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Will Companies Relocate Employees, Facilities Out of China?

As someone who lives and breathes international relocation, I’m always looking out for business trends that may impact global mobility. recently, I read an an article in the New York Times titled “Looking Beyond China, Some Companies Shift Personnel,” that posed the theory that more companies would move facilities out of China for its more favorable neighbors in Southeast Asia (most notably, Singapore). According to the article, GM is leading the pack by moving its international headquarters to Singapore. On the surface, this makes sense. Southeast Asia is emerging from its financial crisis and Singapore is a very attractive destination for executives moving abroad. However, while I agree with much of the article, I do not believe we will see too much movement out of China.

As many of us know by now, companies began setting up international headquarters, plants and R&D facilities in China years ago. Back then, it was a no brainer. Labor in China is cheap and plentiful. Also, the access to the massive International Relocation ChinaChinese consumer market was, and still is, enticing.

Our love affair with China, however is rapidly changing for several reasons.

First, while labor is still cheap, the working conditions are dismal. American consumers, as well as labor unions, are rightfully forcing companies to adhere to more favorable working conditions. While this is good, workplace reform is raising the cost of business and diminishing the financial incentive.

Second, and perhaps the bigger problem, is copyright abuse. Anything built in China will be recreated in China and there is no way to prevent this abuse from happening. So, if you work with an R&D firm to build a technology widget that will give your company a competitive advantage, that advantage won’t sustain for long. Research and development labs are especially vulnerable to infringement and that is scary.

Third, while China supports visa and the setting up of companies, they also protect their own markets by levying a 30 percent luxury tax on western items.

Finally, from a relocation perspective, moving assignees to China is becoming a bigger challenge as well. As the article mentions, pollution, lack of schools and government harassment are deterring executives from accepting assignments.

Singapore, on the other hand, is growing more attractive. The air is cleaner and it’s more business friendly. The government is ramping up the educational system by building more schools. Further, the rules, while stringent, are clear and easier to follow.

All this said, I don’t see companies moving operations from China to Southeast Asia en masse anytime soon. Why? China’s culture is far too punitive. Leaving China would most likely bring about serious consequences for the company moving.  The government can levy more taxes, ban product(s), impose penalty on the remaining staff and more. It’s a bit like the mafia – once you are in China it becomes extremely difficult to leave.

For these reasons, I would suggest companies think long and hard before opening factories, offices and (especially) R&D facilities in China. Those that do decide to open in China, should plan to stay. Even better, wise companies may set up production facilities in China, while keeping strategic R&D elsewhere.  It will be interesting to see when and how any of this changes in the future. But, for now, it will be business as usual for multinationals with operations in China.

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MIKE CANNING
VP, Client Services

RICK CALANNI
VP of Business Development Northeast Region

 

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