Vietnam a fertile spot for growing Chinese factories

Fast-growing Asian 'success story' lures companies seeking to reduce their costs for labor and land

Launching factories all over the world to manufacture products at low cost has been a successful business strategy for Li Shaoxing, chairman of Huaxia Machinery Plastics Co Ltd.

Originally from Zhengzhou, Henan province, Li maintained his goal of pursuing a net profit margin of 20 to 30 percent over the past two decades by moving major production lines from China to Vietnam. Now, Africa is his next destination.

A turning point came in 2000, when Li realized he had to move his company out of China.

His net profit margin was about 5 percent by that time, and it was expected to further decline.

"I was forced to make the decision to shut down the company in Zhengzhou and restart in Bac Giang province in the north of Vietnam," said Li, who, after two years of research, launched a new factory in Vietnam in 2003, becoming one of the first Chinese businessmen to do so.

Benefiting from the preferential policy begun by the Vietnamese government when it started its trading partnership with China in 1988, Li opened the factory with four production lines covering 3 hectares in Vietnam and spent only $250,000 on the land, with a 50 percent discount over five years.

"We started making and selling plastic woven bags to Vietnam buyers when we moved here and then expanded to the export trading market in 2008," Li said.

Vietnam, a financial success story in Asia for 15 years, with an average annual economic growth rate of about 7.5 percent, became a favorite destination for Chinese factories.

Re-established in Vietnam, Li's company made nearly 30 percent net profit margin in 2008 and set up the second factory covering 18.6 hectares with 20 production lines to meet increasing demand from other countries.

But competition was tougher than expected, with other Chinese companies rushing to Vietnam to take advantage of its cheaper labor costs.

Meanwhile, Vietnam's inflation rate grew.

"Labor costs in Vietnam rose rapidly, with a monthly per-person average at the factory of about 6 million Vietnam dong ($281.70), and with more enterprises sharing a limited number of workers," Li said.

Li's net profit margin dropped to about 5 percent in 2011, falling to 3 percent in 2012.

This was a sign for him to transfer production lines again.

Now, he plans to have his factories in Vietnam produce items mainly for local buyers and regular US and larger European clients, who don't want to switch to other companies and are willing to accept higher prices.

Meanwhile, a new factory in Ethiopia is under construction.

It will be launched next year to make products mainly for smaller European countries.

"Vietnam will follow in the footsteps of China sooner or later and lose the advantage of cheaper labor costs with higher economic development, so it is time for us labor-intensive companies to move on," said Li.

Ministry of Commerce data showed that the total amount of foreign investment in 2012, $111.72 billion, dropped 3.7 percent, while foreign investment used by the manufacturing industry, $48.87 billion, fell 6.2 percent.

"The slight drop was created by the normal move out of medium- and large-sized manufacturing-based enterprises from China to find a better solution for making lower-cost products," said Shi Jinchuan, dean of the College of Economics at Zhejiang University.

In fact, some Chinese enterprises have kept their major businesses in China and are using Vietnam only on a trial basis for production.

Having operated a factory in Vietnam for five years, Ningbo Powerway Group kept its research and design center, sales departments, major production lines and management teams in China and moved just a few minor production lines to Vietnam.

"We still have eight factories in China to be the OEMs (original equipment manufacturers) of well-known brands, and our factory in Vietnam could be applied as a backup production base for our company to expand to a larger market," said Zheng Xiaofeng, a senior management executive for Ningbo Powerway, a global supplier of non-ferrous alloys.

Powerway's strategy is to not expand its business in Vietnam in the long term.

"Vietnam will only be a temporary stop for our enterprise to walk onto the world stage. We will continuously focus on our brand building and product designing in China to attract more overseas clients," Zheng said.