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China no more the source of cheapest goods

Rising costs hit its competitive edge, forcing some firms to relocate overseas

(SHANGHAI) The teddy bears selling for US$1.40 each in Shanghai’s Ikea store may be just about the cheapest in town, but they’re not made in China – they’re stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: its huge economy, which has long offered some of the world’s lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labour.

Those expenses, plus higher taxes and stricter enforcement of labour and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

‘It’s true that we are facing difficulties regarding increased costs in China,’ said Linda Xu, public relations manager in China for Swedish retailer Ikea.

Though the competition for lower prices is not new, ‘we are constantly having to compete with other countries and suppliers’, she said.

While costs in China are rising nationwide, the greatest pain is being felt in the south, where about 14,000 out of the 50,000-60,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbours Hong Kong.

‘Wages are rising, materials cost more. Overall, costs are definitely higher,’ says Duncan Du, general manager of Shenzhen Oriental e-Tecs Ltd, an electronics maker in the southern city of Shenzhen.

To adapt, many multinational manufacturers – including Intel Corp, iPod maker Hon Hai Technology Group and Japanese companies like Canon Inc and Sony Corp are expanding operations in Vietnam.

Car-parts makers are decamping for the Middle East and eastern Europe, and textile makers to Bangladesh and India.

Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China’s traditional export hub of Guangdong are closing or moving out.

As many as 300 of some 1,000 shoe factories in the Guangdong factory zone of Dongguan have closed down, according to a report by the China Light Industry Council. It said half of the shoe factories set up by Taiwan investors had already shifted production to Vietnam.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese sub-contractors.

‘Americans continue to want to buy at lower prices,’ said Kevin Burke, president and CEO of the American Apparel and Footwear Association. ‘They are used to going to the store during Christmas and getting something cheaper than a year ago.’

That’s no longer a sure thing.

Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer- term pressures on prices for manufactured goods will persist, analysts say.

Despite its huge pool of unskilled rural labourers, China’s supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 per cent to 15 per cent a year.

A new labour law requiring stronger employment contracts is expected to raise costs even more.

Source: AP (Business Times 23 Feb 08)

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