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Rising Production Costs on Mainland a Challenge
for Hong Kong Manufacturers
HKTDC Reports Also Find Chinese Production Bases Still Rated Highest in Asia

3 June 2010 – Rising production costs on the Chinese mainland are eating into thin profit margins for Hong Kong companies, but manufacturing bases there continue to be ranked as more competitive than other supply regions in Asia, according to two research reports released today by the Hong Kong Trade Development Council (HKTDC). 

The two reports, “Mounting Price Pressure on China Exports” and “The Competitive Supply Chain: China v Arising Asia,” examine how production costs are rising on the mainland, and compare the competitiveness of Chinese manufacturers and Asian suppliers. 

Production Challenge
At a press conference today detailing the results of the two reports, HKTDC Deputy Chief Economist Pansy Yau said Hong Kong manufacturers operating on the mainland are facing increased wages, rapid rises in raw materials and energy prices, inflation and increased pressure for the renminbi to appreciate. 

“These are eating into their thin margins,” said Ms Yau. “Nevertheless, the mainland’s share of manufactured exports in world trade continues to increase, from 4.7 per cent in 2000 to 12.7 per cent in 2008. It shows that the mainland’s competitiveness as a production base is not due to price alone.” 

Ms Yau said that while buyers were sourcing more goods from such emerging Asian production bases as Vietnam, India, Bangladesh, Indonesia and Cambodia, where labour costs are lower, the trend does not pose a significant threat to mainland exports. 

“China’s well-established industrial clusters, highly efficient and skilled labour force and infrastructure systems are able to offset the disadvantage of rising costs,” she said. 

Rising Costs
The HKTDC survey found that, because of increased export orders, more than half of the Hong Kong manufacturers operating in the Pearl River Delta (PRD) experienced a labour shortage in the first half of 2010. To retain skilled labour, wage levels in the PRD increased by an average of about 17 per cent over the last six months, a rise in total production costs of four per cent to six per cent. 

Another challenge was an increase in retail prices of gasoline and diesel fuel, which rose 4.1 per cent and 4.5 per cent respectively in April 2010. Those figures were up 28.7 per cent and 29.5 per cent respectively from the end of 2008. 

Further indications came from the mainland’s producer price index (PPI), which reversed a declining trend in December 2009, posting positive growth that accelerated to 6.8 per cent in April 2010. In addition, the Economist Commodity-Price Index revealed that general metal prices at the end of April were up by more than 120 per cent compared to their lowest levels at the end of February 2009. Prices of copper, aluminium alloy, cotton and pulp also rose. 

Local Content, Renminbi Pressure
The HKTDC survey also found that the local content, or portion of production costs settled in renminbi, has increased from an average of 30 per cent a few years ago to 48.9 per cent for Hong Kong companies producing on the mainland. A rising Chinese currency poses a major challenge for them. 

Ms Yau said that while the market expects only a gradual renminbi appreciation of three per cent to five per cent in the coming year, the marked increase in local content means that even a five per cent rise in the currency’s value against the US dollar would translate into a 2.5 per cent rise in production costs. 

Cost Transfer, Continued Competitiveness
The survey also found that some Hong Kong manufacturers were able to pass rising production costs along to buyers overseas. The mainland’s export price index, after declining throughout 2009, recorded a positive increase in March this year. The decline of US import prices from the mainland has also slowed sharply in recent months. 

Despite rising production costs, the mainland’s share of manufactured exports in world trade continues to increase. The figure rose from 4.7 per cent in 2000 to 12.7 per cent in 2008, which emphasises that the competitiveness of the mainland as a production base is not linked to prices alone. 

That competitiveness is also reflected in the second HKTDC survey, which compared suppliers on the mainland and those in the rest of Asia. The survey, also released today, examined how emerging Asian production bases are supplementing the mainland in terms of supplying labour-intensive goods, and how the region is evolving into a network of suppliers. 

Asian Production Bases
The survey found that rising production costs on the mainland have overseas buyers rethinking their sourcing strategy and considering the purchase of more labour-intensive goods from Asian suppliers with lower labour costs. Vietnam exports mostly garments, furniture and footwear to the United States, taking up 63 per cent of all US imports from Vietnam in 2009. More than 90 per cent of US imports from Cambodia and Bangladesh were garments. 

But while exports from some emerging Asian production bases are growing, their relative share in world trade lags far behind that of the mainland. Vietnam’s exports to the US and EU, for example, grew 18.8 per cent and 9.3 per cent respectively between 2006 and 2009, but its share in those markets was still only 0.9 per cent.   

Surging production costs on the mainland have also pushed manufacturers to restructure their production arrangements to take advantage of relatively low labour costs in the mainland’s inland regions and in other Asian countries to produce mass market and lower-priced items. Production of higher value-added and more sophisticated items, however, remains in the PRD region. 

More than Price
HKTDC Senior Economist Billy Wong said China’s competitiveness as a production base remains strong despite the rise in production costs. “The average output per mainland worker is significantly higher than that of Vietnam, Bangladesh and Cambodia,” he said. 

“Manufacturers on the mainland also benefit from well-developed industrial clusters, where upstream supplies can easily be sourced and essential services such as freight forwarding and lab testing are available,” he added. “This not only boosts efficiency, but also shortens delivery lead time.” 

Mr Wong noted that garment and shoe-manufacturers in Vietnam import most of their raw materials from the mainland so, in a sense, Vietnam’s rising garment exports also benefit the mainland’s exports of textiles to Vietnam. He said the mainland’s upstream production also works together with other emerging Asian production bases that have low-cost labour to form a network of production for overseas markets. 

Mainland Remains Competitive
The HKTDC survey also asked manufacturers to rate the competitiveness of various production bases, and found that the top five regions were all on the mainland. The PRD and the Yangtze River Delta scored the highest, followed by regions in Guangdong Province outside the PRD and inland provinces near Guangdong and the Bohai region. Among those planning to set up new factories in the next three years, 46 per cent still chose the PRD compared to 6.2 per cent who said they were considering Vietnam.

Respondents rated labour costs and supply as the most important factors in determining the competitiveness of a production base. Although at a disadvantage in such areas as labour skills and productivity, as well as the availability of product development and design services, the PRD still ranked much higher than Vietnam.

Mr Wong said it is obvious that the mainland’s well-established industrial clusters, highly efficient labour force and infrastructure systems are able to offset the disadvantage of rising costs. While the production of some labour-intensive and price-sensitive items may be relocating to other Asian production bases, there is no substitute large enough to compare with the mainland in the near term, he added. As far as production of higher value-added and sophisticated products, the mainland’s advantages in quality, productivity and research and development will help safeguard its position in the global supply chain.

Media Enquiries
Please contact the HKTDC's Corporate Communication Department:

Joe Kainz
Tel: (852) 2584 4216
Email: joe.kainz@hktdc.org

About the HKTDC
A statutory body established in 1966, the Hong Kong Trade Development Council (HKTDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. With more than 40 global offices, including 11 on the Chinese mainland, the HKTDC promotes Hong Kong as a platform for doing business with China and throughout Asia. The HKTDC also organises trade fairs and business missions to connect companies with opportunities in Hong Kong and on the mainland, while providing information via trade publications, research reports and online. For more information, please visit: www.hktdc.com.




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