Increasing labor costs have been driving manufacturers away from China to neighboring Asean countries like the Philippines, but the latter is not as attractive in terms of ease of doing business and infrastructure as Thailand and Vietnam, according to French corporate and investment bank, Natixis. [*]
“Facing higher wages, manufacturers have two possible solutions. The first one is to relocate their production sites to Asean. The second solution is to move to the west of China. Because coastal areas (east China) have well established manufacturing sites, they have been regarded as the production base of China,” Natixis said in an Oct. 16 report titled “Will the geese fly to West China or to Asean?”
Citing that salaries across China—both in its eastern manufacturing hub as well as the emerging western region—have been on the rise, Natixis said that existing manufacturers in the mainland “could relocate to Asean rather than to the west of China.”
“In addition to low wages, the attractiveness of Asean lies in the free trade agreements that it has developed. Firstly, it has a treaty with China and has already eliminated tariffs on nearly 90 percent of imported goods,” Natixis pointed out.
Also, Natixis cited of the importance of the newly forged Trans-Pacific Partnership (TPP) in sealing manufacturing deals. “In addition to the elimination of import tariffs, TPP encourages mobility of capital and labor, protects intellectual property and data transmission. In other words, Asean countries’ existing trade agreements open doors to markets in both the US and China (in the case of Vietnam and Singapore even Europe). This is of course a structural advantage compared to West China.”
According to Natixis, three Asean countries stand to benefit the most from rising labor costs in China: the Philippines, Thailand and Vietnam.
In the case of the Philippines, however, the business environment would be “one key issue,” Natixis said.
“Philippines, Indonesia, Cambodia and Laos under perform China, in terms of ease of doing business and control of corruption. In turn, Malaysia, Brunei, Thailand and Vietnam are doing better than China,” it noted, citing the governance indicators of the latest World Bank Ease of Doing Business rankings.
“The Philippines fares well on some key indicators but not on the business environment, which is of course very important. The fact that the Philippines manufacturing sector (mainly semiconductors) has been losing steam during years does not bode well for the future,” Natixis added.
Telecommunication, transport, power and water infrastructure in the Philippines also fell short compared with those in Thailand and Vietnam, the report noted.
Such makes Vietnam and Thailand more attractive relocation sites than the Philippines for China-based manufacturers.
“The hub of manufacturing is expected to relocate to Vietnam given its enormous market access, very low wages, relatively good infrastructure and business environment. Thailand can be another important destination, once the political situation improves and even more so if the country finally joins TPP,” according to Natixis.
[*] Originally published in The Inquirer