China Manufacturing: Cha-Cha-Changing….

Interesting article in today’s Wall Street Journal by Mark Magnier, entitled, How China Is Changing Its Manufacturing Strategy. The article deals with how China cost increases are slowly eroding its low end manufacturing base and how the Chinese government is seeking to replace that with higher end manufacturing. Not much new with this, but the article does a terrific job explaining how this is happening and even not happening in China, including with the following numbers:

1. “China doesn’t release data on factory closings or relocations. But according to an analysis by researcher Justina Yung of Hong Kong Polytechnic University for the Federation of Hong Kong Industries trade group, the number of factories owned by Hong Kong companies in the Pearl River Delta near Hong Kong fell by a third to 32,000 in 2013 from a 2006 peak. Many of those that left moved to lower-wage countries.”
2. “Labor costs in China have grown faster than consumer inflation for years, according to consultancy BMI Research, and are currently nearly four times those in Bangladesh, Laos, Cambodia and Myanmar.”

The article also notes how “China has managed to hold on to low-end industry far longer than its Asian neighbors at a similar stage of development,” thanks in large part to “government incentives, subsidies, the large domestic market and good infrastructure that encourage companies to remain onshore.”

The article also discusses how China’s slow move away from low-end manufacturing is costing jobs and it ends with the following quote from a Sina Weibo user: “Low-end manufacturing goes to Southeast Asia while high-end industries go back to North America and Europe. We migrant workers can’t find jobs.”

With graphs, the article shows how some of China’s apparel and shoe manufacturing has moved elsewhere in Asia, but again, not that much.

Our China lawyers have been seeing the following:

• Many manufacturing companies in China have always been owned by companies out of Taiwan and Hong Kong.
• We are getting far fewer new clients going to China to have their apparel, shoes or rubber ducky type toys manufactured in China.
• We are getting far more new clients going to China to have far more sophisticated products manufactured in China.
• A much higher percentage of the sophisticated China manufacturers seem to be owned by Hong Kong and Taiwan companies than was the case with the apparel and shoe companies of years past. This is particularly true of the (mostly Shenzhen) Chinese companies involved in manufacturing internet of things products.

What we China lawyer geeks find so fascinating about these shifts in China manufacturing is how much they have complicated the legal and IP issues both on the high and on the low end. On the high end, we have to deal with complicated quality issues and issues revolving around who owns what when it comes to the IP. When manufacturing socks, IP is not that big a deal and certainly not terribly complicated. But when manufacturing a product with hundreds of components that has been jointly developed (or at least refined for manufacturing) by both the Chinese manufacturer and our client, the IP issues can seem nearly infinite. For more on this, check out China and The Internet of Things: Who Owns What?

But surprisingly enough, we are also finding that low end manufacturing is getting more complicated as well. Take socks as the example. Ten years ago, we drafted a relatively simple manufacturing agreement between our client and the Chinese manufacturer and that was that. That agreement would make clear that the Chinese company and its factory were not to manufacture or sell the same socks to anyone else and that the quality had to meet XYZ standards and if it didn’t, then ____ would happen. But now what we are seeing a lot more often is that even a sock manufacturing deal with a Chinese company will involve a Vietnamese subsidiary that might make some of the socks. So with whom do we draft the agreement? Just the Chinese company? Just the Vietnamese company? Or both? And if both, what law applies? You get the picture, right?

What are you seeing out there?

The post China Manufacturing: Cha-Cha-Changing…. appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.