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CommentInsight & Opinion

China's growing market the new selling point for multinationals

Dan Steinbock says that while some multinationals are reconsidering their operations in China, many more are staying - with an eye on the country's growing consumer market

PUBLISHED : Wednesday, 12 December, 2012, 12:00am
UPDATED : Wednesday, 12 December, 2012, 2:19am

Multinational companies are reassessing their operations in China, where costs are climbing, and in emerging Asia, which still offers significant cost advantages. The realities, however, are more complex.

Media reports say rising labour costs and cheaper US energy are driving some companies back to the United States. The fast-rising cost of living in the mainland's international cities, such as Beijing and Shanghai, is also contributing to decisions by multinational corporations and their expats to change location.

Over the past five years, I have participated in several conferences which have highlighted these issues. As yet, there has been no such massive production shift.

Three decades of rapid growth have had an impact on Chinese wage levels. Nonetheless, international indicators at least suggest that, in Beijing and Shanghai, these levels remain some 20per cent of the benchmark level in New York City.

Times may be changing, but not in the way the public debate presumes. First, there is nothing new in the shifts of manufacturing locations across the world. Take two very different examples: textiles and electronics manufacturing.

Recently, a blaze outside Bangladesh's capital killed 112 workers. And that was only the latest site in the race to the bottom in the textile business. The new global supply chain comes with a combination of ultra-low labour costs, maximum flexibility and delegated authority that offer undeniable advantages - and considerable risk.

Historically, the conditions at the Tazreen Fashions factory, on the outskirts of Dhaka, were not that different from those at the Triangle shirtwaist factory in New York City, where an infamous fire caused 146 deaths a century ago.

In the postwar era, textile manufacturing in the US was concentrated on the east coast. Rising prosperity, however, translated to rising costs, which caused the business to migrate to the non-unionised south. As business boomed, costs again began to climb, so assembly plants were simply taken across the border, to the Mexican manufacturing operations in maquiladoras, or free trade zones.

As Japanese companies began to shift their productive capacity to Asia's tiger economies - Hong Kong, Singapore, South Korea and Taiwan - many American firms opted for Asian locations - until the reform era in China.

Since making clothes requires relatively low-skilled labour and equipment, the production capacity is highly susceptible to location hopping. But parallels abound across industries.

In modern electronics manufacturing, globalisation took off in the 1980s, when costs began to soar in the US. The transfer of manufacturing to China took off after 2001, when it joined the World Trade Organisation. While the transfer of manufacturing capacity started with assembly plants, it is now spreading to research and development.

In just three decades, the "Made in Japan" labels gave way to those of the tiger economies and then to "Made in China". The new twist in the industrial migration narrative is the relative shift of growth and prosperity levels in China and emerging Southeast Asia.

The shift of industries from mainland China to Vietnam, Indonesia, Thailand and elsewhere in emerging Asia has been driven by labour-intensive manufacturing, especially in textiles and clothing. Typically, it is reflected by export growth, which has been stronger in Vietnam than in China through much of the past five years.

Among investors, it is seen in the sustained rallies of Southeast Asia's stock markets over the same time period.

However, the idea that emerging Asia is now or will soon replace China as the new "world factory" is overly ambitious.

First, many multinational companies do seek mainly low-cost advantages, but not all - and, in effect, it's a shrinking minority. If anything, the commitment of foreign multinationals to China may be increasing. As early as 2009, a study by the American Chamber of Commerce in Shanghai and Booz & Company suggested that sourcing-oriented motives for setting up operations had become relatively minor relative to the dual motives to source and sell in China, which now characterise the great majority of foreign multinationals.

Second, while costs have increased in China's more prosperous megacities, many foreign multinationals have transferred their productive capacity inland and to the west, which now offers the kind of preferential treatment that once characterised the special economic zones.

Third, when productive capacity does move away from the mainland, the hard reality is that emerging Asia is not another China. Most importantly, it cannot offer the kind of huge scale and scope and the associated infrastructure that the Chinese business environment provides.

Fourth, industrial migration may not occur as disruptively as some observers presume. Chinese prosperity in 2001 was already higher than that in most of emerging Asia. In a decade, the gap has deepened. This provides a new window of opportunity to emerging Asia, but also to emerging Latin America, which hopes to replicate the catch-up growth in Mexico and Brazil. Even if these countries offer less in terms of cost or infrastructure, they may offer more in terms of lower transport expenditure than Asian sites. Emerging Asia can offer lower relative cost and diversification advantages. However, China can offer cost, scale and infrastructure benefits.

The bottom line is that industrial migration from the prosperous pockets of China to emerging Asia has begun. But this shift will be characterised by mainly low-cost efficiencies. It will typify some but not all multinationals. Nor will it offer the kind of scale and scope that remains available in "emerging China". Most importantly, the new strategy of foreign multinationals to both produce and sell in China will complicate any simple location decisions.

Dr Dan Steinbock is research director of international business at the India, China and America Institute (US), and a visiting fellow at the Shanghai Institutes for International Studies and at the EU Centre in Singapore

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