(Chinese Version)

For the past few years, an increasing number of Chinese manufacturing enterprises are “running away” and investing overseas. Recently, Cao Dewang, chairman of Fuyao Glass Group and a representative of Chinese private enterprise, accepted an interview with CBN Weekly and revealed the cost gap between Chinese and American manufacturing industry, which again aroused heated discussion among the public.

It all started with the news that Cao invested $1 billion and established an automobile glass factory in the US. On October 7th, the project was completed and put into production, making it the biggest automobile glass factory in the world. Over $600 million was invested in the project, making it the biggest investment from Chinese enterprises in Ohio. However, Fuyao Glass had already invested $400 million in the US in automobile glass in 2014, so it had invested $1 billion in total in the US.

Some media reports commented that after “Li Ka-shing sold his real estate in mainland China and ‘run away’ to the UK”. “Cao Dewang, chairman of Fuyao Glass and once referred to as the first individual philanthropist in China, is going to run away too”.

However, Fuyao Glass hasn’t closed its manufacturing base in mainland China yet. On the contrary, it has been opening more manufacturing bases. Last month, Fuyao Glass just signed a contract with Benxi city government of Liaoning province over float glass production, with a projected annual output value of over 1.2 billion RMB. If we look at Fuyao Glass’s official website, we may also find out that it still has several manufacturing bases as well as lots of marketing outlets across China.

At the same time, Fuyao Glass has been actively establishing factories overseas. In 2011, it invested $200 million and established a factory in Russia. At present, it has factories and marketing companies in both Europe and South Korea.

Some analysts explained that Fuyao Glass invested $1 billion and established factories in the US to get closer to the market, service providers and consumers. The US is known as one of the major manufacturers and consumers of automobiles, so it’s natural for Fuyao to enter the American market and provide high-quality automobile glass for major American automobile manufacturers. Otherwise, it would be difficult to maintain its market position.

However, Cao also mentioned another inevitable factor, the cost gap between Chinese and American manufacturing industry, in the interview.

Cao revealed in the interview that although labor cost in the US was still much higher than that in China (average salary of American blue-collar workers is eight times higher than that of their Chinese counterparts; average salary of American white-collar workers is also two times higher than that of their Chinese counterparts), there are still some obvious advantages for manufacturers in the US: land cost is nearly zero, electricity price is half of that in China, natural gas price is 1/5 of that in China. Besides, “comprehensive tax for manufacturers in China is 35 per cent higher than that in the US”. As a result, Chinese manufacturers can earn several per cent more by establishing factories in the US instead of Chian.

In addition, there’s also so-called “policy cost” in China, that is, the cost to get necessary permission and certificates.Many Chinese enterprises may find it easy to find relevant departments and bureaus but hard to get their business done in time, which might undermine many enterprises’ enthusiasm in their investment.

Both Wu Changhai, researcher at Capital Finance Center of China University of Political science and Law, and Tang Dajie, secetary of CEI China Enterprise Research Institute agreed with what Cao said. However, they also think that it’s natural for Chinese enterprises to go abroad against the background of economic globalization, since such two-way flow of capital in the global market is beneficial for all relevant parties.

It is worth mentioning that Li Weiguang, a professor at the School of Economics of Tianjin University, came up with the concept “deadly tax rate” recently, which meant very similar to what Cao said about the underpinning problems of the Chinese manufacturing industry in the interview.

In the article “Deadly Tax Rate: The Real Reason Behind Continuous Economic Depression”, Li maintained that after some research, he found that the majority (87 per cent) of Chinese enterprise owners thought tax burden was high or too high, which suggested that “high tax burden might have significantly affected Chinese enterprises’ business development”.

According to him, tax burden rate of Chinese manufacturing enterprises is around 40 per cent or even higher, which can already be called “deadly tax rate”. Except from enterprises in new industries and finance, the average tax rate of most enterprises is less than 10 per cent. Therefore, a tax rate of 30 to 40 per cent can hold many manufacturing enterprises in trouble, and some of them are even on the verge of bankruptcy.

