 |
|
|
The mainland’s share of garment and footwear exports to the US
and EU markets has decreased
(photo: EyePress)
|
|
Despite rising costs and the appreciation of the renminbi, manufacturers on the Chinese mainland are under immense pressure to stay profitable, while maintaining their export price competitiveness.
Since 2005, when the renminbi regime exchange-rate changed, to the end of last September, the currency has appreciated 23 per cent. Since 2009, wages have risen rapidly in tandem. In 2010, 30 provinces and municipal cities increased minimum wage levels by an average of 22.8 per cent. Last year, 18 provinces and municipal cities raised minimum wages by some 20 per cent.
The mainland’s export price index began climbing in May last year. Higher export prices can be palliative to manufacturers unable to absorb all cost increases for a sustained period. But given intense global competition, even a small shift in costs can lead to changes in the mainland’s competitiveness.
Changing competitive positions of lower value-added and labour-intensive products, including garments and footwear, are imminent. With textile quotas no longer an issue, United States and European Union importers now pay more attention to price and tariff savings. As a result, developing countries that still enjoy generalised system of preferences (GSP) status, such as Bangladesh and Cambodia, have become more popular sourcing markets for garments.
For other products with low profit margins, importers are also likely to shift their sourcing to alternative, low-cost countries; the mainland is no longer a beneficiary of the US GSP and is excluded from a large number of products under the EU’s GSP.
The mainland’s share of garments and footwear exports to US and EU markets decreased last year, while those of Vietnam, Bangladesh and Cambodia rose. Its share of garments and footwear exports to US and EU markets, meanwhile, dropped, while those of Vietnam, Bangladesh and Cambodia increased.
It’s reasonable to ask whether this is the beginning of the end of the “China price” story. The country is graduating out of the labour-intensive manufacturing industries that once outperformed all competitors because of its low-production costs.
Productivity Sparks Competitiveness
| |
 |
| |
The mainland is a leading production base for labour-intensive products, as well as a competitive exporter of high value-added electronics products
(photo: EyePress)
|
According to World Bank estimates, the growth in the mainland’s manufacturing wages was outpaced by labour productivity growth during the mid-1990s to mid-2000s. Consequently, its unit labour cost, which measures wage costs per unit of production, declined by close to 40 per cent cumulatively during the 1995 to 2004 period, before bottoming out from 2005 on.
Between 2005 and 2010, the average annual growth of labour productivity in the mainland’s manufacturing industry slowed to 8.9 per cent. But a more rapid rate of increase in wage levels has led to a rise in unit labour costs.
For the low value-added processing trades, it has become more difficult for labour productivity growth to catch up with wage growth and renminbi appreciation, leaving room for lower-wage countries to take over the mainland’s turf.
It’s worth noting that changes in the mainland’s unit labour costs are not the same across industries or industry segments. The unit labour cost is not a comprehensive measure of competitiveness. Efficiency in such areas as supply chain and product safety is a crucial factor for cross-country comparisons of competitiveness.
Despite rising unit labour costs and renminbi appreciation, the mainland’s share of manufactured exports in world trade continued to increase after 2005, and the country became the largest exporter in the world in 2009.
The mainland has proven itself a leading production base for labour-intensive products such as clothes, shoes and toys; it is also a competitive exporter of high value-added electronics products. Its export performance suggests that it still enjoys competitive advantages for labour-intensive manufacturing, while also capturing higher value-added work.
The New Exports
 |
|
|
China’s manufacturing workshop remains robust (photo: EyePress)
|
|
A feature of the mainland’s export model is the evolving change in product mix. In the 1990s, textiles, clothing and footwear represented 40 per cent of the mainland’s total exports. Since 2000, electronics have emerged as a new source of growth, in response to capital investment and faster productivity.
Similarly, other higher value-added industries such as machinery and transport equipment have grown faster than traditional labour-intensive industries.
The mainland’s electronics production doubled in value between 2004 and 2008, amid continued relocation of manufacturing processes from advanced countries. As a result, its share of world electronics production grew from 16.2 per cent in 2004 to 25.7 per cent in 2008.
As a global relocation destination for electronics producers, the mainland relies on its versatility. This includes its huge, inexpensive manual and technical labour force, competitive industry cluster and reliable supply chain. That has made the mainland the most competitive location for undertaking manufacturing processes for many IT, telecom and consumer electronics products.
The mainland’s electronics industry enjoys economies of scale, as well as economies of scope, because of its well-developed industry clusters. Upstream supplies include a wide range of parts and components, as well as ancillary items such as metal, plastics and electrical and packaging items, which can be easily sourced locally.
Essential support services such as freight forwarding and lab testing are also well-developed, enabling manufacturers and exporters to enhance efficiency and productivity. Along with the development of increasingly sophisticated electronics products and specialisation in the global supply chain, the mainland’s electronics industry has moved up the production value chain, assembling more sophisticated products such as mobile phones, notebooks and tablet computers. Electronics manufacturers are also expanding their manufacturing and assembly work of parts and components such as semiconductors. This is evident in the mainland’s rising share of computer and telecom equipment among its electronics exports from 2000 through 2010, while the share of consumer electronics, mostly audio-visual products such as TV sets and sound/video players, has fallen.
While clothing as a share of mainland exports dropped from 13 per cent in 2000 to 7.7 per cent in 2010, its absolute export value increased from US$32.3 billion to US$121.1 billion. This reflects mainland manufacturers’ increased productivity through technology. The result is improved vertical integration of the textile and garment industry in areas such as raw material supplies, R&D and human resources training.
As noted by a Hong Kong garment merchandiser, sourcing from Asia now involves Southeast Asian countries, which offer lower costs when supplying simple items in bulk orders. When looking for fashion items with sophisticated design, requiring higher skill levels and delivery in smaller batches with quick turnaround times, however, the mainland is still the choice.
Innovation and Upgrading
| |
 |
| |
Exports ready for delivery in Shenzhen’s Yantian port
(photo: EyePress)
|
In his book, The Competitive Advantage of Nations, Harvard University Business Professor Michael Porter said that the only meaningful concept of competitiveness at the national level is productivity. With productivity defined as the value of output produced by a unit of labour or capital, it would depend on the efficiency of production and the price the products can command.
On the mainland, productivity growth of low value-added products through short production chains may have declined, but for industries and industry segments that place stronger emphasis on such factors as efficient supply chain management, quality assurance and features enhancement, the country’s competitive advantage remains high, as evident in its still healthy export growth.
The ability to innovate and upgrade clearly determines productivity growth, helping to contain unit labour-cost-increases and renminbi appreciation in the long run. Under the 12th Five-Year Programme, China’s economic growth is expected to be driven more by domestic demand, particularly private consumption. And the mainland government is set to support export processing trade manufacturers in expanding their sales in the domestic market.
The mainland’s growing middle-class market is expected to enhance the economies of scale for domestic production, while creating an environment conducive for mainland manufacturers to invest in new technology and product innovation.
For more on international trade trends, please see the December issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.
