China losing industrial cost advantage: US academic

Thursday, May 26, 2011
Issue 1316, Page 4
Word count: 652
Published in: Macau Daily Times

By Poyi (Natalie) Leung

The soaring costs on the mainland have prompted foreign companies to look for the “next China,” relocating their factories to other countries such as Vietnam and Bangladesh, said a US veteran international business academic and consultant on Tuesday.

Speaking to the Macau Daily Times on the sidelines of a seminar at the University of St. Joseph (USJ), Stephen Rudman said China’s role in world trade is shifting and the cost structure in the nation has also changed significantly.

The visiting scholar who has extensive experience in international business and management was invited by USJ to discuss ‘Changes in world trade and the effects on China’.

Thanks to industrial development, China is forced to import more and more food and raw materials to support its domestic consumption, Rudman said.

China’s policy of tying the value of its currency to that of its major trading partner, the US, used to be a “great benefit”. Yet, due to the current decline in the US Dollar, the business consultant said “China is paying more and more for imports of materials and food [from other countries]”.

“Other nations such as India and Indonesia are also competing for the same raw materials and food. So the cost structure in China has changed very much,” added the author of the book ‘The Multinational Corporation in China’.

Call for high-value exports

At the same time the American academic said China’s exports face increasing regulatory obstacles in foreign markets, while demand for Chinese exports may also be diminishing in developed countries.

Furthermore, Rudman pointed out that mainland China no longer offers substantial cost advantage to companies.

“Wages are rising in China very fast and land has also become increasingly expensive. Multinational and major Chinese companies have had to move further into the interior [of China] to find low-cost land and low-cost labour, which is not available in the coastal cities anymore,” he said.

Global interest rates, which have been very low since 1985, are now climbing as well, he said.

“Land, labour and capital are becoming more expensive in China, such as in the Pearl River Delta, where thousands of factories were closed and went to Vietnam or Bangladesh. Everyone looks for the next China,” Rudman added.

He believes that China must be involved in world trade to be able to buy raw materials and other resources for domestic consumption that the country can no longer produce.

“But, in order to do that, it will have to concentrate on exports of high value-added products and also in investing on foreign countries, establishing factories and acquiring foreign companies,” he added.

Expanding domestic market

The second wave of globalisation which began in 1945 and continues today is characterised by computers linked by the Internet (information technology) and containerisation (logistics) that have produced even “more radical changes” than the first wave of globalisation that took place between 1830 and 1910, he said.

“The interaction between the Internet – which enables information to travel worldwide – and containerisation allowed products to be designed anywhere, components manufactured anywhere and the final product assembled anywhere,” Rudman said.

According to the visiting scholar, Chinese legislation such as the Anti-monopoly Law that came into effect on August 1, 2008, has hindered direct foreign investment in China.

When they first came to China in the 1990s, foreign companies were already interested in “manufacturing and selling in the Chinese domestic market”. But now that interest has soared, he said.

“The export focus only came because foreign companies really didn’t understand that in the 1990s there was no domestic demand for the kind of products that they have. You couldn’t sell a Mercedes-Benz or BMW in China in the 1990s because the infrastructure to repair and maintain it wasn’t there,” the business professional pointed out.

Yet, he believed that those companies would now be able to achieve that goal as the domestic market is growing in a China that is “becoming wealthier”.

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