China's Rising Production Costs Are a Boon for Other Asian States

Photograph by Rahman Roslan for TIME
Cheaper labor Eyeballing components in Penang

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Yet for makers of lower-end goods like those P.I.E. churns out as well as higher-end products for which intellectual property plays a key role, the impetus to move from China to cheaper and more legally hospitable climes is growing ever greater. The industrial parks clustered around Ho Chi Minh City in southern Vietnam, for instance, are drawing increasing investment from electronics firms like Intel, which is planning to spend up to $1 billion on a vast semiconductor assembly and testing plant there. Similarly, Bangladesh has come to control 6% of the $200 billion global garment and textile market by taking much of the low-end work from China, notably the stitching of T-shirts and blue jeans.

It's easy to see why. According to Citigroup, the minimum wage for a factory worker in China's Guangdong province is roughly $150 a month. In Bangladesh, by contrast, the minimum wage comes to roughly $40 a month, even after violent strikes by workers recently forced apparel makers to hike wages there nearly 80%.

Not surprisingly, the manufacturing belt that stretches from Bangladesh's western capital, Dhaka, to its southeastern port in Chittagong has begun to lure investors who sense a mini China in the making. Brummer & Partners, a $10 billion hedge fund and private-equity firm based in Stockholm, recently spent an undisclosed sum to obtain a minority stake in a Bangladeshi garmentmaker that counts such retailers as Gap and H&M; among its customers. "We're starting to see these kinds of companies take an interest in Bangladesh," says Kiron Bose, the chief investment officer for Brummer's Bangladesh-focused private equity fund. From stitching jeans and T-shirts, Bangladesh hopes to crack the more complex and lucrative business of making sneakers for companies like Nike and Adidas. "Shoes are still a China story," says Bose. "That's where Bangladesh has to compete next."

But the Bangladeshis will also have to compete with the Malaysians, not to mention the Vietnamese, Cambodians and Thais. As always, a large chunk of the equation determining who will win is cost. But that's not the sole factor driving Penang's recent boomlet. If it were only a matter of cost, the Bangladeshis, who are the least expensive in the region, would win the contest hands down. But Malaysia has a host of additional competitive advantages in the new manufacturing race, from logistics to geography. The island of Penang, for instance, has wide roads, a steady stream of university science graduates, an efficient power supply and a modern airport from which goods are flown around the world. "From Penang, we can get our products anywhere in 48 hours," says Purushothaman of National Instruments, which is currently building an $80 million factory close to the airport.

In addition, Penang has inherited the British legal system from its former colonial masters, which gives those doing business there a degree of comfort. "If you look at the region, companies feel comfortable with the intellectual protection measures and legal system in Malaysia," says Lee Kah Choon, chairman of Invest Penang, a government-run investment-promotion agency. "Whereas in China, they're very uncomfortable that whatever is introduced there can be copied."

The importance of intellectual-property protection is echoed by a wide range of technology executives who operate in both Malaysia and China. Almost universally, there is unease about the latter's commitment to copyrights and patents. "It's not as transparent as we want it to be," says Steven Siaw, a co-founder of Penang-based Vitrox Corp., an 11-year-old tech start-up that produces automated vision-inspection systems and has a presence in China. "There's a certain degree of respect for intellectual-property rights in Malaysia. We want peace of mind."

"We're paranoid about intellectual property," says Atul Bhargava, managing director of Intel Malaysia. How paranoid? Consistent with its global practices, Intel severely restricts media tours of its Penang factory lines: permission is rarely granted, and cell phones are always banned, lest illicit photos be secretly snapped. Any employee who leaves the firm is told, in a less than collegial fashion, that any proprietary work done at Intel does not leave the building. "You have to make sure there is a firewall," says Bhargava. Malaysia's commitment to intellectual-property protection, he says, is one of the reasons Intel employs roughly 10,000 people in Penang the semiconductor firm's single largest bloc of workers outside the U.S.

Penang's recent economic momentum will continue, claim senior government officials. "We've worked our butts off to get investment in," says chief minister Lim. The effort appears to be paying off. National Instruments, Citigroup and health-equipment company St. Jude Medical are all poised to significantly increase their Penang headcounts over the next few years. Online job postings in Penang, according to Kuala Lumpur based Jobstreet.com, soared 80% in 2010 over the previous year. According to Chook Yuh Yng, Jobstreet's country manager, postings for this year are looking pretty good too.

To be sure, the decaying Victorian mansions along the island's northern seashore are vivid reminders that booms can end in busts. Penang's burst of early glory as an 18th century global trading hub under the British was followed by an extended eclipse. Still, those forlorn mansions also show how a place that squandered its competitive advantage, as Penang did several times, can regain it. And that may be the China Effect's most surprising legacy. The conventional wisdom has always been that China's rise would be the story of Southeast Asia's fall. We are now seeing that the Middle Kingdom can help rekindle a boom in a region that it once appeared to doom.

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The China Effect