Relocating labour-intensive manufacturing firms from China to Southeast Asia: a preliminary investigation
© The Author(s) 2016
Received: 24 September 2015
Accepted: 22 February 2016
Published: 4 October 2016
China’s rise as a “world factory” since the late 1970s has been attributed to the strategic coupling of local assets in the coastal regions, viz. Pearl River Delta (PRD) and Yangtze River Delta (YRD) in the global production networks (GPNs) driven by transnational corporations (TNCs). Since 2000, these export-led regions have encountered unprecedented challenges, particularly the rising cost of labour, which have engendered spatial relocation of labour-intensive manufacturing firms from coastal China to lower-cost locations such as inland China and neighbouring Southeast Asian countries. A rich body of literature has examined the internal relocation of TNCs from coastal to inland China, relatively little has been conducted on cross-border industrial relocation out of China to Southeast Asian countries. Drawing upon the global production networks (GPNs) perspective, this study attempts to examine the relocation of TNCs from China’s coastal regions, e.g. the Pearl River Delta (PRD) to Southeast Asian countries, e.g. Indonesia, Vietnam and Cambodia. Particular attention is paid to the rise of Global South and its subsequent implications for the restructuring of global manufacturing in the increasingly globalizing economy.
China’s rise as a “world factory” since the late 1970s has been attributed to the strategic coupling of local assets, particularly low–cost labour in the coastal regions, viz. Pearl River Delta (PRD) and Yangtze River Delta (YRD) in the Global Production Networks (GPNs) driven by transnational corporations (TNCs)’s cross-border investment. Since 2000, these export-led regions have encountered unprecedented challenges, especially the rising cost of labour, land, shortage of labour, policy changes, and shrinking market demand of western advanced economies, which have engendered spatial relocation of labour-intensive manufacturing firms from China to lower-cost locations, e.g. inland China and neighbouring Southeast Asia. Compared with numerous studies on the internal industrial relocation within China, i.e. from the coastal regions, e.g. the PRD and YRD to the mid and Western provinces and cities, e.g. Wuhan, Chongqing and Chengdu (He and Wang 2012; Yang 2009, 2013), little has been conducted on the cross-border production expansion to the neighbouring Southeast Asian countries, e.g. Vietnam, Indonesia and Cambodia. In the meanwhile, these Southeast Asian countries have implemented proactive policies to attract the inflows of TNCs with various government initiatives in the aftermath of the 2008 global financial crisis. The ongoing industrial relocation of China-based “world factory” in the rise of “Global South” particularly and its implications for the restructuring of global and regional production networks remain understudied in the literature.
The 2000s, especially the aftermath of the 2008 global financial crisis, witnessed the shift of markets for final products from Global North to South, particularly emerging economies in Asia, e.g. China and India (Cattaneo et al. 2010). Recent studies have highlighted significant and new trends of how global production networks and global value chains are restructuring the organization (Yeung and Coe 2015). Notably, GPNs and GVCs are becoming geographically more consolidated, which reflects the rise of large emerging economies (Gereffi 2014). Known initially as BRICs (Brazil, Russia, India and China), the emerging economies now include a diverse array of “growth economies” such as Mexico, South Korea, Turkey, Indonesia, the Philippines and Vietnam, which offer seemingly inexhaustible pools of relatively low-wage workers, highly capable expor-oriented manufacturers, abundant raw material, and sizeable domestic markets (O’Neill 2011). Emerging economies have turned into major production centres worldwide, although their specific roles in GPNs and GVCs may vary according to their openness to trade and foreign investment, and other strategic consideration. Nevertheless, little has been conducted to make connections between spatial relocation of production networks of TNCs and the rise of emerging markets in the Global South, in comparison with the relative decline of the US and EU as prevalent external markets for the products in China and Southeast Asian countries. It is worthwhile for noting that the industrial relocation has been undergone in the acrimonious politics of the “South China Sea” disputes. While politics, particularly the international political factors do matter in the industrial relocation, the current study has put more emphasis on the analysis of economic geographical factors, while remain that of political factors in future studies. The combination of economic and political factors will definitely make the scenario of production landscape complicated, which warrants for more comprehensive and systematic investigation on the agenda for future research.
This paper attempts to contribute to the literature through investigating cross-border relocation of labour-intensive TNCs from China to Southeast Asia since 2000. Special emphasis is put on the reorganization of regional production networks in East Asia and Southeast Asia induced by the industrial relocation. Based on intensive field investigation and in-depth interviews in the PRD as origin of industrial relocation and selected countries such as Cambodia, Vietnam and Indonesia as sample destinations in Southeast Asia, it sheds light on Southeast Asian countries as emerging locations for the expanded industrial space beyond the coastal regions in China’s “world factory”.
