A worker at a textile factory in Jiangxi province. (Photo/Xinhua)
China's manufacturing sector has been losing steam in the latest round of industry upgrading. In recent years, international enterprises operating in China have moved their operations back to their home countries or to Southeast Asian or African nations, due to the disappearance of China's low labor cost advantage.
The online version of Guangzhou's 21st Century Business Herald said soaring labor costs, income tax on domestic and foreign businesses and a rising renminbi were eating into enterprises' profits, forcing international manufacturers to relocate their operations to other countries, while export-reliant domestic manufacturers are struggling with operational difficulties.
China is one of the world's leading foreign direct investment destinations, with a large part of this FDI being directed at its services sector and much less now being directed towards its manufacturing sector.
According to statistics compiled by the online newspaper, in 2004 foreign enterprises began withdrawing from China. Australia's second-largest brewer Lion Group sold its Chinese operations to Shenyang Huarun Beer Co. This was followed by the suspension of Dutch Friesland Foods' operations in China and the closure of the contract factories of Nike and Adidas.
In 2011, Pepsi spun off its bottling division. Several international companies, including Ford, Sleek Audio, Wham-O, Adidas, Clark, K-Swiss and Bakers, subsequently either moved their operations back to their home countries and to Southeast Asia, or increased their assembly lines in other countries.
The disappearance of China's low labor cost advantage is being seen as the most important factor motivating the exit of foreign manufacturers from China. A research report said that in 2004, China's coastal areas began experiencing shortages of workers, causing salaries to rise. Another report showed that between 2005 and 2010, salaries for workers increased 69%.
A bank survey conducted in March on 200 manufacturers showed that in the first three months in 2012, wages for laborers had grown 10%.
In a survey of 1,856 enterprises, 80.4% said their labor costs had increased, while 56.4% said their foreign exchange costs had risen, and 56% said their raw material costs were higher.
Beijing began implementing the new Enterprise Income Tax Law in China on Jan. 1, 2008, unifying the tax treatment for domestic and foreign enterprises, which significantly affects foreign investors.
Under the new law, foreign companies that are exempt from taxes or enjoy concessional rates will retain their privileges until 2013. This means overseas companies will lose their tax exemptions thereafter.