Change of Foreign Capital Distribution

Rising labor cost

A responsible person at an American-funded electronic company in Suzhou shared with the reporters that the current rising speed and magnitude of China’s labor costs would have been unimaginable three years ago. The escalating costs and the high turnover rate it triggers have brought huge pressures on the operation of foreign-funded companies in China. But he also mentioned that the company he worked for will not exit from China in the short run， because the Chinese market still outperforms those at the Southeastern countries in terms of infrastructural facility and quality of human resources， although the labor costs of the latter may be lower. But if the rise of labor costs continues， they would consider moving the factories to other regions. Another Japanese-funded car company in Zhejiang also said that it will place more focus on the RD and design at the Chinese market， and move the component RD center to China.

“Currently China still have labor cost advantage， but such advantage is shrinking. The rising labor costs here have forced those low-cost investments into other markets，” Said Zhou Yu， director of the international financial currency research institute， Shanghai Academy of Social Sciences. The labor costs， technological ability， infrastructural facility and distribution of high-stream and lowstream industry chain are important factors considered by investors. Therefore， those small companies more susceptible to the labor costs but less susceptible to the industry chain will easily move to regions where the labor costs are low.

Such change has been felt by many foreign-funded companies. In 2012 U.S.-China Commerce Chamber for the first time raised the question “whether the labor costs will impact company operation” in the annual “Business Environment Investigation Report”. The result shows that 82% people think the labor costs will impact the company operation.

But Zhou also mentioned that those companies who have high requirements about high-stream and low-stream industry chain will choose to stay. It is said that companies of this type would finally return to China.

Hu Ke， director of the trade development department of the Management Committee of the Suzhou Industry Park， told reporters that the companies introduced into the industry park are mainly global top 500， whose core competency lies in their brand and technology. Once established in the industry park， these companies are stable and less sensitive to costs. Hu added that his years of experiences in inviting commercial capital show that those “migrant” companies mainly belong to companies with low added values， weak competitiveness and high sensitivity to the change of costs. The more comprehensive the company is; the more stable it will be. Many foreign-funded companies in the industry park not only function as production base， but also as corporate headquarter， RD center or design center.

“They need this market”

Zhang Xiangchen， director of the Policy Research Institute of the Ministry of Commerce， also discovered that it will be a natural process for the low-end manufacturing business to maintain their investment level in China or move to China’s middle and west regions or even overseas. For the medium-level manufacturing industry， the U.S. and European companies will expand their investments because they need the Chinese market.

Zhang remarked that the U.S. government has adjusted its policies by encouraging the development of local manufacturing industry and also the return of overseas capital. Boosted by such policy change， Ford， Carlyle and NCR Corporation have decided to move its overseas capacities back to the U.S. He confessed that this will bring certain pressures to China， but the survey shows that the number of U.S. companies moving back is small and it is only restricted to those industries or products highly dependent on the U.S. market. Many big American companies， including GE and Apple， will further expand their investment and capacities in China. Therefore， “in general， China’s market potential and industry condition have huge attractions to the overseas manufacturers.”

But the “Business Environment Survey Report” issued by AmCham China in 2012 also shows that although the costs have been rising in 2011， more than 75% people still predict the sales revenue of foreign companies in China will rise in 2012， 39% U.S. companies say that the profit margin in China is still highest in the world， and 78% U.S. companies listed China as one of the three investment targets of the world.“Obviously the foreign-funded companies do not want to leave China.” the report indicates.

Shen Danyang also mentioned that although the U.S. and some European countries will call back the capital and reduce their investments to China due to the impact of the manufacturing industry strategy， the Ministry of Commerce says there has been no large-scale exit of foreign investors from the Chinese market.

Shen added that “we are still optimistic about the prospect of China’s inviting and using foreign investments， because the investment environment here has been improving.” He said that according to the “2011 Questionnaire Survey Report of Japanese Manufacturing Companies’ Overseas Business”issued by JBIC， the Japanese manufacturers are speeding up their overseas expansion， and China and India will be their investment priority. Also， the“Medium-sized Company Business Climate Survey” issued by Singapore UOB Group also shows that China will be the primer choice for the business investment of Singaporean medium-sized companies.