Lower production costs, reduction of tariffs and competitive prices of raw materials have persuaded Chinese companies to shift production to South-East Asia.

RISING labour costs, among other reasons, have driven Chinese manufacturers to set up operations in South-East Asian countries.

Bloomberg in April quoted a study by ANZ Bank economists that South-East Asia would take over from China to become the “world’s factory” in the next 10 to 15 years, citing its youthful workforce and strategic location as catalysts for this shift.

The Asean Economic Community, which is likely to come to fruition by end of the year, would see the emergence of a single market with free movement of goods, services, investments and skilled labour.

The economic zone, the report said, would connect the low-cost labour in Myanmar, Cambodia and Laos, cost-effective businesses in Thailand, Vietnam, Indonesia and the Philippines, and sophisticated manufacturers in Singapore and Malaysia.

The China Chamber of Commerce for Import and Export of Textile and Apparel can attest to the trend.

Asean is China’s largest export destination for textiles since 2010. Imports of textile and apparels from Asean are also growing at a rapid rate of above 30% every year.

The chamber’s secretary-general Zhang Xi’an said lower production costs, reduction of tariffs and competitive cotton prices contributed to the success of Chinese companies in shifting their production to overseas bases.

He noted that manufacturers in both China and Asean countries are complementing each other in the production chain, rather than competing with each other.

“Take cotton yarn for instance. The raw materials are processed in South-East Asia and then repurchased by Chinese businesses,” he said.

Many members of the chamber have expressed interest in establishing their presence in Asean countries. They agreed that rising costs in China is the main factor that pushes them to seek options elsewhere, with the attractive policies by other countries as incentives.

Through their bases in Asean countries, the manufactures can also develop another market for their products, such as European countries and the United States.

The commercial counsellor from the Embassy of the Philippines in Beijing, Christine Rodriguez dela Cruz, cited the Generalised System of Preferences Plus (GSP+) as example. The country’s inclusion in the European Union’s GSP+ allows the Philippines to export over 6,000 items to European Union member countries at zero tariffs, including apparels and footwear, which previously came with a 5-9% and 11.9% tariff.

“The GSP+ has provided new opportunities for foreign investors as it offers tariff-free market access to the EU. Apparel and textile factories in the Philippines are looking forward to establish joint ventures with their Chinese counterparts,” she said.

As the level of development varies from one country to another in South-East Asia, some boast lower production costs as their competitive advantage while Malaysia prides itself on high-value manufacturing.

Malaysian Investment Develop-ment Authority consul (investment) Simon Lee Yew Weng said Chinese manufacturers should not write off Malaysia simply because labour costs are high.

“We are attractive in a different sense,” he said.

“One area Malaysia is focusing on is non-woven fabric and technical textiles for specialised uses, such as disease prevention and fire fighting.

“We have the raw material for these textiles, which is polyester derived from petrochemicals.”

Lee added that the government allows 100% foreign equity and welcomes Chinese investment in the textile industry.

China-Asean Business Association co-chairman Xu Ningning said textile manufacturers in South-East Asia also look forward to working hand-in-hand with Chinese partners through joint ventures to raise the standard of the industry, in terms of technology, design and equipment.

Such partnerships pave the way for establishments of regional brands, he said, adding that Chinese industry players would visit South-East Asian countries in July to explore opportunities to cooperate with local manufacturers. –THO XIN YI, http://www.thestar.com.my/Opinion/Columnists/Check-In-China/Profile/Articles/2015/06/05/Asean-is-the-next-global-factory-Lower-production-costs-reduction-of-tariffs-and-competitive-prices/