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 user 2008-02-25 at 2:12:00 pm Views: 35
  • #20972

    China losing competitive edge
    China – The teddy bears selling for $1.40 in Shanghai’s IKEA store
    might 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 long has
    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 Associati“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.
    instance, American toy makers, who rely heavily on Chinese factories,
    expect prices to increase 5 percent to 10 percent 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 such as 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 percent 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,” said 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 percent to 15 percent a year.

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