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High-end manufacturing holds the key


Nation maintains edge in attracting investment despite challenges 

Two major developments that took place earlier this year are expected to have far-reaching implications for the global manufacturing sector, and particularly in China. At first glance, they appear to be rather innocuous economic predictions. But a closer look reveals that while the global manufacturing industry is tottering, China is still proving to be the lifeline for many global companies

The 2013 Global Manufacturing Competitiveness Index prepared by global professional service firm Deloitte Touche Tohmatsu Ltd and the United States Council on Competitiveness, released in January, indicates that China is not only the most competitive manufacturing nation in the world presently, but will continue to retain that position for the next five years

However, that does not mean that everything is hunky-dory in China, as its relatively strong manufacturing edifice is facing severe challenges such as a sharp decline in the absolute working-age population

Ma Jiantang, the National Bureau of Statistics chief, had indicated in January that although China's labor force had declined by 3.45 million last year to 937 million, it still continued to be the nation's "biggest resource advantage". 

Other risk factors for China include rising labor and land costs, the increasing competitiveness of other emerging markets, and a trend of relocating industries from developing countries to developed ones

However, the decline in China's working-age population is something that most economists would not have anticipated as it comes three years ahead of the previous predictions made by the World Bank. The country's demographic dividend - when the largest section of society is of working age and the dependency ratio is low - has contributed to more than 30 percent of its rapid economic growth, an earlier World Bank report said

In real terms, what the decline in working-age population means is that the endless supply of low-cost labor from China, which accounts for more than 11 percent of the world's exports, is no longer a reality, but a memory

Wu Yu, a manager at a Suzhou-based factory, is one of several Chinese businessmen who have been affected by recent developments. Labor shortage and rising labor costs are the main challenges for Wu's company, a unit of the Taiwan-based computer maker Pegatron Corp

Wu said that most of his employees were born after 1990 and work on average seven months before they seek fresh prospects with other companies

"These youngsters are more ambitious and have bigger dreams than their parents. They want to explore the world and leave the job when they find it boring," he said

"Like every other Chinese, they also want to own a house. But in Suzhou, that dream is almost impossible to realize. When they realize this, they are disappointed and often leave for a higher-paying job in other cities." 

Apprehensions are also growing in industry circles that the floating and shrinking labor force would soon become a grave threat to Chinese companies as they look to make rapid strides in global competitiveness

"A foreign diplomat recently told me that Chinese products are facing the same challenges that Japanese and South Korean products faced earlier from China. The only difference is that the competition is now from other Southeast Asian nations," said Zhou Shijian, a senior trade expert at Tsinghua University

The yuan's appreciation against the US dollar has also been bad for the competitiveness of Chinese products, Zhou said

"According to the research findings of a Japanese nonprofit trade institute, the average monthly wages for a worker in Guangzhou is 1,850 yuan ($295), while it is 752 yuan in Vietnam. With such a huge gap, China may find it difficult to compete with other Southeast Asian nations in low-end products," Zhou said

The 2013 Global Manufacturing Competitiveness Index, however, paints a totally different picture. Most of the 550 chief executive officers and senior leaders of global manufacturing companies, who participated in the survey, admitted that China remains the top destination for manufacturing, and will retain its top ranking for the next five years

Germany and the US were ranked second and third after China in manufacturing competitiveness. But both these nations could be replaced by India and Brazil over the next five years, the survey said

Meanwhile, members of the American Chamber of Commerce in South China expect their investment budgets to total more than $16.5 billion over the next three years, an increase of 40 percent on the previous three years. These companies in the region expressed strong confidence in the market and in China's economic reforms, according to a survey published on Feb 26 in Guangzhou

Ricky Tung, co-leader of the manufacturing industry group of Deloitte China, said the ratings suggest that China is now more of a developed economy competitor rather than an emerging economy player

"In addition to supportive policies, China still has relatively lower labor costs and is above average in the attractiveness of its corporate tax rates. With its focused efforts to localize supply chains and create innovation hubs, China is also seen by CEOs as the only emerging economy offering the same supplier network advantages as developed economies," Tung said

A closer look at how China has scored in each category of manufacturing competitiveness in this survey also indicates China's strengths and weaknesses. Among 38 countries, China ranked high in "cost and availability of labor and raw materials", "attractiveness of local market" and "government's investment in manufacturing and innovation". But China ranked low in "legal system" and "healthcare system". 