Research design and methods
Since 2000, particularly at the onset of the 2008 global financial crisis, the global economy has entered a new era with the rise of contending centres of economic and political power, particularly in East Asia (Cattaneo et al. 2010). Over the last two decades, the concepts of global commodity chains (GCC), global value chains (GVC) and global production networks (GPN) have become popular analytical frameworks with which to explore the changing landscapes of economic globalization and its associated developmental outcomes (Coe et al. 2004, 2008; Gereffi et al. 2005). From the GPN perspective, firms in developing countries have attempted to engage in “strategic coupling” with GPNs to foster regional development (Yeung 2009). Recent literature, however, argues that the concept is not explanatory enough and does not sufficiently take into account decoupling and recoupling dynamics (MacKinnon 2012). In the changing geographical political economy of GPNs, increasing attention has been paid to the negative effects, or “dark sides” of strategic coupling of export-oriented regions, e.g. over reliance on the Western markets (Henderson and Nadvi 2011). Recently, the so-called “GPN 2.0” was proposed to offer novel theoretical insights into why and how the organization of global production networks varied significantly within and across different industries, sectors and economies (Coe and Yeung 2015). Moreover, the concepts of “decoupling” and “recoupling” have been recently proposed to refine the strategic coupling of regional economies in GPNs (MacKinnon 2012). As put Yeung and Coe (2015), “Processes of decoupling and recoupling can take place thereafter, incorporating new groups and/or recombining existing groups of regional and GPN actors”. By examining India’s pharmaceutical industry, Horner (Horner 2014) demonstrated that the dynamic process of strategic coupling, decoupling and recoupling between 1947 and 2005 enabled India to become one of the world’s leading centres for pharmaceutical production. MacKinnon (2012) contends that decoupling is a more likely outcome after structural coupling in those places such as old industrial regions in Western Europe and North America. Similar to the thesis of decoupling, “disarticulation” has emerged in the severe consequences of regional lock-in in the apparel industry in La Laguna, Mexico (Bair and Werner 2011).
Over the past decades, countries in East Asia have been successful in joining global and regional production networks, which has led to a so-called “triangular trade” pattern (Baldwin and Lopez-Gonzalez 2015): China as an export base to assemble components and parts imported from Asian NIEs and Japan into final goods for external markets in the US and EU. Moreover, an increasing share of trade in consumption goods has become reoriented over the past 5 years (2009–2014): more final goods are now being exported to countries within East Asia (Helble 2014). The rise of Asia, particularly China, has turned into not only a low cost global supply base for advanced economies, but, more importantly, has created new demand for goods and services previously destined for consumption only in advanced economies (Kaplinsky et al. 2011). The thesis of “decoupling”, or the trade of East Asia’s delinking from the American and European markets and “recoupling” with emerging markets within East Asia, has aroused wide attention since the early 2000s, particularly at the onset of the global financial crisis (Pula and Peltonen 2009). The notion of “decoupling” postulates that East Asia has become a self-contained economic entity for maintaining its own growth dynamism independent of the traditionally developed markets. During the period of 1995 and 2008, the share of high-income countries in total value-added generated by manufacturing industry declined from 74 to 56 %, and the share of Japan and the East Asian NIEs declined from 21 to 11 %. During the same period, emerging economies have increased their shares of valued added in manufacturing by 18 %. China alone is responsible for half of this increase, with its global share rising rapidly from 4 to 13 % (Timmer et al. 2014).
The export-oriented development in East Asia’s newly industrialized economies (NIEs) was initially designated as a model for China in the late 1970s, and, particularly, the PRD and YRD at a later stage. The export-oriented production regions in China have benefited from the “strategic coupling” process of regional assets (cheap labour and land) and the strategic needs of GPNs (cost-down and time-to-market) through conducive institutions (processing trade regime) (Yang 2012). However, since 2000, the export-led regions have encountered unprecedented challenges at global, national and local levels, including the surge of labour costs, stringent labour and environment regulation, appreciation of Renminbi and decreasing orders from the sluggish demand of the core Western markets (Yang 2007). Prior to the 2008 global financial crisis, Guangdong provincial government initiated a so-called ‘Empty the Cage for New Birds’ strategy, through which labour-intensive and low-end TNCs as ‘old birds’ are forced to move out of the PRD to the less developed areas, while the PRD would be replaced by high-tech value-added industries as ‘new birds’ (Yang 2012, 2014). The outbreak of the 2008 global financial crisis has accelerated the spatial “fix” of the “world factory” (Zhang 2014) characterized by relocation of export-oriented production to lower-cost locations, including intra-regional relocation in the YRD (Wei 2015), inter-regional relocation (Yang 2009) and expansion to inland China (He et al. 2011), as well as neighbouring Southeast Asia (Zhu and Pickles 2014). Taking the apparel industry as a case, Zhu and Pickles (2014) describe the restructuring process as “go up”, “go west” and “go out”. Existing literature on industrial relocation has primarily focused on internal industrial relocation within China, little has been conducted on cross-border production expansion to Southeast Asia, the effects of which on the restructuring of global and regional production network lack comprehensive and updated investigation.
