But for companies that still don't have a presence in China, there are a number of issues that must be considered in order to establish and operate manufacturing plant in that country. As a China based observer I like to share my observations on the cost of labor, form of ownership, plant location, building a plant, staffing a plant, patents and copyrights, and getting paid.

Cost of labor of most manufacturing workers in China are less than a 1/4 of what their counterparts in the Australia earn. But that advantage is quickly diminishing as wage rises regularly and businesses loaded up to provide benefits to the workers.

One factor is that China is in the focus of implementing a social safety system that will combine the functions performed by Social Security, Medicare. The Chinese Social Security would be financed by contributions from employers and employees alike.

The other factor is that production workers wages are rising faster in China than they are in the rest of the world. As expected, the most rapid growth in labor costs is in metropolitan areas.

Foreign company can own 100 percent of a venture it establishes in China. However majority of the businesses making their presence in China prefer to do so via a joint venture.  Joint ventures are attractive because the government gives them tax incentives. They require a minimum of investment (the foreign company need own only 25 percent of the business), and the Chinese partner often can help negotiate the maze of regulations the government imposes on business. It’s worth knowing that tax advantages might be revoked and careful selection of the joint venture partner are required like in any other country.

Checking out about the track record of Chinese companies or the background of their executives can be a tiresome task. There's no law requiring Chinese companies to report their financial results, and no incentive for them to do so because only a very small percentage of them have access to capital in the public markets as majority go to the bank. That's where Chinese companies usually go when they need capital. And the banks closely monitor the performance of the companies they lend to, and they are usually well aware of the background of these companies' managers.

Because labor costs are lower in the inner provinces of China, companies may be tempted to build plants in one of these remote areas.  There are at least two negative factors. It’s hard to lockate competent management in the inner provinces, and it's difficult and expensive to recruit the necessary expertise from the metropolitan areas in the coastal provinces. The other downside is that they don't provide the same degree of legal protection and government cooperation that is enjoyed by companies in the metropolitan areas of the coastal provinces. The provinces that are most hospitable are those along the coast: Shangdong, Jiangsu, Guangdon and Zhejiang.

Remember that foreign companies can't buy land anywhere in China; a plant site must be leased, for terms ranging from fifty to seventy years. Companies that want to manufacture in foreign countries usually prefer to have their plants build by the contractors they're accustomed to working with. But it may not be economical to bring a major western construction firm into China to build anything less than a large factory. That leaves a choice of contractors domiciled in mainland China and those based in Taiwan and Hong Kong. The better choice will usually be a contractor from Taiwan or Hong Kong that is licensed to build on the mainland. Some of these companies have good quality control, better technology and can get projects done on time, on budget. Here again, it will pay to do extensive due diligence to find a good contractor.

There are two positives in working with the Chinese. Most employees are willing to put in long hours, and there is only minor union interference.

On the negative side, Chinese workers in general have a lack of initiative. Typically, a foreign company finds it must put Chinese workers through a long training process before they are able to do their jobs and learn to come up with solutions to problems on their own.

Company can make all the right moves in building a plant in China, manufacturing its products and getting them into efficient distribution channels, but can they get paid for products sold and delivered?

It would be nice if China had a credit ratings agency, but no such entity exists. What, then, can a company do to avoid this problem?

First off companies must accept as a fact of life that the percentage of their receivables that are not collectible in China will almost always be higher.

The way to hold uncollectible receivables to a minimum: Check with the banks that are familiar with prospective customers. As noted earlier in the discussion on joint ventures, the banks know the financial condition and the creditworthiness of Chinese better than any other organization in the country. There will always be one or more banks that know any potential customer of a foreign company.

Company should also differentiate between different types of customers, and be leery of selling to state-owned companies. It's not that these companies deliberately cheat their suppliers; rather, they simply may not be able to pay their bills.

Extreme caution is warranted if a prospective customer is a state-owned manufacturer, because many such companies have obsolete technology and therefore have trouble selling their products.

China subscribes to international treaties and conventions on patents, copyrights and other intellectual property, and the government is sincere in its vow to catch and prosecute infringers. Still, the country is so huge and the profits to made from infringements so great that some infringement does go on.

