Chinese supplier’s cost advantage pressure increase

“Chinese munufacturing plays an important role in worldwide manufacturing link. but it is only a ‘workshop’,far away from ‘ world plant’”. This was a representative view a few years ago from some entrepreneurs and experts and schorlars.But in the past two yeas,with many cost elements’ obvious changes, Chinese suppliers’ manufactuering cost are rising ceaselessly,while, China is facing keen competition pressure from southeast of Asia,which is the reason why China have difficulties in pacing from “workshop” towards “world plant”.

A few days ago , an U.S famous toy company twice recalled more tham 20,000,000 pcs made-in-China problem toys in a short time for quality and safety problems exsisting in the those made-in-China toys, which undoubtedly caused remendous blow towards ropey toy exports .Made-in-China toys account for 70% of world market.In the first half of this year, European Union, the United States established toys production new standard and Chinese Toy compulsory certification ,which cause Chinese toy cost increase rapidly.As a low-profit industry,toy manufacturing suffered from a barrage of “flying troubles”,which caused it facing  survival crisis. 

The same with toy industry , Textile industry is facing difficulties.Last September,Chinese government promulgate the adjustment of export drawback policy,making textile exports reduce 2%.Export drawback account for big proportion of a entrepreneur’s profit,the tax cut cause enterprise profit decline.Although recently European Union finally decided to cancel the clothing and textile importing quote towards China in 2008 ,however ,they are now confronting the problems of “Technical trade barriers”. In order to limit the clothing and textile products import,European Union early or later issued more than 10 new regulations.Those technical trade barriers made the textile and clothing industry confronting heavier pressure of cost and crisis.

If above two case are mainly about how overseas countries gave big blows towards our suppliers by practicing protective measures of anti-dumping, then the cost factors change happened in following domestic cases will produce more direct influences.

Raw materials prices and wages rise

Since 2004,Chinese suppliers obviously encounter the cost increasing presure and oil, steel coal and other raw meterials’s to rise in price considerablly ,which make disadvantageous manufacturers bedeviled.In the first half of 2006,raw meterials ,fuel and power purchase price rise 6.1%. In this year,the pressure of the rising price of raw materials is much more apparent.The purchase price indext which reflect the price of raw meterials rised up to 58.9%. Rising prices momentum of raw meterials is powerful. The unceasingly price rising of raw meterials lead to cost rising ,also deeply influenced those high purchase index industry,such as food processing and manufacturing industry with grain and cotton sideline as the raw meterials,beverage manufacturing industry, clothing shoes hat manufacturing and fur feather products industry,textile industry. As for suppliers,even if its sales increase,once the raw materials rise,is difficult to obtain profit.  

　

As is know to all,the huge cheap labourhood is the main cost advantage for Chinese suppliers ,especially for those labour extensive production enterprices. However,in the past 2 years, continuous upward minimum wage requirement brought lots of impact towards the cost control for these enterprises. Singly from 2006 to 2007,Beijing minimum wage rise from RMB640/Month to RMB730/M,Shanghai from RMB750/Month to RMB840/Month. Many provinces’ minimum wages standard are greatly raised. To increase the minimum wage standard will unavoidably trigger concerns of enterprise operation cost increase. 

Land price rise unceasingly

In the condition of sufficient land ,the government can provide enterprises with production and life land at low prices,while in land condition strained condition,the government have no choice but raise the price of production and life land.Then in the condition of land shortage,enterprise can only obtain the production and life land by market price.

With the increasingly strained land provision,the unceasingly rising price of real estate resulted in Yangtze River delta region manufacturing cost continue to rise.In the fist quarter of this year,Shanghai industrial restate price has been rising 8%,while instrial plant rent are then rose 5.1%.Due to the full implementation of policy of industrial land public bidding in the second quarter,Shanghai industrial land price has a quarter to quarter growth of 2.2%,reaching to RMB898.8/Month.Facing the similar problem of rising sharply land price in Shanghai,the delta region’s enterprises outsouced substantially and also the foreign direct investment growth rate reduced rapidly.

