Rising Costs in China’s Pearl River Delta Causing Manufacturers to Look to Vietnam

July 21, 2014 Posted by Vietnam Briefing Reading Time: 3 minutes

HCMC – China’s Pearl River Delta (PRD), long known as one of the key factory centers for the world’s manufacturers (particularly those from Hong Kong) has now become too costly for many companies to stay in the region.

According to a survey conducted by the Chinese Manufacturers’ Association of Hong Kong, nearly 30 percent of the manufacturers interviewed said they were going to reduce their investment in the PRD over the next three years.

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Additionally, 32 percent of the manufacturers were planning on moving their factories to areas with lower costs, such as Vietnam.

One of the key concerns for many of the companies in the PRD is the increasingly high wages needed to pay workers. Labor costs have been rising at between 10 and 15 percent per year. For many, it is no longer financially feasible to keep the amount of staff on hand that they were previously able to.

In particular, original equipment manufacturers (OEMs) are seeing their profit margins squeezed. China is actively pursuing a policy of encouraging the development of value-added industries in order to keep its economy growing. The OEM industry is a labor intensive but low-profit industry that is particularly sensitive to adverse changes in wages.

As a result of these changes in the region, the number of businesses that feel optimistic about the business environment has declined from 50 percent to 43 percent.

The trail leads to Vietnam

Vietnam stands out as one of the key areas that companies from around the world are moving to as they search for regions with low business costs and good workers. The country is well positioned for businesses pursuing a China +1 strategy and Vietnam’s membership in the ASEAN organization means that the country is part of a number of key regional free trade agreements.

Labor costs in Vietnam tend to be about 50 percent those of China and around 40 percent of those reported in the Philippines and Thailand. The country’s workforce is seeing an annual increase of 1.5 million people, and its workers are young and, increasingly, highly skilled. Partly the result of Vietnamese government investment in education and training programs—often in conjunction with foreign multinationals— over the next decade the country’s workforce is set to provide highly-skilled workers in a range of industries.

Compared with other developing markets in the region, Vietnam is emerging as the clear leader in low cost manufacturing and sourcing, with the country’s manufacturing sector now accounting for 25 percent of Vietnam’s total GDP.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email vietnam@dezshira.com or visit www.dezshira.com.

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