This does not mean that companies should not manufacture any of its proprietary products in China. But they would be well advised to confine the manufacturing of components containing their core technologies in the country of origin, and have the less proprietary parts of their products made in China.

One measure of China’s positive impact is its growing importance in regional export markets, as China has outstripped the US and Japan as the major market for most East Asian economies, including Australia.

Though it is no less beneficent, the dynamic of East Asian growth was never so simple. As China’s manufacturing has forged ahead, there were bound to be competitive pressures on other producers along production chains within the region, as Chinese manufacturing productivity leapt ahead of wage growth and brought unit costs tumbling down. Without investment, especially in human capital and entrepreneurial infrastructure, China’s established Southeast Asian competitors in markets for labour-intensive components and manufactures are left in the low-skilled end of the market, struggling to upgrade their manufacturing into higher value-added activities where China is gaining strength.

Malaysia is a classic example, where failure in up-skilling the manufacturing workforce and ill-judged industrial policies have raised the spectre of being caught in the so-called ‘middle income trap’. The challenge is not the spectre of Chinese competition, which provides the opportunity to lift manufacturing productivity, upgrade trade and industrial structure, and lift national incomes: the challenge is national failure in investment and reform to achieve that outcome. Many in Indonesia also worry about how to find a way in international markets for manufactures around the juggernaut of growing Chinese competitiveness; the more Indonesia closes off competition and back-tracks on openness and reform the more likely Indonesia’s respectable growth and industrial transformation are likely to splutter to a halt.

Yukon Huang, in this week’s lead essay, makes the important point that North Asian economies that are higher on the economic value chain, like Japan, Taiwan and South Korea, have benefited greatly from China’s low-end-manufacturing strengths in the past decade or so. Southeast Asian economies that are more like China in terms of their labour endowments and skills structure are less well positioned to cope with the new competition. That’s not true for all of them, one should add, as Vietnam and Singapore demonstrate in different ways. Huang argues that as East Asia emerged from the Asian financial crisis, China’s rise was viewed by many of its neighbours as a potential threat, rather than an opportunity. But when economies from South Korea to Thailand revived and the regional production-sharing network matured, and China embraced an activist economic (ASEAN+1) diplomacy to open its markets toward Southeast Asia, everyone seemed to benefit from China’s demand for specialised components and primary products.

But, in the second half of last decade, Huang suggests, regional production patterns have affected capital flows, investment rates and wage trends in ways that have benefited some East Asian countries more than others. ‘The more developed North Asian economies are likely to benefit the most from China’s industrialisation process because they have managed to strengthen their position at the high end of the consumer electronics and IT product lines. Meanwhile, production patterns in the region are affecting investment and labour markets in Southeast Asia, thus complicating the sub-region’s efforts to moderate widening income disparities, increase productivity and escape the middle-income trap’.

China has continued to upgrade its technological capacity and has made massive investments in infrastructure, especially in response to the global financial crisis. Location within China is now the issue, as the rising costs of production along the industrial coast and an expanded interior transport network encourage firms to move inland. The complexities of a dispersed supply chain are also encouraging some firms that had previously outsourced components to Southeast Asia to relocate their operations and associated research-and-development activities within China.

Huang observes that ‘processing-related imports have fallen from over 40 per cent of China’s total imports to 30 per cent over the past decade. And as a share of its exports, they have declined from 55 per cent to about 40 per cent as production has become more integrated within China’.

China’s success in industrial upgrading, of course, is already sowing the seeds of a new structure of economic relationships with the rest of Asia, as Chinese and China-based firms look to manage the pressure of higher labour costs by heading into production offshore.

China and the middle-income Southeast Asian countries both face the same challenge of constantly innovating to achieve high-income status and move up the value chain. This is not just a matter of letting markets work in churning out low-end labour-intensive manufactures: it requires high levels of investment in human capital and the next round of fundamental economic and institutional reforms. As they succeed in this, competition across East Asia in higher-end production will intensify as the whole region lifts itself close to industrial-country income levels.

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Looking forward hearing from you! If you have something you are looking to manufacture in China but unsure if P&A can be any help - contact us! We helped many companies and can assist you with a broad range of technologies well outside what is listed on our website. Just ask us!

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Today we are opening this blog to publish news and enable our customers to discuss various issues arising with Manufacturing parts and products in China.

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