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Focus on global value chain ensures flow of FDI
Source: Agencies |
November 27, 2012, Tuesday
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Print Edition
Print Edition
CHINA'S soaring wages and strengthening currency might blunt the competitive edge of exporters that have seen average pay double since 2007, but it won't stop firms worldwide making a collective US$100 billion bet on setting up shop here this year.
Although foreign direct investment inflows in 2012 have seen the longest monthly run of year-on-year declines since 2009, hurt by a weak outlook for corporate investment and sagging global trade, FDI should still top US$100 billion for the third year running.
That would bring China's total since 2007 to about US$625 billion, based on data from United Nations agency, UNCTAD, during which time a rally in the yuan currency has sliced 25 percent from exporters' margins.
Vietnam, Bangladesh, Indonesia and Thailand combined managed to snag only US$141.6 billion in FDI between them from 2007 to 2011, despite being repeatedly touted as the places to which manufacturers fleeing China flock.
Value-added production
What keeps the money coming to China is a steady shift away from cheap assembly lines to high value-added production and from volatile external demand to the spending power of a new mainstream consumer class that analysts at McKinsey reckon will rise 10-fold between 2010 and 2020.
Indeed the decline of low-end manufacturing fits with China's ambition to drive firms up the global value chain to help sustain the wage rises vital to attaining developed economy status and avoiding a "middle income trap" of low wages and stagnating growth.
"It's so far not threatening to the competitiveness position of China because it's the very low-end of manufacturing sectors that are affected," Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong, said.
Under government guidance on foreign investment issued in December 2011, China aims to lure more FDI in advanced manufacturing, as well as services, including logistics, research and development, higher education and vocational training.
"The government policy no longer encourages FDI in the low-end manufacturing, only firms that are up in the global value chain can make profits," said Li Yushi, senior economist at the Commerce Ministry's think-tank - the Chinese Academy of International Trade and Economic Cooperation.
Extensive operations
That fact is recognized by the likes of Marjorie Yang, chairman of Hong Kong-based Esquel - the world's biggest maker of premium cotton shirts for the likes of Ralph Lauren, Tommy Hilfiger, Nike, J.Crew, Brooks Brothers, Hugo Boss, Lacoste, Bestseller and Muji - which has extensive operations across China.
"There is pressure on enterprises in China to transform from being cheap labor-driven to innovation-driven," Yang told a forum in Beijing last weekend, adding that rising wage costs had forced cost-cutting elsewhere in the business in response.
Some factories in the clothing and footwear industries have closed. German sportswear maker Adidas AG has shut its only directly-owned factory in China, but it still sources goods from local suppliers.
Supply chains and relatively sound infrastructure make China a stand-out destination for many foreign investors.
"A lot of our suppliers are in the immediate neighborhood, which cuts logistics and other costs," said Park Jong-ho, management director at LG Innotek in Yantai in eastern Shandong Province.
"If it were just a question of labor costs we should go to Southeast Asia. The reason to be here is not labor costs."
Although foreign direct investment inflows in 2012 have seen the longest monthly run of year-on-year declines since 2009, hurt by a weak outlook for corporate investment and sagging global trade, FDI should still top US$100 billion for the third year running.
That would bring China's total since 2007 to about US$625 billion, based on data from United Nations agency, UNCTAD, during which time a rally in the yuan currency has sliced 25 percent from exporters' margins.
Vietnam, Bangladesh, Indonesia and Thailand combined managed to snag only US$141.6 billion in FDI between them from 2007 to 2011, despite being repeatedly touted as the places to which manufacturers fleeing China flock.
Value-added production
What keeps the money coming to China is a steady shift away from cheap assembly lines to high value-added production and from volatile external demand to the spending power of a new mainstream consumer class that analysts at McKinsey reckon will rise 10-fold between 2010 and 2020.
Indeed the decline of low-end manufacturing fits with China's ambition to drive firms up the global value chain to help sustain the wage rises vital to attaining developed economy status and avoiding a "middle income trap" of low wages and stagnating growth.
"It's so far not threatening to the competitiveness position of China because it's the very low-end of manufacturing sectors that are affected," Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong, said.
Under government guidance on foreign investment issued in December 2011, China aims to lure more FDI in advanced manufacturing, as well as services, including logistics, research and development, higher education and vocational training.
"The government policy no longer encourages FDI in the low-end manufacturing, only firms that are up in the global value chain can make profits," said Li Yushi, senior economist at the Commerce Ministry's think-tank - the Chinese Academy of International Trade and Economic Cooperation.
Extensive operations
That fact is recognized by the likes of Marjorie Yang, chairman of Hong Kong-based Esquel - the world's biggest maker of premium cotton shirts for the likes of Ralph Lauren, Tommy Hilfiger, Nike, J.Crew, Brooks Brothers, Hugo Boss, Lacoste, Bestseller and Muji - which has extensive operations across China.
"There is pressure on enterprises in China to transform from being cheap labor-driven to innovation-driven," Yang told a forum in Beijing last weekend, adding that rising wage costs had forced cost-cutting elsewhere in the business in response.
Some factories in the clothing and footwear industries have closed. German sportswear maker Adidas AG has shut its only directly-owned factory in China, but it still sources goods from local suppliers.
Supply chains and relatively sound infrastructure make China a stand-out destination for many foreign investors.
"A lot of our suppliers are in the immediate neighborhood, which cuts logistics and other costs," said Park Jong-ho, management director at LG Innotek in Yantai in eastern Shandong Province.
"If it were just a question of labor costs we should go to Southeast Asia. The reason to be here is not labor costs."
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