Richard Gottlieb

China + 1

Some major manufacturers are employing a strategy that is being called “China plus one.” According to an article in the New York Times, “Investors Seek Asian Options to Costly China,” manufacturers like Hanes, Cannon and Nissan are no longer building new factories nor are they expanding on existing ones. Rather:

 "[A] growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.  A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of widespread civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain."

So, the China plus one strategy is not about leaving China so much as it is about managing risk. Still, Viet Nam is no panacea. They are experiencing inflationary pressures as well, their labor force is, of course, much smaller than China’s and they are lacking in good roads and other means of transportation.

That’s why I found it interesting that the article talks about automation coming into play in Chinese factories. Here is how Hanes is handling it: “To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam and two more in Thailand.” Now that is what I call risk management.

Are toy companies making the move? Earlier, Tomy announced it was moving 30% of its production out of China over the next three years. Matrix Holding Limited, the owner of Funrise, has long term roots in Vietnam. Mattel, at last week’s “Analyst Day” is reported to have said that it was looking at a long term strategy of moving some production out of China and maybe into Vietnam.

Shouldn’t that be a short term strategy? I think that smart toy manufacturers are going to be hedging their bets. Not only with a “China plus one” approach but also with a move towards automation. This means developing toys that don’t just have play value but lend themselves to automated production. 

It will be interesting to see how quickly the toy importers broadly employ a “China plus one” strategy and how much capacity will be left in Viet Nam when they finally do. And what is there is no capacity left? Well, we’ll always have Cambodia (at least for a while).

Posted by Richard Gottlieb on June 20, 2008 | Comments (0)