The notion of the “Factory Asia” first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods, followed by the Asian Newly Industrializing Economies, namely Taiwan, South Korea, Singapore and Hong Kong. By the 1980s Japanese firms were building plants across Southeast Asia. China became the most attractive location of the Factory Asia since its implementation of opening and reform in late 1970s. Asia’s contribution to the global manufacturing output increased from 26.5 % in 1990 to 46.5 % in 2013. Among which, China accounts for half of the Asia’s manufacturing output. In the meanwhile, Asia’s share of the global trade in intermediate inputs—the goods that are eventually assembled into final products for exports to the advanced Western markets—rose from 14 % in 2000 to 50 % in 2012 (The Economist 2015).
Comparison of labour force in selected Asian economies (millions).
Source: compiled according to the World Bank database
Since 2000, especially in the aftermath of the 2008 global financial crisis, there has witnessed the spatial relocation of labour-intensive manufacturing firms from the coastal China to Southeast Asia. For instance, Myanmar’s clothing exports jumped from $700 m to $1.7 billion between 2011 and 2014. H&M, a European retailer, recently shifted sweater production from China to the Myanmar Century Liaoyuan Knitted Wear factory, a Chinese-run facility in outer Yangon (HKTDC 2013). Taiwan-based contract manufacturer Foxconn signed a letter of intention 2011 to invest up to $1 billion in Jakarta Province in Indonesia as it seeks to diversify production away from China. The letter states that the city has committed to provide a 200-hectare plot of land in Marunda, Central Jakarta, for the upcoming factory. The agreement was signed jointly by Foxconn chairman Terry Gou and Jakarta governor Joko Widodo. Foxconn operations in Indonesia would focus on the domestic market of around 240 million people, he said, but the company could also export to the rest of the South-east Asian region. In 2013 Japanese investment doubled in South-East Asia and shrank by 40 % in China (The Economist 2015). Moreover, the state-designated economic rebalancing of China reflected in the National 12th Five-Year Plan (2011–2016), coupled with the government’s increased emphasis on industrial upgrades for higher-value production, has diminished China’s appeal as a location for low-cost, labour-intensive manufacturing. The scenario of “China makes all” has gradually come under challenges. Furthermore, rising domestic consumption in China has helped TNCs relocated in neighbouring regions. As the purchasing power of Chinese buyers grows, the average distance travelled by consumer-goods exports is changing, depending on whether they are shipped from Asia, Europe or North America. From 2008 to 2012, the average journey length for Asian exports fell by 4.5 %, while those from Europe and North America rose by 25.9 and 13.7 %, respectively. That makes transportation costs cheaper for Asian factories (The Economist 2015). While with well recognition of the influential political factors, i.e. the “South China Sea” disputes, the comprehensive analysis of political issues will remain in another study in future. Instead, this paper puts more emphasis on economic geographical aspects of cross-border relocation of manufacturing production from China to Southeast Asia.
Results and discussions
As in many other emerging markets, a number of ASEAN countries, despite boasting a low-cost production environment and attractively low labour wages, faces a number of shortcomings. Aside from general wage levels, there is a number of other relocation considerations, including land costs, the availability of skilled labour, utility costs, infrastructure concerns, the complexity and transparency of government regulations and uncertainties as to tax regimes. A prime example of these additional concerns would be Myanmar. As a relatively undeveloped and recently emerging economy, it has the undoubted appeal of an average wage level less than half of that in Thailand or Indonesia. On the down side, its public electricity supply is limited just to 5 h in the dry season. The ASEAN-5 countries (Indonesia, Malaysia, Thailand, the Philippines and Vietnam) have all initiated a number of reforms aimed at optimising FDI inflows. These have centred on those trade and investment measures aimed at making it easier for foreign companies to start businesses, trade and enforce contracts. It is believed that these improvements will be seen as a clear response to longstanding calls for greater transparency in the administration of business regulations across all of these five emerging markets. Obviously, labour cost is not a single factor and actor in determining cross-border relocation of labour-intensive manufacturing. Furthermore, market opportunities and paradigm shift of markets are also important factors in the process.
