Hope is still alive for manufacturing
- By Chris Leung
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E-mail Shanghai Daily, February 10, 2014
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[Photo:Shanghai Daily] |
![[Photo:Shanghai Daily]](http://images.china.cn/attachement/jpg/site1007/20140210/001ec949c22b1462a52311.jpg "[Photo:Shanghai Daily]")
Rising labor costs and the strengthening yuan are prompting overseas investors to seek alternatives to manufacturing in China. In China’s biggest export markets, the United States and the European Union, China’s market share began to fall for the first time in 2011. China has lost a little import market share in labor intensive manufactured goods, particularly textiles, fibers and clothing. However, a clear trend has yet to be formed. Meanwhile, China continues to move up the value-added chain. It’s not the end for Chinese manufacturing.
Are emerging markets in Asia gaining market share at China’s expense? For all their cost advantages, Bangladesh and Cambodia’s market shares in both the US in EU are very low and seemingly stagnant. It will likely take years before these countries can achieve the level of vertical integration that China has established over the past 20 years. As long as their supply chains are not fully developed, extra transport costs would be required to transport raw materials or semi-finished goods from China into these countries.
Moreover, there are serious concerns about these countries’ safety records and political stability. Global brands may reconsider expansion plans in these regions or even scale down existing operations, lest events tarnish their reputation. Claims that Bangladesh and Cambodia could replace China Ñ even if in low value-added manufacturing Ñ seem farfetched for now.
Vietnam may be a threat to China’s manufacturing as it is gaining market share in both the US and the EU. However, its import market share is still low. Unlike Cambodia and Bangladesh, which focus on low valued-added manufacturing, Vietnam is increasing its share of high-tech manufacturing as well.
Foreign investors are adopting a “China plus one” strategy to diversify their production bases as China’s labor costs rise. One example is Intel, which opened a US$1 billion chip and assembly facility in Vietnam in 2010, the biggest for the company at that time. Samsung, LG and Nokia have also been building manufacturing bases in Vietnam. In the textile and garment space, Japan’s UNIQLO has cut its share of production in China to 70 percent in 2012 from 90 percent in 2008, with the ultimate aim of having one-third of its production outside China. It also has production facilities in Vietnam.
Further, Vietnam is one of the 12 countries undergoing US-led TPP (Trans-Pacific Partnership) negotiations. Should a deal be settled, the TPP would benefit Vietnam greatly in terms of tariff concessions and favorable treatment by partnership members. Presently, typical tariffs on apparel from Vietnam to the US are 5-20 percent, but could drop to 0 percent under TPP. Some manufacturers in China have already moved or will consider moving to Vietnam to capture potential opportunities there. China, for now, remains outside the TPP.
If China only had low value-added manufacturing, the threat from other countries would be much greater. But China’s manufacturing is no longer confined to low value-added goods. Tougher conditions for manufacturers have induced positive shifts while the yuan’s appreciation and wage increase have deterred entrants into labor intensive segments.
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