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China Factory Owners Look to India for Relocation as Costs Rise

As labor costs in China rise and the country’s economy flounders, Hong Kong-based companies with labor-intensive factories in mainland China are losing their competitive edge—and many are looking to move their production bases to India.

The sustained rise in production costs in China has prompted factory owners to seek alternative production bases, the Hong Kong Trade Development Council (HKTDC) said, following a recent fact-finding trip to India.

“Take garment manufacturing as an example. The Indian garment manufacturing industry has been expanding exports in recent years, with many major exporters successfully building up business contacts with international buyers,” Dickson Ho, HKTDC principal economist for Asian and emerging markets, said. “With advantages in raw materials and prospects for vertical integration, India is a strong production base and a location worth considering for factories with labor-intensive manufacturing, such as garment-making.”

India’s comparatively low taxes as part of free trade agreements within and beyond the region also lend the country an advantageous air, as do its labor costs, which are lower than in mainland China.

In India, workers earn, on average, in the $90 to $100 range each month, though the minimum wage is supposed to be closer to 15,000 rupees ($224) a month.

At least 14 provinces raised their minimum wage in China last year, with monthly wage rates ranging from 1,270 yuan ($195) in the Hainan province to 2,030 yuan ($312) in Shenzen.

A November report from PCI Fibres said textile mill consumption in India was just 23 percent of China’s, that its manmade fiber production was only 13 percent of China’s and that its apparel export activity only accounts for 14 percent of what China puts out.

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The relative trajectory of the two textile economies is expected to change in the coming years, however, according to PCI Fibres.

India’s labor productivity has been on an upward trajectory, recording a 3.8% growth rate in 2014, HKTDC noted. That coupled with its many major seaports has positioned India as a more viable production base than its South Asian neighbors.

The Indian government has implemented policies to encourage foreign direct investment in recent months, including tax incentives for exporters. The country’s laws are notoriously complex and therefore, as Ho suggested, companies considering relocation might want to move into industrial parks where conditions are more favorable.

“With the world’s second-largest population, India’s retail landscape is evolving rapidly, and is currently estimated at about $600 billion with an average annual growth of 12 percent,” HKTDC noted. “With the surge of middle-class consumption, the retail sector is projected to keep expanding.”