With labor costs, which is a grave concern domestically, the study shows China's average cost ($2.80 per hour) is lower than most manufacturing powers. By comparison, Brazil's labor cost is $12 per hour while in the US it is $35.40 per hour

Andrew Heath, director of the international marketing division of Shenyang Machine Tool Co Ltd, China's largest machine tool producer, said China's manufacturing strength lies more in its established supplier network

"Those who are talking about relocating units do not know the basics of business. It is not so easy to relocate these plants," he said. "We need to have natural resources. We have to purchase and have a supply chain. Since we have the huge market here, why would I even consider moving?" 

Tim Hanley, global leader of the Global Manufacturing Industry group of Deloitte Touche Tohmatsu, said that China is driving efforts to bolster advanced manufacturing knowledge and capabilities

"If China wants to climb up the pyramid of the manufacturing world, it has much to consider besides labor costs," he said

The best example is labor productivity, as Chinese workers generate just $14,200 worth of value per year, far below the global average of $33,000. By comparison, German workers generate $43,300 worth of value per year. In terms of innovation capacity, China has 1,071 researchers for every million population. The global average is 2,980, while Japan's is 7,038, the highest

China's poor performance in these areas has also led to a low score in "talent-driven innovation", which Deloitte said is a leading indicator of a country's competitiveness. China scored 5.89 in this category while Japan scored 8.14 and the US scored 8.94. 

Global CEOs also feel that China's trade, financial and tax environment is less competitive than that of US, Germany and Japan. Though China's corporate tax is slightly lower than the global average, many CEOs think the government's non-tax revenues are not included. Some experts say if all hidden costs were considered, China's tax burden would exceed 40 percent

In January, the French tire maker Michelin Group decided to invest $1.5 billion, its largest single investment in China, to open a factory in Shenyang, capital of Liaoning province

Asked if rising labor costs were a concern for the factory, Michelin's executives said China's huge market demand is "tempting" enough to offset the impact of a cost rise

"As one of Michelin Group's most important markets, we will meet the diversified demands of local consumers through our innovative technologies and products, especially in the high-performance sector," said Jean-Dominique Senard, president of Michelin Group

Michelin Group's Shenyang investment demonstrates how foreign manufacturers are still scrambling to enter the Chinese market despite rising labor costs

China overtook the US as the world's biggest car market in 2010. In 2012, China's automobile sales rose by 4.3 percent, the lowest growth in several years, amid slowing economic growth and restrictions on auto purchases

But not all manufacturers have the confidence that growing domestic demand will offset rising labor costs. A report by international accounting firm Grant Thornton in February revealed that 61 percent of the businesses in China cite shortage of general workers as their primary problem, while 55 percent cite a shortage of technical skills as a major concern

Li Huaying, owner of the Shanghai Litan job agency, said it is becoming increasingly difficult to fill the lower-paying positions, as workers' demands are higher than expectations

"It is becoming difficult for a company to hire an ordinary worker without any specific skills for a monthly salary of 2,000 yuan, as the salary is deemed to be unacceptable for migrant workers in Shanghai," Li said

Lu Ming, an economics professor with Shanghai Jiao Tong University, said that what worries him most is that the latest round of wage increases is the result of insufficient labor supply, rather than the result of productivity increases

"A healthy scenario is that people want to increase their salaries or find a job with stronger fulfillment so that they can go to colleges and get more training. This helps enhance skills and improve productivity," Lu said. "Currently, this does not seem to be the case in China." 

Zhou, however, said that higher labor costs are a good thing as they create pressure on Chinese manufacturers to improve their efficiency, upgrade their products and move up the value chain

"The truth is that you have to create more value, or else you will die." 

For foreign manufacturers who have a huge workforce, rising wages are not necessarily a lead sinker that would threaten their survival, if managed smartly, experts say

Tan Chow Khong, managing director of AMD Technologies' Suzhou plant and vice-president of the company's manufacturing operations, said his plant has seen the fastest growth in wages among all AMD operations around the world

"Wage rises and high employee turnout rate did put some pressure on us. But our business is a capital-intensive one and labor cost is showing an increasing trend, which must be offset with productivity gains," said Tan

Another trend that is slowly shaping among Chinese manufacturers is that many are now setting up offices and shops in developed markets. Communicating directly with local consumers helps them better understand their needs, while an increasing number of mergers and acquisitions have helped them gain access to advanced technology, management and marketing skills

When asked about the reason for moving his business overseas, Zhang Yu, vice-president of a Guangdong-based audio equipment maker who is now doing business in California, said: "Our sales rose in recent years, but profits dropped significantly. We'll die if we don't expand. We have no choice." (From China Daily)



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