April 24, 2014 10:00 am JST

Facing rising costs, Japanese companies saying sayonara to China

KEN MORIYASU, Nikkei staff writer

More than 100 attended a business seminar on exiting from China.

DALIAN, China -- The era of China's dominance as the world's factory floor is coming to an end.

     Chinese wages have climbed so much that they now stand 90% above those in the Philippines and 150% above Vietnam's. That, combined with the yuan's appreciation against the yen, presents a double whammy for Japanese manufacturers making goods in China. And many are concluding that their "made-in-China" policy no longer makes financial sense.

     This is why businesses are flocking to seminars that offer know-how on withdrawing from China, held here in the northeastern city of Dalian, a hub of Japanese manufacturers. "We get two to three companies every week coming to ask for our advice on closing their business," said Tsuneo Kobayashi, president of Shanghai Huazhong Consulting Service, at a seminar it held last week.

     The seminar was officially called "Withdrawal or Expansion," but it barely addressed strengthening operations. "Japanese companies are desperate for information about exiting, but if they attend a seminar entitled 'withdrawal,' this would fuel rumors," explains a person involved in organizing the event. Last week's seminar drew about 100 participants.

     At these seminars, experts explain the costs, procedures and time needed for pulling out of China. Last week's seminar also explained that businesses leaving the market within 10 years of entering it must return the tax breaks they received. When taking into consideration payment of retirement benefits to employees and deregistration procedures at government agencies, withdrawing turns into a time-consuming, involving process.

     Despite such headaches, Japanese companies are still contemplating a retreat. In short, manufacturing goods in China no longer gives them financial advantages.

     Workers in the manufacturing industry in China earned an average monthly base wage of $375, more than the comparable compensation of $366 in Thailand, $248 in the Philippines and $162 in Vietnam, according to a fiscal 2013 survey by the Japan External Trade Organization. The annual employer burden, including social insurance premiums, overtime and bonuses, came to $7,503 in China, while the figures were $6,936 in Thailand, $3,922 in the Philippines and $3,000 in Vietnam.

     CK San-Etsu, a manufacturer of copper products based in Toyama Prefecture, said earlier this month that it will move a portion of work at its Dalian factory -- assembly lines for water faucets used in residential fixtures -- back to Japan and automate the process. Labor costs in China have been rising nearly 15% a year, the company says. It is also shrinking its production there in part because of "inexplicable tax collection and business improvement orders," a company official says.

     CK San-Etsu is not the only Japanese company hit by dubious improvement orders. "When the fire department ordered placement of fire alarms, they told us to buy expensive alarms from a certain supplier," says an official at one Japanese manufacturer. "They must have a cozy relationship." Such "hidden costs" above and beyond labor expenses are rising every year.

     Meanwhile, businesses in the information technology industry are trying a new personnel scheme. They are bringing Chinese system engineers to Japan to work there. They figure that, if they pay these workers 200,000 yen ($1,929) a month, total costs would be significantly cheaper than hiring Japanese in Japan or employing Chinese in China.