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With Rising Costs, Can China Keep its Competitive Edge?
Author:Portman    Released in:2011-09-10 04:06:17    Writing:【big】【middle】【small
China’s Maturing Economy Challenges Manufacturers

China’s manufacturers currently face many challenges to stay competitive. Chief among these challenges is the inflation of the Yuan, up 6.2% from September last year, thus increasing the cost of goods for foreign buyers. In addition, this inflation has sparked a government-planned minimum wage increase of 13% every year for the next five years (source: Business Spectator), meaning a higher per-unit cost for Chinese products across the board. This inflation has already driven some international buyers to countries like Bangladesh and India. Supporting this, Portman saw a 72% increase of ordered inspections in Bangladesh and India in Q3 2011 compared to the same period last year.

Despite Challenges, Figures Indicate Increased Demand for China Products

Even with these factors, figures from China’s manufacturing industry in Q3 indicate that demand for Chinese products continues to grow. China’s purchasing managers index (PMI), while down slightly in September at 49.4 from 50.9 in August, still suggests 12-13% annual growth by year’s end. Portman figures also saw a 27.5% increase in inspections ordered within China year-over-year in Q3 2011.

China’s Superior Supply Chain

To explain this paradox, it helps to consider that pulling out of China and switching sourcing operations to another Asian country is a tough trade-off, and buyers are as sensitive to lead time and product quality as they are to input costs.

In these two areas, China remains far ahead of its regional neighbors like Vietnam and Bangladesh, owing to a superior supply-chain infrastructure that was built over the past 30 years. To picture this structural gap, it helps to remember that China operates 8 of the 20 busiest container ports worldwide (9 if you include Kaohsiung port in Taiwan) – while all other Southeast Asian countries combined only operate 3. Additionally, China has a significantly larger industrial labor force of 227 million compared to that of India with 67 million and Bangladesh 22 million.

When it comes to quality, and despite challenges remaining for the ‘made-in-China’ brand, an interesting Portman figure shows that inspections are 23% more likely to fail inspection in Bangladesh and 16% in India versus China.

Labor Intensive Industries Most Impacted

Manual labor varies greatly by industry, and thus not all industries in China have been equally impacted by cost increases. Reflecting this, Portman saw a 20% decrease in Q3 in inspections performed in China on textiles, traditionally more labor-intensive, while hardline products, which allow for more automation in production, were up 20%. This goes far in explaining why Portman performed inspections in textile-dependent countries (Bangladesh and India) were still booming in Q3.

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