Global manufacturing set to drift

By Malini Hariharan

China’s status as factory for the world is under threat as rising costs of operating are startingto bite.

Estimates of wage cost hike this year range from 10% to 20%. And if higher prices of raw material such as cotton and plastics plus the appreciation of the yuan are factoried in, then there is every reason for companies to look at alternative production sites.

Chinese companies supplying products to major retail chains such as Wal-Mart have warned that export prices will rise by as much as 15% this year.

And US retailers are looking to raise prices in the coming months. Average apparel prices are projected to rise 10-12% in the second half of this year.

Exporters based in China are looking to move inland or overseas. But a move to the inner provinces of China is not easy as it involves building new supply chains and setting up a logistics infrastructure to efficiently move large volumes of end-products to ports.

So some companies are pursuing both options.

Take the case of Foxconn Technology, one of the largest suppliers of electronic parts to companies such as Apple and Sony, which is planning to gradually trim its 40,000 workforce in Shenzhen by a quarter. It will be moving inland and is also planning investments overseas.

Brazil’s president recently announced that Foxconn may invest up to $12bn over the next 5-6 years to expand production in the country. A company spokesman would only say that the company is giving “serious consideration” to further investment in Brazil. Foxconn already has five plants in the country and it joins other electronics manufacturers such as LG and Motorola that are looking to expand in Brazil.

In a report published earlier this year, Credit Suisse predicted that China’s labour issues would have a major impact on the “manufacturing outsourcing model” for the rest of the world.

China’s vast army of migrant labour that keeps its factories ticking has already started diminishing. And the country’s labour surplus is projected to disappear post 2014 as population growth is slowing down while demand for workers in the services sector grows. Wages are likely to rise by 20-30% annually for the next 3-4 years.

“It may take a decade for China to see its export competitiveness erode, but we have seen the beginning of this happening,” said Credit Suisse.

It’s time to start thinking about which country will be stepping into China’s shoes

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