Samsung is building a factory in Yenphong Industrial Park in Yenphong, Vietnam. (Justin Mott for The New York Times)

As Chinese costs soar, manufacturers expand elsewhere in Asia

HANOI: Canon is no longer building or expanding factories in China, but the company is doubling its work force to 8,000 at a printer factory outside Hanoi.

Nissan is expanding a vehicle engineering center nearby. Hanesbrands, based in Winston-Salem, North Carolina, is building two new factories here. Texhong Textile Group of China is constructing two plants for manufacturing spandex.

China remains the most attractive destination for industrial investment in the world, drawing almost $83 billion last year. But, in a strategy that companies are calling "China plus one," multinationals - worried about soaring costs in China and about becoming overly dependent on factories in one country - are increasingly establishing or expanding bases elsewhere on the continent, particularly in Vietnam.

The long list of worries about China includes inflation, rapidly rising labor costs, shortages of workers and energy, a strengthening currency, dwindling tax breaks for foreign investors and the possibility of civil unrest. With wages in China now rising close to 25 percent a year in dollar terms in many industries, the vaunted "China price" for a growing list of goods, particularly low-tech products, is no longer such a bargain.

Multinationals "should be thinking about all the world and keeping a balance," and they are doing so by encouraging suppliers to diversify out of China, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory sells to Wal-Mart and Kohl's in the United States, and it is building a factory in Vietnam to supplement its three factories in China.

Very few factory jobs are headed from China to the United States, despite high oil costs that are making it more costly to ship goods across the Pacific. The factory investments shifting from China to elsewhere in Asia tend to be in low-skill, low-wage industries as China deliberately focuses on higher-wage industries like precision machining and computer component manufacturing.

That is making it an even more formidable rival for the United States. "China is becoming more competitive because they're moving upscale," said Jack Perkowski, the chairman and chief executive of Asimco Technologies, a 12,000-employee engine parts manufacturer based in Beijing. China's main rivals also suffer from serious inflation. But their costs are rising from a lower starting points. Inflation hit 25.2 percent last month in Vietnam, yet workers there still earn less than half as much as Chinese workers.

At stake is more than corporate profits. When the cost of making goods in Asia rises, consumers around the world inevitably feel the pain in the form of higher prices for imported products.

Moreover, higher prices for goods from China and elsewhere in Asia could make it easier for companies producing goods elsewhere to raise their prices as well, further contributing to inflation around the world.

Few companies are actually closing factories in China. For companies with large operations there, the China plus one strategy is meant to mitigate risk. Many of those staying in China are looking desperately for ways to control costs, including greater automation.

And that includes Chinese companies.

"We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees," said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world's largest manufacturers of cotton and spandex fabric.

Hanesbrands is building a largely automated factory in Nanjing to manufacture fabric, a process with limited labor costs. But the company is building a factory in Vietnam to sew underwear there and has recently bought another factory in Vietnam and two more in Thailand.

Gerald Evans, the president of global supply chain at Hanesbrands, said that compared with China, "we found more ready availability of both land and labor in both Vietnam and Thailand." Hanesbrands will be shifting some manufacturing from Mexico and Central America and is also expanding its overall output.

In China, where rural villages are running out of able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.

In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour workweek, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour workweek that includes a full day on Saturdays.

Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs. That is in addition to a 12 percent increase last year.

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