Source from: PLASTICS NEWS REPORT

Posted August 27, 2010

 

HONG KONG (Aug. 27, 2 p.m. ET) -- Export-oriented plastics processors in China like Ace Corp. Holdings Ltd. are starting to follow larger manufacturers and build factories in inland cities to escape rising costs in the coastal areas and position themselves for the country’s growing domestic market.

 

Ace, based in Hong Kong, said this month it’s investing US $10 million in an injection molding, assembly and mold making factory in Hefei, Anhui Province, where the company estimates costs are 10 to 20 percent cheaper than its factories in Guangdong Province and Shanghai.

 

“A lot of our customers have moved and are looking at lower costs and the inland market,” said Jack Yeung, chief executive officer of Ace, in an Aug. 25 telephone interview.

 

The new plant will both reduce costs for its traditional export markets and respond to global firms like consumer products companies and car makers that are shifting their gazes to China’s market, he said.

 

Those firms need suppliers who can reduce the costs of their products for Chinese consumers, but importantly, maintain quality, Yeung said.

 

While China’s internal markets are “early stage,” Yeung said that “the growing middle class in China is an opportunity for us.”

 

Ace is not alone.

 

Hong Kong’s Cosmos Machinery Ltd., for example, said in an Aug. 24 filing to the Hong Kong Stock Exchange that it was also planning to expand its plastics processing factory in Hefei, and noted that that city has become one of China’s centers for making household electrical appliances.

 

Cosmos said China’s policies of subsidizing appliance purchases in rural areas and promoting urbanization has meant “pleasant growth” for the Hefei operation.

And British-owned plastics and metals processor CBL Group, based in Guangzhou, Guangdong province, recently announced plans for a factory in Hubei province to help it cut costs and provide a distribution base for China’s internal market.

 

Some much larger Chinese manufacturers have made rapid moves in recent months to shift work from the coastal regions to inland cities. Taiwan’s Foxconn Technology Group, for example, opened the first phase of a factory in August in Zhengzhou, Henan province, to make iPhones for Apple, production it had done in Shenzhen, Guangdong province.

 

More well-known household names like Intel and Hewlett-Packard have built factories in western China recently, making computer chips and laptops, respectively.

 

Yeung said Foxconn’s moves stimulated a lot of thinking among smaller firms like Ace, but he said these moves were already underway before Foxconn’s recent headline grabbing announcements.

 

He said the first phase of manufacturing moving inland started in 2008, with labor intensive operations searching for cheaper locations after China’s new labor law came into effect.

 

The industry is now in what Yeung considers the second phase, as firms search out spots to better tap China’s internal markets.

 

He said cities like Hefei can be a good spot for distribution within China as road and rail transportation is improving quickly.

 

While it may not equal the established coastal cities like Shanghai, Shenzhen or Guangzhou, Yeung said “the logistics side of things are not that bad.”

 

Most of Ace’s work in Hefei will be in the automotive and packaging markets, including food packaging.

 

Yeung said the 23,500 square meter Hefei factory will employ about 500 and have 30 to 40 injection presses, with the largest probably about 500 tons. It is slated for completion in mid-2011, and will also have mold making operations.

 

Moving injection molding operations to a place like Hefei does not save that much money, but Yeung said the firm will see savings of up to 20 percent in labor intensive assembly projects.

 

The Hefei location also carries benefits for some of the firm’s workers in its Shanghai and Guangdong factories, he said, who are from Anhui or nearby and are interested in working closer to their families. That will provide the factory with an experienced core of employees from the start, he said.

 

Ace currently employs about 2,800 workers and has about 150 injection presses at its coastal factories.

 

The new plant also requires a retooling of the company’s business model, which had been oriented around production strictly for export markets, Yeung said.

Making goods for markets like the United States and Europe required Ace, which was founded in 1988, to constantly try to upgrade its quality to match world standards, he said.

 

While quality remains key, manufacturing for the mainland China market and its more price sensitive consumers requires a different approach, he said.

 

“If we duplicate that methodology [in the internal Chinese or Asian markets], it does not make much sense,” Yeung said.