The Future of Taiwan-Owned Factories in China

As a follow up to my last post, this article in the Taiwan Journal predicts a possible drop off in Taiwanese investment in China as a result of changes in labor laws that came into effect today. From the article:

Many Taiwanese businesses in the Pearl River Delta area of China may soon shut up shop, in order to dodge surging labor costs brought on by China’s new Employment Contract Law. The new law is widely believed to contain the world’s most complete regulations governing labor-related issues, and is scheduled to take effect on Jan. 1, 2008.

The situation will be miserable,” predicted a Taiwanese businessman on condition of anonymity. “Big firms will take the lead in calling it quits, followed by their suppliers of raw materials and other supporting factories,” he added Dec. 20.

An unofficial survey shows that one third of the Taiwanese firms in the area either have halted their operations or plan to do so in the near future. The area of the Pearl River Delta includes such regions as Dongguan, Shenzhen, Guangzhou and Zhuhai.

With the implementation of the new law on the horizon, businesses in the area are worried about the impact on their bottom lines. Taiwanese firms already have to bear various welfare costs, including pension allocation and medical insurance.

Industry insiders estimate the new law will boost manufacturers’ labor costs by an extra 20 percent. In addition, the new law stipulates that employers must offer open-ended labor contracts to employees with over 10 years of service. Employers must also provide severance pay in case of mass layoffs.

Others are not as concerned:

Wang Jeng-tang, president of the Taipei Computer Association, stated Dec. 19 that the notebook manufacturing industry is likely to be affected by the new law. “Maybe in the future notebook manufacturers will raise their prices a little,” he said, describing the impact of the Chinese action as “limited” and “not necessarily negative.”

As a Taiwan-based consultant, I was particularly interested in this little nugget:

The uncertain situation appears to have triggered a wave of Taiwanese businesses moving back to Taiwan, as reflected in the recent increase in demand for land in Taiwan’s industrial zones.

Taiwan’s Ministry of Economic Affairs reported that the US$1.54 billion subsidy for a preferential rental program for industrial-zone land is already close to depletion. Economic Minister Chen Ruey-long has instructed the Industrial Development Bureau, which oversees the program, to expand the scale of the program to accommodate the flood of applicants for industrial land in Taiwan.

I’d like some confirmation of the statements made in this piece. There are a few too many “unofficial surveys,” “estimates,” and “situations that appear to trigger (certain events)” for my comfort level. I’m not going to comment on whether this is good or bad news. My role has always been to advise individual companies about their businesses. I’ve tried to remain out of political issues, which suits both my role and my natural bent towards pragmatism.



Filed under Business, Economics, Taiwan

3 responses to “The Future of Taiwan-Owned Factories in China

  1. If these new laws are even enforced, it will only serve to shoot China in their own foot. Nearby Vietnam and India are wide upon and waiting to make our products.

  2. truettblack

    Yep, China has competed based on low labor costs and ever-better technological capabilities. The foreign businesses that I know will leave their Chinese suppliers in a heartbeat as soon as they can get the same thing cheaper in a neighboring country.

    As I see it, part of the problem China faces is the fact that so many industries are just now figuring out that cutting costs or service to make a quick buck, alienating the buyer in the process, isn’t the best way to sustain long-term profitability. If your supplier treats you well and provides consistently high quality and service, there is much less incentive to look around. Many of the foreign companies I know are fed up with their Chinese suppliers, but stay with them because there’s nobody cheaper.

  3. Life3

    Yes, China is competing on costs. No other countries can beat it based on costs. As for quality, I guess and I always said, you get what you pay for. In Europe, if you buy a thing which lasts for say 10 years, you get what you pay for. Surely the price is way more expensive than what China can offer. But I think it’s also a matter of manufacturing management. By that, I mean, do you send your own people or hire someone you trust to monitor the manaufacturing process besides their own inhouse production manager or QC? See, that’s very important, if you want to get the most out of China.

    China sourcing is often taken too easily, too light-heartedly. People think, as long as they pay, they will get what they pay for. Yes, really they get what they pay for. Low cost, low quality. High cost, high quality. But., how do they get low cost, high quality? That’s the tricky part!

    Sourcing with management is like you create a nice looking (expensive) website and you think customers will automatically come to you! No way!

    It’s Managed Sourcing.

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