China is transitioning away from being the world's discount
manufacturer. But it will have to loosen its currency even more to
avoid the pitfalls of development.
China is responsible for about 20 percent of total global
manufacturing and the ubiquitous "Made in China" label can be found
on an astonishing array of products. But its days as the world's
discount manufacturer may be coming to an end. This weekend's
loosening of controls on China's currency is the latest sign of the
transformation under way.
China is moving inexorably up the value chain. It boasts some of
the most advanced manufacturing firms in the world. As the level of
factory and worker sophistication has grown, so have salary
expectations. And the pool of workers once thought inexhaustible is,
in fact, proving to be limited. Throw in higher fuel prices to ship
its good overseas and it's clear that the factors that tilted in
China's favor during its dramatic first phase of development are now
tilting away from it in its second phase.
While this might help North America's beleaguered manufacturing
sector eventually, at this point it appears other emerging nations
are reaping the main benefits from the change in China. Over the
past few years, for example, several US toy companies have turned to
Vietnam and Indonesia to produce more of their products. Auto parts
manufacturers have likewise increased their presence in India where
a thriving auto industry continues to build momentum. Even Foxconn,
the manufacturing giant that makes products for Dell and Apple, is
in the process of expanding its operations in India and Vietnam.
These moves will come at the expense of plants the Taiwan-based firm
has contracted in China.
The shift is understandable. Chinese wages are going up - and
will continue to go up by 19 percent a year, according to a report
from Credit Suisse Group AG. That's explosive growth that's almost
double the expected rate of growth in the economy. As a result,
Credit Suisse forecasts, wages - which stood at 50.5 percent of
China's gross domestic product in 2010 should rise to 62 percent of
GDP by 2015.
That's not necessarily bad for China. Richer Chinese will buy
more Chinese goods. Credit Suisse expects private consumption, which
accounted for 35.6 percent of GDP last year, to reach nearly 42
percent by 2015.
Another reason wages are rising is that the pool of workers is
shrinking and companies are having to compete for skilled workers.
The old model of factory owners having the upper hand over migrant
workers fleeing rural poverty and willing to take on any task at any
wage is disappearing. The advantage is slowly turning to the worker.
That, too, is good for China. Employers are being forced to
address some of the horrendous working conditions much of the
workforce has been forced to endure. …