Executive Briefings

Why the Exodus of Foreign Companies from China?

The pursuit of being the low-cost producer has been and will continue to be the primary focus of all successful businesses. Over the past few decades, companies have targeted low-cost labor areas, with governments that were willing to sacrifice the environment and even the welfare of its people to attract investors. In the 1960s American companies moved from the unionized and high-cost Northeast and Midwest to the "right to work" south. Then it was Japan, Korea and Taiwan. But in each case, the costs increased and the journey continues.
In the 1980s the Chinese government sought to attract multinational companies via the combination of incentives and its huge, low-cost labor force. According to the Financial Times, some 30,000 South Korean companies had taken advantage of China's tax incentives to invest in southern China by the late 1980s, and by 2003, Korean companies had invested 41.4 percent of its investment into China. Other countries, like Japan and Taiwan, followed a similar pattern. China was clearly their preferred manufacturing nation. U.S. companies lagged but in recent years have accelerated their Chinese investments and have even been willing to transfer some of the research and development into China.
But as in the past, many companies have found that China is not as attractive and are leaving the country for other "lower cost, hungry locations." For instance: the number of Korean companies in China has been reduced by two-thirds, from 30,000 to 10,000, and between 2003 and 2006 total investment declined from 41.4 percent to 31 percent. Japanese and Taiwanese companies are also leaving China. Why the exodus? We believe that there are four major reasons that Korean, Japanese and Taiwanese companies are leaving China: cost, security, flexibility and complexity.
Source: Chief Executive, http://www.chiefexecutive.net

The pursuit of being the low-cost producer has been and will continue to be the primary focus of all successful businesses. Over the past few decades, companies have targeted low-cost labor areas, with governments that were willing to sacrifice the environment and even the welfare of its people to attract investors. In the 1960s American companies moved from the unionized and high-cost Northeast and Midwest to the "right to work" south. Then it was Japan, Korea and Taiwan. But in each case, the costs increased and the journey continues.
In the 1980s the Chinese government sought to attract multinational companies via the combination of incentives and its huge, low-cost labor force. According to the Financial Times, some 30,000 South Korean companies had taken advantage of China's tax incentives to invest in southern China by the late 1980s, and by 2003, Korean companies had invested 41.4 percent of its investment into China. Other countries, like Japan and Taiwan, followed a similar pattern. China was clearly their preferred manufacturing nation. U.S. companies lagged but in recent years have accelerated their Chinese investments and have even been willing to transfer some of the research and development into China.
But as in the past, many companies have found that China is not as attractive and are leaving the country for other "lower cost, hungry locations." For instance: the number of Korean companies in China has been reduced by two-thirds, from 30,000 to 10,000, and between 2003 and 2006 total investment declined from 41.4 percent to 31 percent. Japanese and Taiwanese companies are also leaving China. Why the exodus? We believe that there are four major reasons that Korean, Japanese and Taiwanese companies are leaving China: cost, security, flexibility and complexity.
Source: Chief Executive, http://www.chiefexecutive.net