November 2010 Archives

Low labour costs have been a crucial element of China's low cost country sourcing advantage. Yet in the course of this year a series of strikes and labour shortages in China have to some observers heralded the end of the era of 'cheap' China. Salary increases have supposedly become common in China's manufacturing sector - high-profile increases at firms like Hon Hai and Foxconn have been prominent examples of this. (For more detailed analysis on these developments this year, see this article by the Wall Street Journal's Andrew Batson and Norihiko Shirouzo).

Looking over the course of the 2000s, however, it is clear that China's labour costs have crept up marginally, yet as they are rising from such a low base they are still vastly in arrears of labour costs in developed countries: 

Labour costs.pngYet if we compare China's labour costs over the same period with other developing countries, China's advantage is still perceptible, yet it no longer has a singular advantage:

Labour costs2.png
Over the course of the decade, China's labour costs have gradually eclipsed those of Vietnam and Indonesia, yet it is still below those of countries like Mexico, Brazil and Hungary. The next ten years, however, might very well see China catching up with these countries.    
   
During 2007, a landmark change occurred in China: inland cities started to grow faster than the coastal cities. The global financial crisis further enhanced this trend when it struck China's coastal exporting centres, and economic data for Q3 2010 further solidified the picture: growth in eastern China reached 15.6%, while central China achieved 18.9%. 

In a new report by the Economist Intelligence Unit (EIU) (check here for access) entitled CHAMPS: China's Fastest-growing Cities, the EIU identified the CHAMPS - China's fastest-growing cities who all have one thing in common: rapid increases in population, income and infrastructure development. The report lists China's 20 fastest-growing cities, all of which (with one exception: Xiamen) are located inland, with strong representation by Anhui (5 cities) and Henan (5 cities). 
    
The business opportunities in these inland cities represent a whole new frontier, as their populations are expected to increase by nearly one-third and incomes will grow by more than threefold in the space of a decade. With a long period of strong growth lying ahead, businesses will need to plan for long-term growth opportunities and patterns of urbanisation and growth increasingly driven by the inland cities.   
China is now the world's leading exporting nation, yet how has its exporting profile changed over time? 

China Export Growth.png
Collecting the cumulative annual growth rate and share of total exports in the period 1992-2008, with the bubble size representing the value of exports in 2008, the chart above illustrates just how China has moved up the value chain since the early 1990s. This is evident in the rapid growth of machinery and electronic exports, which are way out in front in terms of annual growth and as a share of total exports. Low value added commodities like apparel, toys and games, and footwear, on the other hand, have inversely grown sluggishly. Interestingly, however, exports of rubber, aluminium, ship structures and autos have grown at annual rates in excess of 20%, yet have been overshadowed as a share of total exports by machinery and electronics.