Nevertheless, the factors of business environment are more complicated than labour cost and market dynamics, salient social, political and cultural factors do matter in production relocation to the Southeast Asian countries. Notably, the World Bank currently ranks ease of doing business in 185 economies. These ratings are based on 10 individual criteria, including starting a business, dealing with construction permits, securing credit, protecting investors, access to electricity, registering property, paying taxes, trading across borders, enforcing contracts and resolving insolvency issues. If these figures were abstracted out for Asia, and China was adopted as the benchmark when considering relocation to an ASEAN-5 economy, it would appear that Vietnam is now closely behind China, with both Malaysia and Thailand also moving seemingly well out in front (Fig. 3). Looking more closely at the 2013 criteria-specific rankings, China falls behind the Philippines when it comes to securing an electricity supply, taking three times as long (i.e. 145 days versus 50 days). Although China was the world’s leading exporter in 2012, it is seen to be cumbersome to trade across its borders than it is in either Indonesia or the Philippines. The problems largely stem from Chinese regulations requiring more export documents than competing nations, thus considerably lengthening the lead time for exporters working in the country.
Given ASEAN’s economic diversity and its growing capacity, across the board, for handling sophisticated production of an expanding scale, it seems likely that no one ASEAN country will be the solitary beneficiary of any mass industrial relocation from China. Overall, much will depend on the exact requirements of the production facilities being relocated, as well as the perceived ease of doing business in any given ASEAN country. Despite this, Vietnam looks set to have considerable appeal, given its comparatively low wage costs and its reliable labour supply. With all the focus on facilities being relocated from China, it should be remembered that there are already signs of existing ASEAN-based industrial operations considering a move from one of the region’s countries to another. In particular, there have been reports indicating that a number of Thai-based garment companies are considering relocating their plants to Myanmar. These developments have been fuelled by Thailand’s adoption of a daily minimum wage of about US$10 as of January 2013.
Aside from manufacturing low cost items, such as in the flourishing garment industries of Cambodia and Vietnam, ASEAN has also become progressively more capable of handling more sophisticated manufacturing on an increasingly large scale. This is largely down to the growing availability of talented workers and the continual influx of FDI earmarked for higher-end manufacturing projects. This has seen Thailand emerge as an automotive manufacturing hub, with Indonesia also succeeding in attracting investment from abroad in the motoring sector. In 2012, electronic products overtook garments as Vietnam’s leading export sector. This was largely due to increased output and exports for MNCs from the US and East Asia. Beneficiaries of this have included Samsung’s factory in the Bac Ninh Province, adjacent to Hanoi. This now produces more than 100 million smartphones and tablet units annually, amounting to an export value of US$12.5 billion in 2012. As part of a plan to expand its business and production capabilities in Vietnam, March 2013 saw Samsung begin the construction of its second industrial complex in the country. The new facility represents an overall investment of US$2 billion by the company and is based in Thai Nguyen Province, some 2 h’ drive time from Hanoi. While Thailand remains a key ASEAN investment target for Japan, despite the disruptions caused by flooding, Japanese companies have also stepped up investment in other ASEAN countries, notably Indonesia and Vietnam. This is largely in a bid to seek alternative production bases to hedge against their exposure in China. In the case of Vietnam, Japan’s inward FDI in the country doubled in 2012, despite an overall double-digit decline in net FDI inflows.
Based on the field investigation and in-depth interviews with senior managers of TNCs which have engaged in cross-border relocation from China to Southeast Asia, this paper argues that the “China plus” strategy has been widely adopted by TNCs in spatial expansion and reorganization of production networks beyond China to selected Southeast Asian countries. In consequence, a China-ASEAN regional production networks has been in emerging, which will be fostered in the institutional context of China-ASEAN Free Trade Agreement effective from 1 January 2010. While some US companies are reportedly reconsidering onshore production in light of growing operating costs in China, others are planning to relocate production to Southeast Asia. Despite this, concerns over a wholesale relocation from China would appear overblown, especially taking into account Chinese workers’ higher productivity, the comparative sophistication of China’s industrial clusters and the country’s undoubted capacity to rapidly mobilise and utilise a large amount of workers to meet substantial international orders. Although, as referenced earlier, China’s inward FDI surpassed the US$100 billion mark in 2010, this inflow decelerated somewhat in 2012. Despite this slowdown, FDI will likely remain robust in the years ahead, particularly those funds targeting China’s domestic market and the production of high-value exports, as opposed to those low-value products where manufacture is likely to be relocated to other regions.
