here.