IS CHINA LOSING IT’S COMPETITIVE EDGE ?

[Anonymous]

China losing competitive edge
SHANGHAI,
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.
For
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.
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.“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.” 

[Author]

February 25, 2008 at 2:12 PM