I have not written any blog for a long time as the recent economic and business developments are more political driven. There are no shortage on reports and news about the apprehension and acrimony that many have felt about China on her rise to economic and military power.

The unexpected high rate of inflation, high increase on labor cost and never ending inflating housing bubble also lead us to believe that China is losing out the world factory status to other emerging countries such as India, Vietnam, Indonesia, etc. Many Chinese and foreign owned factories are moving out of China to these countries to stay competitive. So, has China lost her cost competitive advantage?

It all depends at which angle you are looking at. If you are referring to apparels, shoes and household goods, you are probably right. However it is too early to write off these industries from China. The factories, which provide such merchandized goods and mainly located along the coast lines, are moving inland where the labor and infrastructure cost are at couple of years behind the coastal cities. They also brought with them the manufacturing know-how, management skills, customer base and product knowledge with them to these new locations. Many workers at these inland provinces have worked at the coastal cities before and are familiar with the skills and manufacturing processes. Foxconn redeploys many of its workers from the Guangzhou factories to the inland factories that are close to the workers hometown. Thus the last ten years of painstaking and horrific development on product safety and quality is not to be repeated again.

The less developed countries which offer much lower labor cost bear the same remembrance of China ten years ago. Thus you need to repeat the learning cycle and woes from the products newly produced there. Do the end consumers willing to encounter or tolerate same problems they have had with Chinese goods ten years ago?

Let me make an assumption here. We have a household item that cost $10 from China in early Jan 2010 before the onslaught of labor cost increase. It now costs $12 from the same factory or $10.50 from its inland subsidiary. The similar item from a less developed country could cost $9. If there is no quality or safety concern, I am sure most consumers will buy the $9 item. For needed quality on the product, the consumers will probably buy the $10.50 item. The factory that now sells the item at $12 will repackage it with improved design and quality or just simply branding it as a premium product.

Though the cost impact to Chinese manufacturers is great but not to the extent that diminishes her competitiveness and survival. The reduced export revenue actually turns out good as it forces the manufacturers to focus and meet the requirements of their fellow countrymen. That is why China is still able to maintain a remarkable GDP! The manufacturers have been ignoring the plight of the domestic demand for a long time and it is time to realize the “kings” are now residing in the same town.

It is too early to use the economic models of Japan, Korea, Taiwan, Hong Kong and Singapore to predict the outcome of China. Japan and the Asian “Four Dragons” had grown too rapidly with cost increase outpaced the competitiveness in a short time and forced the manufacturers to relocate the manufacturing base out of the country. China has a large land mass and population with the economic development so vastly different among the provinces. Shanghai and Beijing probably have the worse property bubble crisis than Japan but will not suffer the same scenario as China can spread out the risks across the country. If Shanghai is a country, she will encounter far worst fate than Japan. China has well developed coastal cities on par with the developed countries while still having some less developed inland provinces. She is like a miniature globe herself. That is why the pessimistic anticipation on the collapse of China economy due to the asset bubble burst will not happen imminently. If the economy does fail, it is probably caused by the inappropriate and unrealistic fiscal policies from the central government.

The reduced export revenue on cheap merchandized goods due to higher cost could spell relief to the central and foreign governments as it will alleviate the trade imbalance. There will be less pressure on pushing the yuan exchange rate further. However I suspect the relief is short live for the Western countries. The foreign buyers could not immediately replace the Chinese supplies with those from other emerging countries immediately and thus the higher priced Chinese goods will cause inflation. It will certainly cause nightmare to these governments. It will not resolve the unemployment crisis as there are probably very few factories in the country making similar products. It is no longer competitive for the well developed western countries to produce cheap merchandized goods. You need factories and farms to resolve high employment and not offices and banks. There are few workers in the high tech factories which are usually highly automated.

I am sensing a change in China factories. In the past with the abundance of cheap labor, many factories and service providers have low productivity in their operations. Not too long ago, you will probably have at least one waitress standing next to a dining table waiting for further instruction from the customers. Likewise in the factory, it is not unusual to find some workers standing idly on the production floor. Now you will find productivity has gone up in many places. Some restaurants are having radio frequency gadget for the customers to summon the waitress, production processes have been optimized to minimize labor wastage and many factories are automating their manufacturing operations. More tooling fixtures have been used to reduce labor. I have visited some factories in some remote areas and astonish to find sophisticated and high level automation in place. I am sure companies offering automation solutions are having soaring business now.

And you know what! This improved productivity will further enhance China competitiveness and product quality. Her competitors and foes will have sleepless night again!

    Posted on 29 Jan 2011