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, ending 2020 with a growth expansion in its manufacturing sector. 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:
- Site Selection
- 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:
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.
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.
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 access in those areas are better.
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.
Optimized Supply Chain
Having a site close to your primary suppliers' location has long run implications for your factory’s success. 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.
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.
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.
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.
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.
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.
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