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36
ACCOUNTING

A Cheaper China
 

How a manufacturer saved money by moving inland.
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Manufacturing in China has never been easy for American companies. But over the past couple of years, it has gotten trickier than ever. The government has raised the minimum wage, repealed tax rebates for exporters, and made it harder for foreign companies to borrow from local banks. Those changes, along with rising fuel costs, have led thousands of factories to close their doors. But not Coda Resources, a family-owned industrial product manufacturer based in Brooklyn, New York. In late 2006, Coda left Shengzhou, a manufacturing hub, and became the first U.S. company to open a factory in Heze, a city about 400 miles inland. The move cost $2.5 million but paid for itself in 18 months, thanks in part to perks from the city government. We asked Coda to show us how its business changed as a result of the move.

2006 2008*
Revenue from China Operations $4 million $30 million
No. Of Employees 275 1,200
Size of Factory 40,000 sq. ft. 200,000 sq. ft.
Avg. Salary Per Line Employee $330/month $140/month
Time to Train Line Workers 30 days 40 days
Annual Turnover 70 percent 10 percent
Annual Rent and Office Overhead $50,000 $85,000
Utilities 18 cents/kilowatt-hr. 8 cents/kilowatt-hr.
Total Utility Bill $300,000 $450,000
Days Missed Because of Electricity Outages 30 0
Average Time to Ports 2-3 days under 2 days
Operations Cost As % of Revenue 17 percent 12 percent
Insurance $0 $35,000

* Projected.

A looser labor market

"In Shengzhou, we were fighting with the surrounding factories for every single worker," says Moshe Tropper, the company's vice president of manufacturing in China and son of co-CEO Solomon Tropper. In Heze, by contrast, there's a scarcity of good jobs, and finding workers is easy. Coda's Heze employees have experience working on farms, not in factories, so it takes Coda extra time to train them. But the effort more than pays off in lower turnover. "Of all the costs, this is probably the most significant -- not having to walk in and wonder who is going to show up," Moshe Tropper says. "The way these plants make money is by running 24/6."

Getting products to sea

Coda's old factory was roughly an hour and a half by car from Ningbo, China's second-largest port. Heze, by contrast, is 12 hours from the nearest port. But as a result of its deal with the city, Coda now gets its products to market more quickly, because customs officials come to its factory to clear shipments before they leave. "For an insignificant company in Ningbo, you could easily be pushed to the back of the line, which would delay shipment by two days," says Moshe Tropper.

The benefits of being big

U.S. insurers generally won't cover small companies in China, because the risk and the effort required outweigh the limited earnings from small clients. And because foreign companies have a notoriously difficult time pursuing claims in Chinese courts, Chinese insurance agencies aren't an option. But the new facility in Heze was large enough for Coda to secure full fire and business-interruption coverage from a U.S. insurer.

Salary savings

Salaries are considerably cheaper in Heze than they were in Shengzhou; Coda now pays $90 a monthand up, compared with $190 and up two years ago.

Watching quality control

Coda, which rented its Shengzhou factory, bought 20 acres from the city of Heze for its new facility. To lure Coda, Heze priced the land 80 percent below the market rate -- a practice Beijing has since prohibited. Coda's suppliers, however, are all more than a day's drive from Heze. So Coda set up three offices in larger cities -- Shenzhen, Tianjin, and Ningbo -- from which its staff can conduct quality control. As a result, Coda is paying slightly more rent than it used to. Coda also had to hire additional employees to staff the dispersed offices, at a cost of about $350,000.

Power problems

In Shengzhou, Coda frequently had to shut down its operations to comply with city regulations governing electricity use. In Heze, by contrast, Coda negotiated an agreement with the city stipulating that its power is never cut off, except for two days this year during the Olympics. "We were a fly on the wall in our previous city," says Moshe Tropper. "Now, we have the mayor in our factory every other week when he wants to show off his American company."

Last updated: Dec 1, 2008




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