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Companies leave China as manufacturing costs rise [Copy link] 中文

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Post time 2008-2-22 10:02:20 |Display all floors
By Ng Han Guan, AP

SHANGHAI (AP) — The teddy bears selling for $1.40 in Shanghai's IKEA store may be just about the cheapest in town, but they're not made in China — they're stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: Its huge economy, which has long offered some of the world's lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labor.

Those expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.

"Americans continue to want to buy at lower prices," said Kevin Burke, president and CEO of the American Apparel and Footwear Association. "They are used to going to the store during Christmas and getting something cheaper than a year ago."

That's no longer a sure thing.

For instance, American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 to 10% for the 2008 holiday season, largely because of rising manufacturing costs.

Costs in China are climbing nationwide, but the greatest pain is being felt in the south, where about 14,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbors Hong Kong.

To adapt, many multinational manufacturers — including Intel Corp., iPod-maker Hon Hai Technology Group and Japanese companies like Canon Inc. and Sony Corp. are expanding operations in Vietnam.

Auto parts makers are decamping for the Middle East and Eastern Europe, textile-makers to Bangladesh and India.

Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China's traditional export hub of Guangdong are closing or moving out.

Meanwhile, Chinese inflation has risen to its highest point in more than 11 years, jumping 7.1% in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but analysts say longer-term pressures on prices for manufactured goods will persist.

"China needs to reprice its exports, and that has to be accepted by international buyers," says Andy Xie, an independent economist based in Shanghai.

But raising prices may be tough for Chinese manufacturers given the suspicions about product quality raised by a slew of scandals over tainted or potentially dangerous products.

Despite its huge pool of unskilled rural laborers, China's supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10% to 15% a year.

A new labor law requiring stronger employment contracts is expected to raise costs even more.

Prices for plastics and other materials have climbed 30% or more, and electricity rates are surging, too. The government has also slashed export tax rebates — originally given to promote exports — on more than 2,800 products accounting for nearly 40% of all Chinese exports.

The steady appreciation of China's currency, the yuan, also contributes to the problem.

At IKEA's Shanghai store, a stroll down the aisles finds most products made in China, rather than Europe or the U.S. But a growing share of the goods come from less developed markets: stuffed toys from Indonesia, wooden train sets from Bulgaria, colorful rugs and throws from India, bed sheets from Ethiopia, baskets and wooden trays from Vietnam.

"We are constantly having to compete with other countries and suppliers," said Linda Xu, public relations manager in China for the Swedish retailer.

For many companies, especially those focused on the potentially huge Chinese market, leaving the country would be a last resort, says Jonathan Woetzel, co-author of "Operation China," a book that outlines strategies for competing in the country's fast-changing business environment.

"You'd have to start over, essentially," he said in an interview. "There's still quite a lot of opportunity to take cost out of the system. What we do see is supply chains extending inland, for example, going inland for final assembly."

In inland China, wages still lag far behind the richer eastern and southern coastal areas.

Despite those strategies, prices for Chinese-made products will probably continue to rise in the next few years, causing some companies to invest elsewhere, says UBS economist Jonathan Anderson.

"Over the medium-term, where are you going to invest if you're building a factory? Maybe not China anymore. Maybe Bangladesh, Vietnam, Indonesia. Maybe India."

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Post time 2008-2-22 11:08:49 |Display all floors
This is an important matter for which some suggestions:

(a) make the product in the new inland regions, then add value and finish them in the coastal places before exporting; this removes the cost difference for the first part which may help to reduce the final price;  however, this will also depend on:

(b) the cost of transporting raw materials to the inland regions and semifinished product from the inland regions to the coastal places;  however, this is something which has to be done anyway if the inland regions are to grow, and the transport infrastructure should plan for intermodal flexibility (land-river-air combinations from one place to another) to seek scientific-level efficiencies;

(c) accelerate the national down to provincial programme to grow research-borne value-added inputs as well as to make presentation and packaging even more worldclass; some research done in A can be used in a different industry B, or done by C can be used in D, even if C and D compete locally but their joint product (one contributes research and design, the other production and sale) can be exported;  this is one of the key advantages of socialist capitalism that has not been tapped;  in the western capitalism, they have little or no national perspective except to win for themselves.   Also finetune negotiating with buyers, and share notes with those in the same export segment;

It is time China's enterprises move quickly from being OEMs and outsourced suppliers to ODMs and own-grown enterprises;

(d) China is one of the biggest producers in the world; she is also one of the biggest buyers in the world;  many countries don't appreciate the second fact. She should make use of it to ensure strategic advantage in being the preferred buyer for many strategic raw materials which in turn means the products made from those raw materials can command better prices;  right now those raw materials are controlled by others so that the returns to China's producers are relatively less per unit weight/effort etc. than to the raw materials owners.

(e) work a new set of investment objectives to make China the preferred operational headquarters for multinationals;  OHQs centralize MNC planning and logistics for the region where they operate, including staffing and most importantly cross-border marketing ..and thus pricing.  They also provide higher-level technical and marketing jobs, even for the services MNCs, and can be turned into call/service/computing centres in the hub-spoke transnational operation model.

(f) Chinese companies should also invest their production overseas where it makes cost and pricing sense - but the savings must be repatriated home to invest in research and new value-development (such as deeper training, better design centres and latest equipment);  this will at least ensure that the value-chain keeps growing which in turn will create more job opportunities as new factories for displaced local workers;

(g) increase the G2G contracting; other countries have done this before, learn from their successes and mistakes; G2G contracting gives conditional aid for the recipient to buy from China's suppliers in order to complete the overseas projects;

(h) set up wholesale and distribution enterprises in the buying countries; these enterprises incorporated and located in the foreign countries are owned by Chinese businessmen who buy from China's producers to distribute to foreign markets, thereby controlling the pricing;  it may be difficult to start anew and to penetrate pre-established foreign networks, but if you have the first say to what, from who, and at what price, especially when the producers have agreed to export under one common wholesale brand (and thus one common set of rules), it will be easier to leverage on market/mind-share to maintain price from improving on advertising.

There are many other suggestions..this topic is important enough for more research and study... and it must be done for the future of China's manufacturing and export industries.

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Post time 2008-2-22 13:03:16 |Display all floors
Originally posted by markwu at 2008-2-22 11:08
This is an important matter for which some suggestions:

(a) make the product in the new inland regions, then add value and finish them in the coastal places before exporting; this removes the co ...

Or go for switch to higher Value Adding High Tech products...........
What's on your mind now........ooooooooooooooo la la....Kind Regards

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Post time 2008-2-22 13:27:53 |Display all floors
While Mark shouldn't be dismissed out of hand, I would point out that the fact this "problem" exists means that there is no problem at all. If China can no longer compete at the low end, it is because its companies are already competing elsewhere. If they were not, the costs would not have risen. That is all.
"Justice prevails... evil justice."

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Post time 2008-2-22 13:31:53 |Display all floors
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Roach Exterminator

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Post time 2008-2-22 14:43:47 |Display all floors

Reply #3 caringhk's post

More likely that the INLAND REGION will be the ASSEMBLY,  LOWER COST MANUFACTURING, specialty products for the SUPERCENTREs, tier 1 and tier 2 cities.

The export hub would transform to more middle to higher value added products while the supercentres will develop more services, financial, advanced manufacturing!

Green Dragon

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Post time 2008-2-22 14:50:32 |Display all floors
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