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How to Choose the Right Location For Your Factory in China

April 12, 2021

 by David Collins III

A woman engineer overlooking the factory setup

China is the world's factory – from textiles, shoes and toys to cars, steel, iron and aluminium, the region makes and sells more manufacturing goods than any other country on the planet.

Even after being incapacitated by COVID-19, China roared back as the growth engine of world. With evolving automation trends facilitating growth in the sector, there has never been a better time to establish your manufacturing base in China than now. 

As with others looking to open their own factory in China, you may wonder if you will encounter issues with the language barrier, ownership of the factories, and the region's laws. In actuality, the process of setting up a factory in China is no more complicated than in other countries as factory ownership is protected under Wholly-Foreign Owned Enterprise (WFOE).

Chinese laws and business ecosystem of networked suppliers, component manufacturers, and distributors have evolved considerably to make it a more efficient and cost-effective place to manufacture products.

Setting up a manufacturing plant in China is split into two basic processes:

  1. Site Selection 
  2. Factory Preparation

In this blog, we’ll help you determine how to select the right location for your factory. 

 

Identifying Factory Location Attributes

When choosing the right site for your factory, consider weighing your desired characteristics against one another to understand what you value the most. Often, these considerations will be at odds with each other.

Here are some of the attributes you can take into account: 

1. Land Cost

Prices for the land vary considerably in China – it can be extremely high in cities like Shanghai & Guangzhou, and completely the opposite in regions like Mongolia & Xinjiang. 

2. Labour Cost and Availability

The cost of labour and its availability will often be at odds. Well-developed areas of China are home to large pools of qualified workforce and specialists with higher (and likely rising) wages. While other regions in China may have surplus manpower, their effectiveness may be lower. 

3. Utilities and Infrastructure Maturity

Despite impressive infrastructure growth throughout China, access to good roads, rail lines, and ports can vary across regions. The general idea here is to choose a site that is closer to the coast as raw materials and finished goods can be shipped in and out easily, lowering site development costs

4. Logistics Cost 

Logistics costs are heavily dependent on a country's infrastructure maturity. You will need to account for all expenses incurred from getting raw materials to product delivery. Consider all labor, operational (including utilities and taxes), facilities and transportation costs. 

5. Optimized Supply Chain 

Having a site close to your primary suppliers' location has long-run implications for your factory’s success and will mitigate supply chain risks. With an optimized supply chain, your facility can maximize production efficiency and scale down the need to carry unnecessary inventory. In fact, many Chinese companies in similar fields tend to cluster in one city or province to leverage this. 

6. Convenience of Travel 

We often see companies looking at sites in remote regions, but fail to realise its impact on operations. While it may seem tempting with cheaper land, labor costs and additional tax benefits, it may struggle to attract specialists or have outsiders visit because the location is too difficult to reach. Having a convenient mode of transport is critical and often under-appreciated consideration. 

7. Land Use Expiration

In accordance to the Administration of the Urban Real Estate laws in China, all land is owned by the government, but you can purchase the land use rights for a fixed period. There is no freehold title, and upon expiry, the government has the right to reclaim the land. 

8. Government Policy & Capability 

Not all cities and provinces operate the same way. Some are better equipped to handle your company's licenses, regulatory and incorporation procedures than others.

 

The Pros and Cons of China's Most Popular Factory Cities

Shenzhen: A dynamic hub for technological advancements and electronics production

Pros:

  • Known as the electronics manufacturing hub of the world, particularly strong in high-tech industries.
  • Home to a vast number of factories and a highly skilled workforce.
  • Excellent infrastructure with advanced logistics and transportation networks.
  • Proximity to Hong Kong offers strategic advantages for international trade.

Cons:

  • Higher labor and operational costs compared to other Chinese cities due to its developed economy.
  • Intense competition and intellectual property concerns.
  • Rapid urbanization has led to challenges like congestion and higher living costs.

Shanghai: An industrial powerhouse blending cutting-edge manufacturing with a global business hub.

Pros:

  • One of the largest and most developed cities in China with a strong industrial base, especially in automotive, steel, and chemical industries.
  • World-class infrastructure including the Port of Shanghai, the world’s busiest container port.
  • Vibrant business environment with a large talent pool and advanced research and development capabilities.

Cons:

  • High cost of living and operating expenses.
  • Stringent regulations and competition in the market.
  • Environmental regulations are more stringent, impacting certain types of manufacturing.

Guangzhou: A strategic manufacturing leader, bridging traditional industries with modern market dynamics.

Pros:

  • A significant manufacturing center, particularly for automobiles, electronics, and petrochemicals.
  • Benefits from its strategic location in the Pearl River Delta, one of the most economically dynamic regions in China.
  • Access to a vast domestic market and ease of export through the Port of Guangzhou.

Cons:

  • Labor costs are rising as the city develops.
  • The region sometimes faces energy supply constraints.
  • It may not have the same level of technological sophistication as Shenzhen in certain industries.

 

Evaluate Site Framework with a Weighted Scale Method

Pre-planning the scope of site selection will help determine the lead time for the process. With different policies available from different government authorities, it is essential to negotiate professionally and consider your investment capabilities to obtain the best policy. The site selection process can last anywhere between 3 to 18 months, depending on the government's requests and approvals. 

At CMC, we use a weighted scale to determine the best option when choosing between multiple sites. This weight of each consideration  varies depending on the type of factory you want to build. For example, we had a client that shipped large containers and needed immediate access to navigable waters for shipping. For them, labor prices were relatively unimportant. Other labour-intensive industries might place more emphasis on labor cost and less on the convenience of travel. 

This method is effective when looking at many sites or trying to compare similar locations. It is a simple and unbiased approach that makes site selection easier. We recommend shortlisting the top 3 to 5 sites and engaging in a deeper dive after. 

 

Selecting Your Ideal Factory Location in China's Manufacturing Landscape

Choosing the right location for your factory in China, whether it's the high-tech hub of Shenzhen, Shanghai's industrial might, or Guangzhou's strategic position, depends on balancing various factors like costs, infrastructure, and logistical needs against your business goals. A thoughtful assessment of these elements will guide you towards a decision that aligns with your manufacturing objectives, ensuring success in this dynamic market.

If you are looking to relocate your manufacturing facilities to China, our 9 steps to plant relocation guide will help you plan and prepare for this process. 


Need expert advice on setting up a new factory in China? Click below.

New Factory Setup in China

Topics: Manufacturing Consulting, New Factory Setup, Manufacturing In China

David Collins III

David Collins III

David was a Senior Strategy Consultant for Deloitte, served in Iraq as a Special Operations Civil Affairs soldier, and as a Governance Advisor to the Afghan Government with the Department of State. At CMC, David advises clients on strategy and investments.

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