Excerpt from: China Supply Chain and Logistics Strategy
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| October 31, 2005 | | Build vs. Lease | Multinational companies wishing to set up manufacturing capabilities in China basically can choose between building a plant from scratch and leasing an existing facility. In 2004, construction of 25,680,00 m2 of factory space was commenced in Shanghai. If you want to construct your own facility beware of working with design institutes. These institutes are under pressure due to lack of qualified resources. These Chinese firms tend to put unqualified teams together under the guise of skillful marketing tactics. Also, small contractors won’t understand your requirements so you need to educate them. In addition, there are serious safety challenges to deal with when building your own facility.
It is much easier to move into an existing building where you can lease or buy someone else’s mistake, rather than creating your own mistakes. Building a manufacturing facility in China is a real headache. This is particularly true when you move towards the interior of China. A recent seminar in Shanghai which discussed the nuts & bolts approach to setting up a new plant in China discussed the horror stories of one company that ventured into Chongqing. It truly is like the wild-west in interior China. Be prepared to do plenty of due diligence before embarking on a manufacturing journey in western China.
Leasing a Facility
Leasing factories is very common in China. Leasing allows you to obtain temporary space while a purpose built facility is under construction. Also, a smaller space may be advisable for companies new to the China operating environment. Development zone governments are usually helpful and willing to protect your rights. In order to find a suitable factory you need to visit several dozen development zones and conduct extensive due diligence. You must peel back the layers to understand the real quality of your leased factory.
Another problem has to do with a conflict of interest at the development zones. Typically the chairman of the development zone sets a rental range and guarantees a return rate which gives the landlord an incentive to build the cheapest possible building.
At the same time, the investment promotion people are given high incentives to make sales, thus they are under pressure close a deal as quickly as possible.
Quality Issues
Before leasing a building in China companies should have a 3rd party inspect the strength, thickness, and flatness of the flooring. Usually the test will fail. Vapor barriers are also not used in China, which causes problems due to the high water table in East China. Be prepared for high replacement costs of windows and doors, since the Chinese builders usually install the cheapest windows and doors possible. Lighting fixtures are also of poor quality and fire protection standards are minimal. | | |
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