Why Firms May Pull Out of China

| About: PowerShares Golden (PGJ)

Here’s a brief follow up on the last post on manufacturing leaving China. The Globe and Mail reports that a stick manufacturer — yes, that says a stick manufacturer — is pulling out of China for Thunder Bay, Ontario (China’s loss is Thunder Bay’s gain, May 17). Your gut reaction is likely that stick manufacturing must mean hockey sticks, but, no, we’re talking stick sticks, like you would find in Popsicle. Global Sticks Inc. has 35 to 40 per cent of the North American market for ice cream sticks and spoons, and related small, wooden objects. Over the last several years, all those stick have come from China but that is changing:

For the past nine years, [Global Sticks] has been producing wooden sticks in a Chinese plant, and shipping them by the container load to North America. That is about to end. Mr. Metcalf is picking up his stick production and moving it to a new factory on the outskirts of Thunder Bay. “It’s got too expensive in China,” says Mr. Metcalf, general manager and part-owner of Global Sticks Inc. …

Mr. Metcalf says the economics of China are rapidly changing. He sees his Chinese plant as a casualty of the country’s move to conserve natural resources by increasing prices of wood and other raw materials. Combined with sales-tax changes, higher fuel costs and the slight rise in the yuan over the past five years, Chinese operations have become much less competitive.

“It’s reduced our margin from about 20 per cent down to less than 10 per cent,” he says. Add the costs of long-distance transportation, and, he says, “It’s just not worth it.”

The article goes on to note that one of the reasons firms have moved to China is deals form the government. Some of those are now expiring and that is another reason why firms are reconsidering where to locate production:

Also, the Chinese have been willing to give generous tax concessions to Western companies. As some of these concessions end, and if there is no prospect of renegotiation, companies may have no choice but to leave, Prof. Chan says.

It is hard to imagine a product as low tech as, well, a stick. But the Global Sticks example highlights another reasons why firms may pull out of China, access to raw materials. There is plenty of birch (North America’s preferred wood for ice cream sticks) near Thunder Bay so even if labor is pricier than China, savings in transportation and raw materials can compensate.

Disclosure: No positions