Chinese Factories No Longer Cheapest

[M.D. Holloway]

Chinese Factories No Longer Cheapest
By Elaine Kurtenbach, AP Business Writer
Manufacturing.Net - February 22, 2008


SHANGHAI, China (AP) — The teddy bears selling for US$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.

''It's true that we are facing difficulties regarding increased costs in China,'' said Linda Xu, public relations manager in China for Swedish retailer IKEA.

Though the competition for lower prices is not new, ''we are constantly having to compete with other countries and suppliers,'' she said.

While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000 to 60,000 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.

''Wages are rising, materials cost more. Overall, costs are definitely higher,'' says Duncan Du, general manager of Shenzhen Oriental e-Tecs Ltd., an electronics maker in the southern city of Shenzhen.

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.

As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already shifted production to Vietnam.

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.

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

''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 is tough for Chinese manufacturers when the quality of their products is suspect after a slew of scandals over tainted or potentially dangerous products.

At the same time, 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 percent to 15 percent 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 percent 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 percent 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.

It also is sourcing from inland cities like Luoyang and Wuhan, outside the traditional export zones of Guangdong and the Yangtze River Delta, near Shanghai. In inland China, wages still lag far behind the richer eastern and southern coastal areas.

For many companies, especially those focused on the huge potential Chinese market, leaving the country would be a last resort, says Jonathan Woetzel, co-author of a recent book, ''Operation China,'' 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 alot 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.''

Despite those strategies, prices for China-made products will likely continue to rise in the next few years, causing companies to increasingly look 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.''

...

[MRM]

This has been going on for a long time. My wife works for a large manufacturing company some on this board might have heard of and they haven't build plants in China for cheap labor for a long time. They build in China to sell to their domestic market, to be close to raw materials and to have access to skilled workers. Indoneasia, Bangaladash, Vietnam are all lower cost manufacturing sites.

China has a long way to go but they'll go the route of Japan and Korea soon. It used to be that Japan was the center of low cost wages. Then they became the highly skilled manufacturing center and low cost/low skill stuff was made in Korea. That ended maybe 20 years ago. China and the smaller Asian Tigers are next in line. 20 years from now people will be writing about the Bangaladashis taking over the world and China will be just Europe East to most Americans.

[onewhippedpuppy]

Someday we might have to buy items made..................in AMERICA!!!!! Oh, the horror....

[red-beard]

We sell stuff there all the time.

[Gogar]

Originally Posted by onewhippedpuppy

Someday we might have to buy items made..................in AMERICA!!!!! Oh, the horror....

Like . . . . . . Cadilacs?

[onewhippedpuppy]

Originally Posted by Gogar

Like . . . . . . Cadilacs?

Hey, I tried to do my part.

[Andras Nagy]

MRM is correct - this movement from one country to another in the eternal quest for the cheapest labor has been going on for quite some time.

Just wait a few years, and it will move again. Soon (who can predict when?), the entire world will become homogenized, and there will be no country left that is willing to work for slave wages, and we are then going to see prices equalize. Then perhaps quality will become the next Big Thing.

For example, Audi builds cars in Hungary and Slovakia because labor is cheaprer than in Germany. Japan is now building cars in Korea because it is cheaper than in Japan.

It will never end.

[alf]

Originally Posted by onewhippedpuppy

Someday we might have to buy items made..................in AMERICA!!!!! Oh, the horror....

Like any country in the world some stuff made in the US are good, some stuff are crap. Notice that none of your cars are domestic

MRM is spot on, China will start to move up the value chain, they are already doing so. Look around your home, they do make high quality, high value and high end stuff.

[alf]

Just looked in my immediate vacinity...My Toshiba laptop, Microsoft mouse, dress shirt and Sony LCD monitors. All high quality stuff made in China.

[dd74]

Buick is the highest selling American car in China...

[MRM]

US companies are now smart enough not to locate companies just to chase cheap labor. They've belatedly realized they need to invest in the locale and look for added value for the long term. That means access to raw materials, an educated work force, easy distribution of goods and a local market. The cheapest labor on the planet is in Haiti. No factories there to speak of. You know why? No source for raw materials and civil unrest completely cancels out the labor advantage. The labor pool is uneducated so there's no value added. Viet Nam, now there's a market waiting to be exploited. Fairly educated work force, decent exchange rate, lots of raw materials and easy distribution to all the markets that need what you have to sell. People who are afraid of China today just need to relax and wait a few years. It will take China a hundred years to get to where we were 20 years ago.

[Andras Nagy]

And the Vietnamese speak French, the most civilized language in the world.

Or so the French claim!!!!!

[hytem]

The crap will hit the fan sooner or later here. When Asian goods start climbing in price, you'll see inflation here start to climb--and steeply. Cheap Asian goods have been offseting higher service and energy costs here for a long time. You can't keep a lid on production costs over there forever, especially with environmental restrictions coming into play. And we are especially vulnerable with the weak dollar and a big budget deficit. We can't print money fast enough to pay for foreign oil and Asian imports.