Tuesday, February 11, 2014

Why China is losing its competitive edges in global economy?

Open the closet, take a close look at each clothes’ tag:
Mango, made in Vietnam,
H&M, made in Cambodia,
The Limited, made in Indonesia
Abercrombie & Fitch, made in Philippines,
Banana Republic, made in Vietnam…

In the last two decades, China was the powerhouse of world manufacturing. Cheap labor and the efficiencies of mass scale production generated a low-cost economic environment in China so that people all around the world enjoyed the benefits of “Made in China”.

But this is not always the story. The only constant is change.

In 2012, according to a study reported by Taiwan-based daily WantChinaTimes, forty percent of US importers and manufacturers are thinking of moving their manufacturing bases away from China. In the report, 31.3 percent of respondents of the study indicated they are moving their manufacturing to the US, followed by 18.8 percent to Vietnam, 10.9 percent to Pakistan, 9.4 percent to Bangladesh and 3.1 percent to the Philippines.

In 2013, Japanese retail chain Uniqlo moved its apparel production from China to Vietnam; Level Style was testing a shift to India for Nordstrom, Samsung Electronics was shifting to Vietnam, Tiffany & Company was quietly building a diamond-polishing factory in Cambodia…  manufacturers are moving out of China to its Asian neighbors. 

According to the secretary general of the Garment Manufacturer’s Association in Cambodia (GMAC), Ken Loo, “Presently many factories are moving out of China and the countries they are considering are Bangladesh, Cambodia and Indonesia” where costs are much more cheaper than the constantly rising costs in China. “Investors are leaving China, out of the 85 new factories, probably a third from mainland China, and the remaining is a spread of owners from Taiwan, Korea and Hong Kong,” Loo said.

Why China is losing its competitive edges in the global economy?

1. Rising costs, higher wages and appreciating currency. A new study by the consulting firm AlixPartners estimates by 2015 the cost of outsourcing manufacturing to China will be equal to the cost of manufacturing in the U.S. The average wage in China has been growing at an amazing average of 14% per year for the last 10 years. It's expected to grow further for the next 5 years. The standard of life have risen fast from abject poverty to close to international standard wages of over $1,000 per month. Soon the average worker in China will be paid roughly as much as an equally well trained person anywhere else in the Western world. In the last decade, Chinese currency RMB has appreciated 25 percent vs. the U.S. dollar, which has caused even more expensive shipping costs from China to elsewhere around the world.

2. Automation and Robotization. There is a growing trend of using more and more reprogrammable robots in manufacturing that can do many different tasks with high precision. Robotized production in China is no cheaper than robotized production in, say, Texas or California, where Foxconn maintains manufacturing facilities. As robots replace people in factories there will be less reason to have manufacturing done in China.

3. More regulations and laws protecting environment in China. The enlightened Chinese citizens are protesting against dangerous or toxic factories that are planned to be built in China, hence Chinese authorities started enforcing environmental rules as citizens took to the streets to complain about metals in the soil, pollutants in the water, and soot in the air.  Now, no one in China wants to live in a “cancer village,” and people are routinely blocking projects, especially in the prosperous coastal regions of the country.

4. Intellectual property theft. China has been slow on protecting intellectual property and Chinese people lack the respect and cognition of intellectual property. Foreign investors began to pull back as they realized that manufacturing in China substantially increased the risk of loss of their intellectual property.  Chinese government has done little to stop rampant theft.

5. Chinese political risk, once thought to be minimal, became a factor.  Beijing attempted to use its considerable economic leverage to achieve geopolitical goals, and this involved the targeting of companies from countries that had, in one way or another, angered China.  Since the middle of 2010, Beijing has gone against Japanese, Norwegian, American, and European Union businesses.  Chinese leaders, in the process, started to make their country an unreliable part of global supply chains.

6. Chinese social risk, which is undermining the stable economic status in China. As China grows rapidly, more social and economic issues have surfaced: polarization between the poor and the rich, corruption in central and local governments, unbalanced development between western part and coastal part, illegal and black box business operation… all the unstable factors might cause disastrous outcomes that might greatly influence the foreign companies’ manufacturing in China.

7. Market rules. Changes in the market convinced companies that there were significant cost and time-to-market advantages in manufacturing close to customers.  The friction in dealing with faraway Chinese factories, once ignored, is now a big consideration in plant-location decisions. Moving manufacturing back to the west could, in great part, get close to its customers.

8. Nationalism and quality of product. There is a growing trend among Westerners demanding locally produced goods. Once the products from China were perceived as cheap and of low quality. Western people feel better about using and buying their own products and services since they believe their quality and environment to produce are better. So companies are catching up with the demand. Food and car manufacturers were the first to use nationalism to sell their products. Lately even technology companies like Apple and Google are marketing their products as Made in USA to generate more goodwill and sales. This trend is going to continue for some time and puts and extra pressure on Chinese manufacturing.

      1.     How can China’s Asian neighbors avoid Chinese manufacturing fate and establish a more sustainable way to keep economy growing and to offer more good quality product?

      2.      Based on all the reasons, how can China improve its situation to better fit in the global economy and not to lose its competitive advantages?

   1. http://www.huffingtonpost.com/2013/04/19/china-manufacturing-costs_n_3116638.html
   2. http://www.nytimes.com/2013/04/09/business/global/wary-of-events-in-china-foreign-investors-head-to-cambodia.html?_r=0
   3. http://raszl.com/blog/why-jobs-are-moving-china-back-west
   4. http://www.forbes.com/sites/gordonchang/2012/12/09/move-over-michigan-china-is-the-worlds-next-rustbelt/
   5. http://www.phnompenhpost.com/special-reports/china-factories-relocate-cambodia
   6. http://online.wsj.com/news/articles/SB10001424127887323798104578453073103566416
   7. http://www.taipeitimes.com/News/biz/archives/2013/12/13/2003578891
   8. http://www.nydailynews.com/news/national/40-firms-moving-factories-china-article-1.1183781
   9. http://www.aljazeera.com/news/asia-pacific/2013/05/20135415820150217.html

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