For the past few years, it’s already amazing for Chinese manufacturing enterprises to be able to bear 10 per cent tax rate due to sluggish growth of revenue. Although tax rate was reduced several times, lots of enterprises still couldn’t afford it.

Besides an enterprise income tax of 25 per cent, Chinese manufacturing enterprises also have to bear an added value tax of over 10 per cent. In addition, they have to pay several other kinds of tax and fee, such as stamp tax, vehicle and vessel tax, city construction tax, education additional fee, local education additional fee, etc.

According to statistics from Zhou Tianyong, a professor at Central Party School, the problem mainly lies in high macro tax burden. In 1995, the macro tax rate was only 16.5 per cent. In 2000, the macro tax rate rose to 21 per cent. In 2005, the macro tax rate continued to rise to 26 per cent. However, macro tax rate jumped to 36 per cent in 2010 and continued to grow to 37 per cent in 2015.

The more practical problem is that private enterprises are at a disadvantage whentaxburden is high in general.While SOEs can enjoy tax refund oftentimes, some dominant upstream Central Enterprises can transfer their tax burden to enterprises and consumers in the midstream and downstream. In general, tax burden of private enterprises is obviously higher than that of SOEs and Central Enterprises.

Similar to Fuyao Glass, Jiangnan High Polymer Fiber invested and established its own factory in Carolina last year and became the first Chinese enterprise to establish a recycled polyester staple fiber manufacturing factory in the US. JHPF planned to invest $25 million for the first stage and $20 million more for the second stage. According to JHPF’s official statement, the major reason it established a factory in the US is that they can’t bear the rising cost in China. JHPF even compared some of the cost of establishing a factory of similar size in the US and China:

1. Land Cost: China VS US=9:1

Land price in China is generally 9 times as high as that in the US, though land ownership in the US is freehold but lasts 50 years in China. For example, Industrial land price in Cixi city of Zhejiang province is 180,000 RMB per mu, but merely $20,000 per acre in the US (around 20,000 RMB per mu). However, industrial land price in many Chinese counties and cities has already reached 1 million RMB per mu, 50 times as high as that in the US.

2. Logistics Cost: China VS US=2:1

Logistics cost in China is twice as high as that in the US. Take for example gasoline price, China’s gasoline price is twice as high as that in the US. As gasoline price is higher, logistics cost is also higher, let alone lots of road toll, bridge toll, which are of strong Chinese characteristics.

In the US, however, logistics cost is composed of three parts: storage cost, shipment cost and management cost. When we see the change of these costs within the past two decades, we may find that shipment cost didn’t change much in GDP. Therefore, the main reason logistics cost in the US is reduced is that storage cost has reduced.

3. Bank Loan Cost: China VS US=2.4:1

The lowest annual interest rate in the US is 2.5 per cent, but 6 per cent in China, which as 2.4 times as high as that in China. Suppose a factory borrows 7,000 RMB and $1,100 respectively for four months, then loan cost is 140 RMB ($22.58) and $9. That is to say, loan cost in China is 2.4 times as high as that in the US.

However, if a factory borrows money not from banks with lowest interest rate, but instead buys financial products with an interest rate of over 10 per cent, borrows money from private equity fund with an interest rate of 15 per cent or loan sharks with an interest rate of 20 per cent, then how can it afford to pay back?

4. Electricity &Natural Gas Cost: China VS US>2:1

Energy cost in China is over two times as high as that in the US. Except for Hawaii, electricity in other American states isn’t expensive. Take Texas for an example, electricity price is around 0.2 RMB per Kwh. In comparison, electricity price is controlled by government bureaus. Suppose a factory uses 450 Kwh to manufacture a ton of product, and electricity price is 0.76 RMB per Kwh, then electricity cost is 342 RMB per ton (around $55.16 per ton). In the US, owing to high automation degree, suppose a factory uses 10 per cent more electricity and uses 500 Kwh of electricity to manufacture a ton of product with an electricity price of $0.05 per Kwh, then electricity cost is around $25 per ton. If so, electricity cost in China is 2.2 times as high as that in the US.

