The Chinese factories that produce and export consumer products are mostly along the coast. There are no good statistics about this, but I estimate that more than 90% are in the provinces of Guangdong, Fujian, Zhejiang, Jiangsu, and Shandong. And, even in these provinces, exporting factories tend to be clustered in a few cities.

Over the last 20 years, the objective was to be as close as possible to the ports, to reduce trucking costs and time. It is was not difficult to find cheap labor and welcoming officials 2 or 3 hours (by truck) away from the main ports. Material suppliers also settled in these clusters, and skilled labor was predominantly there. Overall it makes a lot of sense in economic terms.

This system has been increasingly questioned over the last 5 years because of several factors:

• Salaries have gone up in the main producing areas, and some areas suffer serious labor shortages.
• The most developed cities have been pushing polluting and low-value-added factories away.
• Competition on price is stronger and stronger, and even a 5% reduction in costs can be the difference between life and death for many factories.
• The transport infrastructure has become excellent between the larges cities, including in inner provinces.
• China’s demographic policy and the development of inner provinces will progressively reduce the pool of migrant workers.

In parallel, more and more articles cited anecdotal evidence that factories were relocating to inland provinces. Are they representative of reality? Not for every industry.

I heard many manufacturers thinking strongly about relocating their factory, or preparing to do it. Only a small minority seem to actually do it. And when I look at the places of the inspections we perform for our clients, more than 95% are in the 5 coastal provinces I listed above.

Global Sources just published a detailed article on this subject, entitled Higher expenses drive factories inland. It does a nice job of describing this phenomenon:

• Labor, factory space, and energy are cheaper inland, but freight is more expensive. Overall, “most transplanted factories claim to incur general savings of between 5 and 30 percent.”
• It is mostly suitable for labor-intensive activities, low-end products where pricing is everything, and for factories that produce for the domestic market.
• Recruiting unskilled workers is easier in inland provinces, close to their home towns.
• Most exporting factories will remain along the coasts for convenience, but also for access to suppliers and skilled employees.
• Looking down the road, it is not clear what the cost differential will be between cities that are 3 hours from ports and those that are 12 hours away. Costs are rising everywhere.

To sum up, relocating to inner provinces is clearly not the best strategy for all manufacturers, and it will be a slow movement.

A lot of suppliers are hesitating and lack critical pieces of information: how much will they really save? should they re-invest now? what if the RMB is revalued and importers switch to other Asian countries? shouldn’t they invest in Vietnam instead?

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UPDATE 9 July: for a very refreshing perspective on this issue, see PRD Labor Costs Rising: Run Away, Run Away!!! Not so fast.