It is worthwhile for noting that apart from Southeast Asian countries, Africa has turned to be alternative locations for the relocation and expansion of labour-intensive manufacturing from China in recent years (Hong and Hong 2006). The sectoral composition, ownerships and sources of origins of the firms to Southeast Asia and Africa are found quite different. Comparative studies which take into account the economic, political, social and cultural factors are thus in need. Moreover, it is essential to develop a multi-scalar and multiple locational analytical framework to better understand the comprehensive and complicated process and dynamics of cross-border production relocation and expansion from China to the other parts of the world. More in-depth issues, e.g. adaptation and localization of foreign-invested and China-based manufacturing firms in Southeast Asian countries warrant for further research.
To summarize, the spatial relocation of TNCs from coastal China to the neighbouring Southeast Asian countries and restructuring their production networks have three major targets. Firstly, to cut down the costs. As the aforementioned, workers in the selected Southeast Asian countries generally are less expensive to hire than Chinese employees. By 2010, China already had become the third-most-expensive labor market in Asia. Moreover, labor costs have continued their upward trajectory while with difficulties in sufficient supply. Second, to diversify risks in the cross-border production. By taking “China plus” strategy, TNCs could geographically disperse the production across several markets to ensure producers less vulnerable to supply chain disruptions, currency fluctuations and tariff risks in various markets. Thirdly, to explore access to new markets in Southeast Asia with the rise of consumers. Nevertheless, when making decision on the location for companies to diversify away from China is not a simple one, with each country presenting its own advantages and challenges as discussed earlier. The recoupling and decoupling of developing countries and regions in the GPNs have turned into a daunting challenges for TNCs in the changing global and local dynamics.
This paper has conducted a preliminary exploration of the ongoing cross-border relocation of TNCs from coastal China to the Southeast Asian countries since 2000. It elucidates that the spatial expansion of China’s “world factory” from coastal China regions to selected Southeast Asian countries could help the strategic coupling of regional development of the Southeast Asian countries to the GPNs. With the relocated TNCs from China, Southeast Asian countries have gradually incorporated into the GPNs. The subsequent effects on the reorganization of regional production networks have emerged, in which the intra-regional cooperation and integration has been strengthened. There witnessed the emergence of China-Southeast Asian regional production networks in the restructuring of global manufacturing and production networks. Nevertheless, as predicted by The Economist (2015), on one country in the ASEAN with 630 million people or less than half of China’s population, will replace China’s role in “Factory Asia”. But the region will benefit if better integrated. ASEAN countries have made progress in removing tariffs, especially on goods, but non-tariff barriers on consumer goods, electronics and automobile industry remain high. The same as the restrictions on services, investment, labour mobility and customs regulations. According to the McKinsey Global Institute, the import/export costs in ASEAN (clearing customs, port fees, inland transportation) are 24 % higher than China, and the time for customs procedures in ASEAN takes 66 % longer than in the OECD countries.
Through relocating labour-intensive manufacturing to the Southeast Asian countries, to what extent that China could hopefully upgrade its positions from the low-end in the GPNs warrant comprehensive investigation. According to the International Federation of Robotics, China purchased 20 % of the robots made in 2013 and became the biggest market for robots in the world. Foxconn, the Taiwanese firm as the largest contract manufacturer for Iphones and employed over a million workers in China forecast that robots will complete 70 % of its assembly-line work within 3 years. The interaction between cross-border relocation of labour-intensive manufacturing firms from coastal Chin to Southeast Asian countries and technological upgrading in China warrants comprehensive investigation. Moreover, this study sheds light on China’s growing market for the expanded production and trade networks in East and Southeast Asia, which used to mainly target the Western core markets. The findings have not only fostered the theoretical development of GPNs with the articulation of emerging host markets in Global South into the conceptual framework of GPNs, but also fundamental implications for concerned business and governments for policy making. More empirical studies in different countries and different industries related to the cross-border relocation of TNCs from China to Southeast Asian countries could provide more comprehensive understanding and empirical evidence to the reorganization of regional and global production networks in the interconnected global economy.
Financial supports from the General Research Grant (GRF), Research Grant Council of Hong Kong Special Administrative Region government (HKBU257210), National Natural Science Foundation of China (41571119), Faculty Research Grant (FRG1/14-15/042 and FRG2/14-15/055) of Hong Kong Baptist University are gratefully acknowledged. The earlier version of the paper was presented as a keynote speech at the International Conference on the Commemorative Academic Conference for the 60th Anniversary of the 1955 Asian-African Conference in Bandung, Indonesia, 4–6 June 2015. Thanks go to the participants of the conference for their constructive comments which helped improve the paper.
The author declare that she has no competing interests.
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