5. Steam Cost: China VS US=2.1:1

Thermal power plants’ steam is widely used in China. Suppose it cost 1.6 tons of steam to manufacture one unit, and 190 RMB to purchase one ton of steam, then steam cost is 304 RMB per unit (around $49.0 per unit). However, natural gas boilers are widely used in the US to produce steam by factories. Suppose natural gas cost is $0.48/therm per day and it costs $14.52 to produce one ton of steam, then steam cost is $23.33 per unit. That is to say, steam cost in China is 2.1 times as high as that in the US.

5. Spare Parts Cost: China VS US=3.2:1

The spare parts cost in China is 3.2 times as high as that in the US. In China, equipment performance is generally poorer, and workers generally don't have a proper operation habit, so average spare parts cost is around 100 RMB per ton (around $16.13 per ton). However, since American workers generally have better operation habit and equipment performance is also generally higher, their spare parts cost is around $5 per ton. In other words, spare parts cost in China is generally 3.2 times as high as that in the US.

7: Tax Cost: Tax break in the US is more that in China

In China, there are all kinds of taxes. Suppose a Guangzhou-based logistic company wants to deliver a batch of goods to Hainan province and can earn 19,000 RMB in total, it’s net profit is only around 216 RMB, since the tax is already 1,260 RMB.

In comparison, since California state government attaches high importance to employment rate, enterprises will often be offered tax break. For example, if an enterprise completes its annual production goal, it can enjoy a tax break of $30 million offered within three decades.

8. Customs Clearance Cost: No input/output customs clearance cost in the US

There’s no customs clearance cost when establishing factories in the US. However, suppose a Chinese factory’s raw material all comes from import, then it has to pay 3,500 RMB per container to go through all necessary import procedures, let alone shipment fee, customs tax, added value tax, etc. If each container weighs 20 tons, then a Chinese factory has to pay a procedure fee of 170 RMB per ton (around $22.58 per ton).

Suppose a Chinese factory wants to export its finished products, then it has to pay 1,600 RMB per container to go through all necessary export procedures. If each container weights 20 tons, then the factory has to pay a procedure fee of 80 RMB per ton (around $12.9 per ton). If we add shipment fee and other kinds of expenses, then the cost will only be even higher.

9. Labor Cost: China’s advantages are shrinking

Although average American labor cost is 2.57 times as high as that in China, American factories can hire few workers due to high automation degree. While a Chinese factory have to hire 250 workers to maintain two production lines with monthly production volume of 4,500 tons, an American factory only needs to hire 180 workers to maintain similar production volume by improving equipment performance.

Moreover, labor cost in China has been steadily growing. Suppose average labor cost in China double in five years and quadruple in ten years, then Chinese manufacturing enterprises may enjoy no advantage as to labor cost.

10. Depreciation Cost: China VS US=1:1.7

The depreciation cost in the US is 1.7 times as high as that in China. Suppose it cost 90 million RMB and $25 million to establish a factory of similar size and productivity in China and US, respectively. If annual production volume is 50,000 tons and both factories are depreciated after fifteen years, then the depreciation cost of Chinese factory is 120 RMB per ton (around $19.35 per ton), while that of the American factory is $33 per ton, which is 1.7 times as high as that of the Chinese factory.

11. Factory Construction Cost: China VS US=1:4

The cost to build factories in the US is four times as high as that in China, but cost of second-hand American factories (with over ten years old but of good performance status) is 1/8 to 1/2 than that of new factories.

Based on the above calculations, owing to rising environment cost and labor cost, cost in the Chinese manufacturing industry has already risen close to that of American manufacturing industry, or even higher in some sectors. Although JHPF’s calculations can’t be applied to the entire industry, the inconvenient truth is that cost in the Chinese manufacturing industry has indeed been rising significantly in the past few years. It is worthwhile for all of us to be aware that cost in the Chinese manufacturing industry has already risen so high before it grows strong enough. It is high time relevant parties figured out ways to reduce cost and improve the competitiveness of “Made in China”.

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Translated by Levin Feng (Senior Translator atPAGE TO PAGE), working for TMTpost.

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