• Thu
  • Dec 25, 2014
  • Updated: 6:24pm
BusinessChina Business

China losing status as 'world's factory'

Companies are increasingly moving their production bases to developing countries, especially Africa, lured by an abundant and cheap workforce

PUBLISHED : Monday, 03 February, 2014, 4:11am
UPDATED : Monday, 03 February, 2014, 6:16am

China's status as the world's factory is facing a spirited challenge by would-be contenders for the crown in low-end production from rivals near and far, especially in fast-growing Africa. Now, even high-end manufacturing is moving out, with the United States added to the list of countries squeezing China's production base.

Hong Kong manufacturers, under margin pressure and mindful of Africa's growing appeal, are thinking about taking a long shot to invest in some countries in the continent, including Rwanda and Ethiopia, lured by an abundant and cheap workforce. Africa has become increasingly popular for a roster of global brands, including H&M, Tesco and Walmart, to source low-end, mostly non-urgent products.

At the other end of the scale, Hon Hai Precision Industry, the flagship unit of Foxconn Technology, drew attention when it announced plans recently to build advanced facilities in the US. The maker of Apple's iPhones and iPads is looking to expand in its largest market.

Analysts said the firm's move was aimed to meet growing demand for US-made products and offset damaging publicity from a series of suicides by workers in some of its mainland factories.

While Hon Hai's US plans have grabbed the headlines, the biggest threat to China's manufacturing sector comes from developing countries keen to tout an edge in cheap labour, against the backdrop of rising wages and worker shortages on the mainland.

Lin Yifu, a former chief economist at the World Bank, has urged mainland manufacturers to move labour-intensive factories to Africa. The young labour force of the continent's one billion population was similar to China's profile in the 1980s, said Li, who is now vice-chairman of the All-China Federation of Industry & Commerce.

Stanley Lau Chin-ho, chairman of the Federation of Hong Kong Industries, looks to Africa's labour advantages. "The salary in Africa is about US$50 per month now, which I expect will continue to be very competitive in the next 10 years," he said.

Shenzhen authorities recently announced yet another rise in the minimum wage, by 13 per cent to 1,808 yuan (HK$2,297) a month. The increase, which came into effect on Saturday, would set the pace for other cities in the Pearl River Delta, Lau said.

Africa's growing attractiveness is also coming at the expense of Vietnam, Cambodia and Bangladesh, which had been viewed as the preferred alternatives to China for production lines.

Average wages in Bangladesh had risen 50 to 70 per cent a year over the past two years, said Co Mei-ling, vice-president of Ying Ming Enterprise, a Hong Kong-based underwear manufacturer that set up production lines in Bangladesh almost 10 years ago.

"I am thinking about moving to African countries as the competitive edge in Bangladesh is also diminishing," Co said.


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As for the second problem, it goes without saying that China has to start protecting forcefully all the intellectual property rights (patents, copyright, franchise, trademarks, industrial design rights, trade secrets, trade dress, and so on).
No one should cheat.
Remember, China’s own intellectual property rights may be stolen or infringed by the foreign countries as well.
To solve the first problem, China can imitate Germany's famous Apprenticeship Programs --- perhaps the best worker-training system in the world.
But the labour contract in China has to be revised as well --- after receiving the training the workers cannot switch to another factory or company (with paying a high compensation) in the first five years (say).
Of course this kind of contract gives us an impression of slavery.
But freedom also comes at a cost.
If you are free to quit anytime you like, only a foolish employer will give good training to you.
(I think, as the freest economy in the world, Hong Kong can’t avoid having some workers who are not well trained by their employers.)
In China, the workers are also protected by the minimum wage law.
While moving low value-added industry inland to preserve China's low-cost advantage on the global market and preventing losing market share to economies with cheaper labour costs, Beijing also wants to foster a few strategic industries and hopes to turn the richer coastal areas into high-tech hubs.
But there are two problems at least.
First, trained workers are required.
Training rural workers to do sophisticated tasks overnight is much more difficult than requiring them to produce toys or to assemble iphones.
Second, it's not easy to grab market share from the high-tech manufacturers in the US, Japan and Germany.
Right now, the country can't even produce enough dairy products trusted by her own people.
And high-technology transfer from the foreign countries is hindered by China's traditional disregard for intellectual property rights.
The protection of intellectual property rights was not explicitly stressed by China's new leaders.
(Adapted from 'The American Phoenix')
That’s why China has to successfully move up the value chain, by climbing up the value-added ladder backed by technology innovation and transfer, in the process of transiting to a sustainable domestic consumption-driven model backed by high technology, from a low value-added export-oriented manufacturing kingdom.
Or the middle-income trap is the pitfall waiting for China --- she can’t compete successfully both at the upper and lower end of the value chain.
Instead of becoming the United States she’ll become the next Latin America.
(From ‘Strategic Priorities’)
One way out for China is to encourage the Chinese manufacturers to move further west, to Xinjiang and Tibet. The goods can be exported to the west through the Eurasian railway.
If you don’t believe that China is too big in size, go to Xinjiang, and you’ll change your view.
Once as a tourist, I got on a train (at night) which kept on running in the Taklamakan Desert all night while I was sleeping. When I woke up the next morning and looked outside, I was still inside the desert!
I think China is even bigger than the United States.
Tian Shan in Xinjiang is a must see. Go there at least once (in summer) before you die --- the highest compliment that can be given to a tourist spot, I think.
By relocating the factories there, we’ll have more and more Han people living in these two places, and Beijing’s sovereignty of these two regions will be much more secured than now --- those ethnic Uyghur and Tibetan people will become a tiny portion of the whole population there.
But obviously the journey to the west has its limit --- the territories west of China’s westernmost boundary are no longer China’s.


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