Articles / Rubric: Global

The Chinese Dragon Is Not Giving Up
December - January 2014 | Global

Recently there has been a lot of talk about China losing its competitive edge, and that many large manufacturing companies intend to shift their facilities elsewhere – to India, Pakistan, Vietnam, Bangladesh, and even Russia. In short, where costs are lower. But the statistics show that it is not so simple.

Almost all experts agree that there is no direct financial rationale for pulling production out of China. Although the cost of Chinese labor, traditionally considered the country?s most important competitive advantage, has increased, production is even more expensive in most other countries. Furthermore, China?s official policy is now much more focused on stimulating domestic consumption. True, China no longer wants to be "the workshop of the world," capable of producing everything from pencils to steel. The Chinese are concentrating on industries that offer the potential for high added value – especially electronics and mechanical engineering.

However, it would be shortsighted to think that Chinese manufacturers are simply surrendering their positions in light industry. Imagine for a moment that China were to issue a series of directives that prohibit or to some extent severely restrict foreign production in the country. Then what? Millions of Chinese would be left without work, which would have extremely serious social consequences in the very short term. Nobody would dispute that the social situation in China is very tense. China does not like sudden disruptions, and the current leadership is unlikely to allow a retreat from its hard-won positions vis-a-vis foreign producers and investors.

China is eliminating administrative barriers and removing restrictions on foreign investors, setting up preferential economic zones where foreign companies are given special conditions. For example, take the cost of production in Shanghai and Guangzhou, where the input of foreign capital is growing. The Chinese government is responding by creating new incentives for investors in the eastern part of the country. As a result, at the beginning of 2013, the Japanese company Panasonic announced that it would be shifting the assembly of plasma TV screens from Shanghai to Shandong province.

As an illustration, take a few figures: According to the Chinese Commerce Ministry, for the first three quarters of 2013, China attracted $88.6 billion in foreign investment, which is 6.2% more than in the same period the previous year. The figures increased in each of the previous eight months, with the investment growth in September amounting to 5% ($ 8.84 billion). From January to September, investments in 10 Asian countries, as well as the United States and the 28 countries of the EU, rose by 7.5%, 21%, and 23%, respectively. Therefore, it is safe to say that China will remain an attractive market for foreign manufacturers for a long time to come, especially since we have not yet seen any mass withdrawal of production from the country. So it makes no sense to write off the Chinese dragon.

Text: Yevgeny Kolesov, CEO of Optim Consult, Guangzhou

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