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The Decline of China's Manufacturing Sector

Over the years, China’s unstoppable economic growth has been largely attributed to the strength of its manufacturing sector and the rapid advances achieved by the country technologically. Many factors like cheap labor, good quality infrastructure and the huge size of the domestic market have made the country one of the…

Over the years, China’s unstoppable economic growth has been largely attributed to the strength of its manufacturing sector and the rapid advances achieved by the country technologically. Many factors like cheap labor, good quality infrastructure and the huge size of the domestic market have made the country one of the most attractive places in the world to invest. This has resulted in foreign investment inflows into the manufacturing sector of the country that will exceed $70 billion in 2005 and economic growth rates of more than 10% on an annualized basis (1). However, things are set to change with a growing number of firms realizing that from the standpoint of costs, country risks and the customer base, China may no longer be the best place in Asia to invest.

Manufacturing’s slow decline

In the last decade, China’s share of the world’s exported goods has been growing exponentially and in 2005 it became the world’s third largest exporter of goods and services behind Germany and the US (2). In stark contrast, most members of the G-8 group of rich nations saw their shares of world exports and global production fall during the comparable time period. However, the trend seems to be slowly but steadily changing. In other parts of Asia, manufacturing and exports are also growing rapidly with South Korea, Taiwan, India and the Association of South-East Asian Nations (ASEAN) increasing their share of global manufacturing from less than 7% to more than 9% in the decade leading up to 2003 (3). In fact, many new factories are being set-up in other regions of Asia as increasing numbers of companies and foreign investors seek to diversify their country risks and minimize their costs of production. Experts believe that there are several flaws in the current Chinese manufacturing model. These include highly fragmented domestic markets, industrial growth being concentrated in certain pockets, firms, and sectors and the wide-spread prevalence of small, underutilized and poorly-managed firms (4). There is also a serious shortage of skilled workers in the country that results in massive poaching among rival companies and huge wage increases being offered to workers. This growth in wages is only partially offset by the gains in productivity achieved by the factory workers and has therefore led to a huge problem with wage-inflation in the domestic economy.

Other nations seize the opportunity

This situation has created an enormous opportunity for the rest of Asia to become manufacturing hubs like China. Foreign companies are not just driven to minimize their costs, but also to diversify the risks of being overly dependent on a particular country to meet their production requirements. Many foreign managers are also concerned with the current political situation in China and the growing social unrest among the populations of the economically backward rural regions of the country. In recent years, there have been strong measures taken by the United States and the European Union to make China more accountable for its World Trade Organization obligations. This has created some fears among foreign investors and companies that this might disrupt the current trade system. Meanwhile, factories are being set up in other low-cost Asian countries like Cambodia, Vietnam, the Philippines, Singapore and Malaysia as part of the diversification objective. China also suffers from another setback, the lack of protection for intellectual property rights. This has prompted several firms to move to countries like India where the intellectual property rights environment is much better than in China (5). The rising value of the yuan in recent months is another factor which has diminished the competitiveness of China as a manufacturing hub.

The road ahead

Despite these challenges, several factors remain in China’s favor as far as the attractiveness of its manufacturing sector is concerned. The country has a highly vibrant middle class prevalent in the big cities, has achieved consistently high growth rates over the years and has developed highly integrated supply chains (6). It also possesses quality transport facilities and infrastructure which are perhaps unparalleled in many other competing nations in Asia. In fact, the biggest reason why the Indian manufacturing sector has not progressed as much as China’s is that the country is saddled with huge problems like inadequate infrastructure, a poor law and order situation, a corrupt and tardy bureaucracy, complex tax laws and archaic labor laws (7). However, countries like India and Singapore, with their highly educated, skilled workforce are slowly but steadily catching up. India, in particular has a population of over a billion people and its domestic economy has grown by leaps and bounds in recent times. As the governments of these nations develop their economies even further by taking several steps to strengthen the physical infrastructure and integrate more effectively with the global markets, the mantle of ‘manufacturing hub of the world’ may soon pass on to the next best contender in the race to the top. (811 words)

Source: www.asiaecon.org |



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