19 December 2018
Japan’s Softbank is among a number of foreign companies that have pledged to invest heavily in the US. Photo: Reuters
Japan’s Softbank is among a number of foreign companies that have pledged to invest heavily in the US. Photo: Reuters

Why are companies rushing to invest in the US?

Japan’s Softbank Group and Taiwan’s Hon Hai Group, known as Foxconn, are planning hefty investments in the US. Also, China’s Fuyao Glass has built a factory in Ohio recently.

Why are these companies flocking to the US to set up factories?

Isn’t it true that production costs in the US are much higher than in China? The answer is no, according to Fuyao chairman Cao Dewang.

Cao said that although he spent US$15 million on the US factory, he got a subsidy of US$16 million from US government, effectively costing him nothing to build the plant.

Better, the company has permanent ownership of the land on which the factory is built while in China, one has to pay for the land and still only have the rights to use the land for 50 years.

Labor cost is the only element that is higher in the US than in China, Cao said.

“Blue-collar workers are paid eight times those in China while white-collar workers are paid more than twice the level in China,” he said.

But elsewhere, electricity cost is half that in China and the price of natural gas is only one-fifth.

The overall tax cost is higher in China, too.

Cao estimates the company can increase the profit margin by a dozen percentage points by moving to the US.

Moreover, the exorbitant regulatory and invisible costs are more dreadful than the high tax rates in China, according to well-known analyst Zhang Huaqiao.

Companies need to spend a lot of time and resources coping with ever changing policies.

“Entrepreneurs are preoccupied with entertaining various government officials to apply for various licenses and obtain approvals,” Zhang said.

In fact, cost advantage has been the primary factor underpinning China’s economic miracle in the past three decades. But migrant workers who are paid several hundred yuan, cheap or almost free land are no longer available.

What has pushed up China’s production costs? Skyrocketing home prices have prompted developers to snap up land in suburban areas of major cities. That has also affected land prices for building factories.

In terms of energy prices, the exploration costs in China are much higher than those in the US. And the energy sector continues to be dominated by state-owned companies, which means there is insufficient competition.

In the past, local governments offered cheap land and tax benefits to woo foreign investors. But the package has become less attractive in recent years. Meanwhile, the US is getting more aggressive in luring overseas investors.

In recent years, property has been one of the few booming sectors in China, but overreliance on the sector for growth could be dangerous, leaving the economic structure highly unbalanced.

China needs to improve the business environment for the manufacturing sector before it is too late.

This article appeared in the Hong Kong Economic Journal on Jan. 25

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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