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Rising costs squeeze Chinese factories

SHANGHAI – THE teddy bears selling for US$1.40 (S$1.97) in Shanghai’s Ikea store may be just about the cheapest in town, but they are not made in China: They are 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 Ms 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 to 60,000 Hong Kong-run factories could close in the next few months, said Ms Polly Ko of the Economic and Trade Office in Guangdong, which is next to Hong Kong.‘Wages are rising, and materials cost more. Overall, costs are definitely higher,’ said Mr Duncan Du, general manager of Shenzhen Oriental e-Tecs, an electronics maker in the southern city of Shenzhen.To adapt, many multinational manufacturers, including Intel, iPod-maker Hon Hai Technology Group and Japanese companies like Canon and Sony, 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 moved 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 consumers outside China are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.Chinese inflation, meanwhile, has risen to its highest in more than 11 years, jumping 7.1 per cent last month, as snowstorms worsened food shortages. The biggest price hikes have been for food, but longer-term pressures on prices for manufactured goods will persist with prices for plastics and other materials climbing 30 per cent or more, analysts say. Source: ASSOCIATED PRESS (The Straits Times 23 Feb 08)

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