The secret to moving factories to US: cost, tax and supply

Are the days of China as a manufacturing hub over? This question has sparked extensive and fervent discussions since China’s glass king, Cao Dewang openly compared the cost of running factories in the US versus China to justify his US$1 billion investment to set up a factory in Ohio.

“Except for labor, everything in China is more expensive than in America,” said Cao, who founded Fuyao Glass Industry Group, China’s largest auto glass manufacturer in an interview with The Beijing News in late December last year.

He elaborated on his argument by listing the basic costs.

“The price of natural gas in America is 9 US cents per cubic meter, only one-fifth of China’s,” Cao said, “and electricity is half the price of China’s, only 4.5 US cents per kilowatt hour.” The cost of transportation, including petroleum prices and highway tolls, is 50% cheaper in America than in China, Cao added.

While the highest expense, according to Cao, is tax. “If I earned US$1 million, I would have US$600,000 in my pocket after paying taxes in America,” said Cao, drawing an analogy. “But I would only have 420,000 yuan out of 1 million yuan in China after tax.”

Companies in China paid about 35% more in taxes than their counterparts in the US, Cao estimated.

In the 2016 Global Manufacturing Competitiveness Index released by Deloitte, a survey of global executives ranked the corporate tax rate as the biggest disadvantage in China’s appeal to set up a manufacturing base. This was followed by concerns over individual taxes, despite the fact that the central government has tried to portray its value-added tax (VAT) reform as a move that will reduce levies.

Cao, a high-school dropout, was among the first generation of private entrepreneurs who benefited from China’s reform and opening up that began in the 1980s. The 71-year-old billionaire’s move to America is challenging long-held manufacturing wisdoms, but he may not have told the whole story.

Another entrepreneur Mei Xu believes some companies with manufacturing bases in the US benefit more than others.

“Taxes in the US are probably one of the highest – over 35% for corporate tax – so I don’t think it has been a really good reason for moving,” said Xu, the founder and chief executive of Pacific Trade International, an American company that produces candles, home fragrance and decor products.

Even though President Donald Trump had made lots of promises to lower taxes for corporates, a reduction anywhere from 15% to 20%, Xu said that in most cases, larger companies would get benefits instead of small companies or firms with new investors to the country. “We have never had any kind of a tax break,” Xu added.

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Xu has been moving her factories from China to Vietnam, and to America, during the past two decades. She decided to set up a factory in Glen Burnie, Maryland, in 2011, in response to the need of being closer to the market. At the time, retailers were still recovering from the 2008 financial crisis and were unwilling to take risks on accumulating inventory, so the speed of getting products to the market became an important test for suppliers such as Xu.

However, the most decisive factor in moving a manufacturing site should be meeting the needs of a firm’s supply chain, according to Xu. “Or being able to be the leader in the supply chain, but that’s something not going to happen overnight,” she added.

“The reason why we are there is because the ecosystem is there,” Xu said. “We have oil companies that produce fragrances and dyes, we have petroleum refineries and soy wax blenders, and we have glass and label manufacturers. So everything we need is available in the US.”

However, after over 40 years of deindustrialization in the US, “it is really not so easy to just start the supply chain somewhere else,” said Louis Kuijs, the head of Asia economics at Oxford Economics, “that is also the reason why there are other emerging markets like Latin America, which would like to be more involved in the supply chain.”

Kuijs thinks other than electronics and cars, there are other types of manufacturing that are easier to move, such as gardening equipment, medium and high-end furniture or clothing. Such manufacturing needs to be closer to the market to be able to respond quickly because tastes change very quickly.

Also, “the productivity can be pretty high, so we don’t need too many people,” Kuijs added, “and they don’t need a lot of different ingredients all coming from various supply chain sources to make the products.”

In that case, Trump, who has been trying to lure firms back to the US under his “Make America Great Again” slogan, may not be able to regain the labor-intensive manufacturing that the US enjoyed in the 1950s. It is unlikely, therefore, to bring back the large scale of jobs Trump expects under his Manufacturing Jobs Initiative, simply by cutting the costs and taxes.