Posted : 2013-03-10 10:40
Updated : 2013-03-10 10:40

Exodus from China to Southeast Asia

Workers make clothes at a Hansae Fashion plant in Ho Chi Minh City, Vietnam, in this file photo. A growing number of Korean firms are relocating to Southeast Asia from China due to the latter's soaring labor costs.

Soaring labor costs, high taxes drive Korean firms out of world's second-largest economy

By Lee Hyo-sik

Tens of thousands of Korean manufacturers, large and small, rushed to set up plants in China after the two nations established diplomatic ties in 1992.

They wanted to take advantage of cheap labor and a wide range of benefits given to foreign-invested firms by the Chinese government.

However, an increasing number of these companies have begun leaving the world's second-largest economy for Vietnam, Indonesia and other rapidly growing Southeast Asian nations.

More are expected to join the exodus as it has become less profitable to produce goods on mainland China, due to surging labor costs, higher taxes, increased state regulations and other unfavorable business conditions.

Analysts here say many businesses are in the process of moving to Southeast Asia from China for cheaper wages, lower land prices and other favorable conditions. Some companies are even returning to Korea to capitalize on free trade agreements the nation has signed with the United States and other countries, and the increased global recognition of made-in-Korea products.

However, the analysts advise local food companies and other consumer goods makers to establish a strong production base in China if they want to effectively target its rapidly-expanding consumer market.

The narrowing investment gap between the two indicates that local manufacturers engaging in labor-intensive sectors are becoming more interested in expanding operations in Southeast Asia.
According to the Export-Import Bank of Korea (Eximbank), Korean companies invested a combined $2.3 billion in China last year, only $300 million more than the $2 billion investment into the 10-member Association of Southeast Asian Nations (ASEAN). In 2007, Korea Inc. invested a total of $3.87 billion in China, while putting $1.08 billion into the ASEAN.

For example, underwear maker BYC is currently building a 40,000-square-meter plant in Jakarta, Indonesia. A company official said it decided not to expand its China plant, but instead to build a new factory in the Southeast Asian country to take advantage of cheaper labor costs.

Another major underwear producer GOODPEOPLE, which currently operates a plant in Cambodia, has no plans to invest in China.

"It costs a lot to produce goods in China," a GOODPEOPLE production manager said. "We might pay Chinese workers $100 a month, for instance, while we only need to pay $30 in Cambodia. We plan to expand our Cambodia plant and export goods to China, Korea and other consumer markets."

Kim Yu-shin, EximBank's senior research officer, said Korean manufacturers' investments in China have been on a downward curve after peaking in 2007. "The decrease is largely due to soaring labor costs and consumer prices, as well as higher taxes and increased regulations. Wages in China have jumped at a double-digit rate every year since the mid-2000s," he said.

According to the bank, the monthly salary for plant workers on the mainland averaged $328 last October, higher than the averages of $258 in the Philippines, $145 in Vietnam and $53 in Myanmar. In Shanghai and other eastern Chinese cities, the monthly wage reached as high as $700.

"The single biggest factor behind the accelerating exodus from China is high labor costs," Kim said. "It is much cheaper to hire plant workers in Southeast Asian nations and produce textile and other labor-intensive products," he said. "Additionally, the increased tax burden and the abolition of benefits previously offered to foreign-invested companies have driven Korean and other foreign firms out of the mainland."

Kim projected that more Korean firms will leave China for Southeast Asian nations, seeking to manufacture goods at lower costs.

Yu Byoung-gyu, executive director at the Hyundai Research Institute, echoed Kim's views, saying it has become expensive to produce goods in China and export them to the United States and other advanced consumer markets.

"Even without solid data, it is easy to characterize what's been going on in China. It is certain that domestic companies are increasingly moving out of China because it has become costly to make products in China's current economic environment," Yu said.

Some returning to Korea

Some Korean companies that folded up operations in China have decided to return home and start anew.

Last year, 14 Korean gem-processing firms that has been operating in Qingdao, China, signed an investment agreement with Iksan City, North Jeolla Province. They agreed to invest 73 billion won to create a 107,000-square-meter processing complex. They decided to move out of China mainly because of soaring labor costs.

In order to attract the gem processors, Iksan promised to exempt them from paying corporate income tax for three years and to pay for 40 percent of the land acquisition expenses.

Commenting on the return of Korean companies to Korea, Yu of Hyundai said, "Some businesses are apparently seeking to take advantage of free trade agreements between Korea and other countries as they can benefit from low tariffs. They also seek to benefit from the improved status of made-in-Korea products in global markets."

He predicted that labor costs in Southeast Asia would eventually catch up with those in China, stressing that it makes more sense to return to Korea early and establish a strong foothold here.

"I think it is better for labor-intensive manufacturers to operate in the Gaeseong Industrial Complex because wages there are much cheaper than in China or in Southeast Asia," Yu said. "To encourage Korean companies overseas to come back, the government should introduce a comprehensive package of financial and other support measures. This will help create much-needed jobs here."

Kim of EximBank also stressed that the government should play a more active role in prompting Korean enterprises abroad to return.

"The government has been focusing mostly on drawing foreign businesses. But it is more important to bring Korean firms that headed abroad back home. This will generate jobs and provide much-needed vitality to the domestic economy," he said.

Viewing China as market, not production base

Yu said Korean businesses now have to change their approach toward China, stressing the world's second-largest economy is no longer a cheap production base.

"China has become an attractive consumer market in tandem with growing household income," he said. "Manufacturers of food, fashion items and other consumer goods need to build plants there not to export products but to sell them to increasingly wealthy Chinese consumers."

"Korea will likely see its trade surplus with China narrow in the coming years as fewer Korean manufacturers on the mainland will import industrial parts and other materials from the country," he said. "Domestic firms will invest more to produce a wide range of household goods that Chinese consumers want."

Yu projected that China will become the world's largest consumer market in the near future, adding it will present Korean companies a golden opportunity to find a new growth engine.

  • 1. 'Water park video' suspect caught
  • 2. Girls' Generation's 'Lion Heart' tops Billboard World Albums
  • 3. Singer Ivy robbed in Paris
  • 4. [Breaking] Accomplice to hidden-camera recording at water parks nabbed
  • 5. Actor Ahn Yong-jun to tie knot with singer Venny
  • 6. Singer's sexy cross tattoo grabs attention
  • 7. Park Shin-hye stars on cover of SELF
  • 8. G-Dragon, Kiko Mizuhara split: reports
  • 9. President will attend military parade in Beijing
  • 10. Star of '70s TV detective series dies