Is the China Manufacturing Industry Losing its Competitive Edge?
September 26, 2011
The Confucian concept of Yin and Yang is a concept that the Chinese are not only comfortable with, but attempt to apply to their business, lives and society. The contradiction of equal forces and the pulling in two different directions balances one. China has not seen much balance since Deng Xiaoping’s open economy policy and the economy surged at such an unprecedented rate. OECD countries eager to take advantage of the low cost, low value production resources and buy direct from China jumped at the chance to take advantage of this and invest in China. Billions of dollars later, the same OECD countries that helped build China back up are fearing the rising inflation, appreciating RMB, increasing labor and input costs and are considering the necessary move to Vietnam, the Philippines, Bangladesh or ‘insert name of developing economy from long list of South East Asian countries.
It is possible that due to the million and one things wrong with the global economy – from the US to Greece, to Portugal – back over to unrest in Libya and then Japan’s continual natural disasters – economists are finding it easier to think along the same wave length of demise and destruction when considering China and its future trade. RBS’s top China economist Li Cui was quoted as saying that ‘evidence of China losing out is still absent.’ Stating that China has been remarkably adaptive to rising labor costs and a strengthening currency. So companies interested in China sourcing need not raise a white flag and retreat. The IMF predicts that due to a fall in the population Chinese workers will become more powerful and have more bargaining power by 2025 and therefore at this point wages may force FDI in this very specific low-value sector out of China.
Even during the GFC (Great Financial Crisis), China managed to maintain growth in an industry that typically operates off margins due to China’s movement up the value chain even in labor intensive industries. Experienced workers who are specialized in the manufacturing of a specific product and also the capitally equipped factories that have the capabilities to create complex products have been particularly resilient. Undeveloped economies like Vietnam and Bagladesh, who although have high and cheap labor armies, do not have the same technological standing that China has had after 30 years of strong and continuous Foreign Direct Investment, which, with a now record of reliability, is not likely to slow any time soon.
So don’t be fooled into thinking that China is over. China’s booming economy is not foreseen to just evaporate into thin air. China will face two important milestones for China’s export sector in 2011. First, developing countries or non-OECD members will take over as China’s primary export market. Second, domestic Chinese firms will overtake foreign-invested companies as the dominant exporters from China. The last five years have seen a trend, albeit slow, away from low-end, labor-intensive production towards high-end, technology and capital-intensive production in China. China manufacturers will move trade into more specialized, high tech sectors such as machinery, construction and transportation including railways, trains, and aviation and away from the low value sector.
Even if the products coming out of China in the next 10 to 20 years from now are different, rest assured there will still be billions of dollars worth of goods leaving China every year. It is fallacy to assume that the “made-in-China” label is in trouble.
- Kaitlyn Tregenza- CPG Marketing Intern