This article was first published in South China Morning Post on January 31, 2024.

China’s manufacturing landscape is undergoing a major transformation, driven by rising wages, more stringent environmental regulations, a wider adoption of digital technology and opportunities in overseas markets.

The transformation was accelerated by the Covid-19 pandemic and heightened geopolitical tensions, particularly the US-China trade and technology conflict.

In response to these challenges, Chinese firms have actively engaged in adjusting and shifting their operations, demonstrating resilience and adaptability in navigating the evolving industrial terrain. In their pursuit of new markets and greater competitiveness, many companies have opted to relocate to overseas destinations or China’s western inland regions.

Inland movement has gained momentum as businesses strategically relocate to regions within China that offer economic advantages and lower operational costs. This strategic shift reflects a proactive approach to counteracting challenges and maintaining competitiveness amid a dynamic global business landscape.

To promote development of the inland provinces, the Chinese government is proactively encouraging manufacturing firms in coastal provinces to diversify and relocate or move part their production more inland. Since 2010, a series of guidelines have been issued to encourage inland transfers from the eastern coastal cities to the central and western regions. The objective is to achieve more balanced regional development, accelerate industrialisation and urbanisation in inland areas and foster economic upgrading in the eastern region.

In conjunction with the initiatives undertaken by the central government, regional authorities in inland areas have also implemented a range of policies to attract manufacturing firms to relocate in their areas. These encompass subsidies, tax incentives, streamlined approval processes, assurance of labour supply and various cost reduction measures.

Chinese inland cities, such as Chengdu and Kunming, offer a multitude of advantages, making them attractive destinations for industrial transfer. The low wages in these regions reduce production costs for businesses, enhancing their overall competitiveness in the global market.

Moreover, the average years of completed education in China surpass those in many foreign countries that could serve as alternative manufacturing bases. China’s workforce exhibits high technical proficiency and industry-specific knowledge, offering a competitive advantage, especially in the production of sophisticated goods.

Inland cities feature a vast and thriving consumer market, contributing to nearly half of China’s gross domestic product. Their economic size and growing middle class present attractive opportunities for businesses.

The well-developed infrastructure in inland cities, including efficient transportation, reliable telecommunications and stable power supply, ensures smooth operations and logistical efficiency for the manufacturing firms.

Finally, China’s inland cities are renowned for their complete industrial supply chains, well-developed industrial ecosystems and comprehensive industrial support networks, providing businesses with the necessary resources and services.

Recognising the strategic imperative to reduce dependence on China’s domestic market or production, relocating outside the country, especially to the Association of Southeast Asian Nations (Asean) countries, has also become an increasingly attractive option for Chinese businesses.

The disruptions caused by the pandemic and heightened geopolitical tensions have driven the need to diversify supply chains. Multinational companies are accelerating the “China Plus One” strategy, resulting in a growing trend of production diversification across countries for enhanced supply chain security and resilience.

Chinese firms view Southeast Asian countries as favourable locations for offshore production. These countries actively engage in free trade agreements, leading to lower tariffs and reduced trade barriers.

Asean countries benefit from strategic geographical advantages. Convenient sea transportation through their numerous ports enhances their connectivity and accessibility to global markets. Moreover, many Asean economies offer the benefit of low labour costs, making them attractive destinations for labour-intensive industries.

The expansion of the middle class in Southeast Asia and their growing purchasing power have also sparked multinationals’ interest in establishing production centres in these countries, enabling them to be closer to consumer demand.

Chinese firms are increasingly leveraging Asean’s potential for global market competitiveness, as outward direct investment from China to Asean has been steadily rising since 2010. This expansion spans various sectors, including advanced industries like electronics, batteries and motor vehicle parts and semiconductors, as well as services such as e-commerce and hospitality.

Ultimately, the decision to relocate to China’s inland regions or Asean countries depends on the industry’s unique characteristics and market dynamics. Industries targeting the domestic market with strong industrial support and a skilled labour force tend to relocate to China’s inland cities.

Industries focusing on overseas markets with large or rapidly growing middle class, may prefer to relocate to Asean economies with their low labour costs and preferential trade agreements, including with the US.

Everything considered, the trend of the Chinese firms’ strategic relocation to China’s inland cities or expanding into Asean mirrors a broader global pattern observed among advanced economies such as the United Kingdom, Germany, the United States, Japan and South Korea.

The pivotal factor shaping the location of Chinese firms lies in their adept navigation of the shifts in market forces. The ability to skilfully relocate and restructure manufacturing industries will play a crucial role in positioning Chinese companies on a more competitive and high-value-added path.

As the landscape of global markets continues to evolve, the strategic choices made by Chinese firms in response to market forces, technological advances or geopolitical tensions will be instrumental in determining their success on the international stage.