The continued appreciation of RMB

Since from the reform of RMB exchange system in July21,2005, influenced by dollar exchange rate weakness in international mrket,RMB exchange rate has being in the trend of uprinsing.Statistics show that the exchange rate,compared with 8.11,has risen 7.55%,while in this year,the RMB exchange rate has risen 3.55% within not more than 9 months, in another word ,in the light of invariable commodity price,the suppliers’ profit space narrowed 7.5%. This rise exceed the amplitude of last year. This figure influenced continuously towards export enterprises,especially medium and small ones.Then those enterprises export profit was squeezed, which weakened their international competitiveness. Up to now ,there are many enterprises,especially labour-extensive export enterprises who figure out it was unprofitable even a loss by exporting . The uncertainty from exchange rate change also lead to difficulties in obtaining order and production equipment idle .

The competitiveness pressure from south-east Asian areas

At present, in the outh-east Asian countries,China is facing fiece competition from Vietnam and India.In labour-extensive aspect ,Vietnam is China’s reality rival ,and Indian is considered as a China’s largest potential rival.Vietnam’s economic grew the second-fast,Only after China.In 2005,Vietnam’s manufacturing income has reached to GDP21%. More and more export enterprises are willing to take Vietnan as the second low-cost production base except China.

Vietnam’s wage rate is lower than China ,more and more investors convertes to Vietnam.Based on not only low cost,but risk-distribution consideration,Vietnam is really a ideal place and has long-term development potential in the area of labour-extensive manufaturing.However, the influence Vietnam towards China’s labour-extensive manufacturing transformation.is limited.Fistly ,there are not so many young workers in Vietnam and it is impossible for them to introduce labours abroad.So it is out of the question that many Chinese labour-extensive enterprise went to Vietnam for help.

India’s recent achievement in manufacturing area attacted worldwide attention.No one think India has passed China in this area ,but also no one doubt India’s potential of backwardness in the process of transforming to developing country in the munufacturing area. India has 10 billion population and the yougth proportion is bigger than China.       From the labourhood total amout requirment,India is the only able one to take charge of China to become a big labour-extensive manufacturing country. However,India’s manufacturing industry exist problems as weak foundation,low profeessional skills,deficient investment.Such persistent ailmenth has not been healed effectively and also cause Inadia’s manufacturing growth rate in recent 10 years(from 1995 till 2004) is still in a low level of 7%. However ,India has significant potential to raise manufacturing export,which can not be ignored by Chinese suppliers.

Apart from above,East Europe,Mexico and the Caribbean and some other regions also bring much competitiveness pressure to China. East Europe is becoming a new world electronical manufacturing center,whose manufacturing growth advantage is from low-labourhood,overseas investment increase and the production network development in that region. Mexico and Carribbean mainly export to U.S. and are free of custom tax. Mexico’s manufacturing ability is elevating rapidly and cooperates smoothly with U.S. and Canada industrial integration process,advantagous over China regarding to technology and geography.The Carribean enjoys  U.S preferential treatment of their Clothing,following China’s production tightly .Carribean has become an important clothing import origin.   

The Chinese manufacturing cost increase caused by raw materials ,wages and land is obvious . RMB appreciation,foreign anti-dumping measures and also with South-east Asia and regions’competition bring continuous pressure to Chinese Suppliers’cost advantages.However, Chinese suppliers’ advantages are still obvious,then how to search for sustainable development to solve the problem of cost rising is an important project to research for.As Chinese suppliers,how to deal with such uncontrolled factors:

1.       Need more to improve own core competitiveness.

2.       Develop hi-tech independently.

3.       Do not rely on OEM production.

4.       Cultivate more hi-tech talented.

5.       Elevate product’s international competitiveness.

In by way , can we retain our advantages and then stride forward to a higer stage.

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