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China factories slowly climbing the value chain

Posted to Far East Maritime (by on June 8, 2011

Upgrade and automate is the message resonating among manufacturers, and the sooner the better.

It may seem we harp on about China’s changing manufacturing industry, but that's because of its direct impact on export ocean cargo and the import of raw materials.

All the stuff we consume has to be made somewhere, and the mainland has pretty much cornered the manufacturing market.

But rapidly rising costs in production centres such as the Pearl River and Yangtze River deltas is threatening many factories with closure. Thousands have already shut down, unable or unwilling to adapt labour intensive business models to mitigate rising operating costs.

And the costs are hefty. Minimum wages in Guangdong Province, home to the PRD, are expected to rise 20 percent a year for the next five years. At a large factory of around 50,000 workers, that will increase the payroll by more than US$1.5 million a year, a large chunk when you are making low cost goods with wafer thin margins.

Other price pressures are coming from tighter controls on pollution, increasing raw materials costs, the elimination of tariffs on Chinese exports and the rising value of the yuan. Not to mention regular power cuts.

In the past, factory owners’ responses to peak season surges in orders was to throw workers at the assembly line to increase production. A shortage of labour and rising wages make this solution a costly one.

Beijing has taken an unsympathetic approach to the cacophony of complaints coming from manufacturers as it tries to force factories to move up the value chain. Low cost products for export are some of the worst polluting goods made on the mainland.

The cost pressures are proving effective, either forcing factories unwilling to adapt inland or out of business (or even out of the country to Vietnam or Bangladesh). Factories are finding that the cost of installing equipment to automate repetitive functions is cheaper than having hundreds of workers lining assembly lines.

This greatly improves productivity, and at a time when labour is in such chronic short supply, the automation is not heightening social tensions by putting thousands of people out of work.

So even though much of the low cost manufacturing is moving inland, the major manufacturing regions like the Pearl River and Yangtze River deltas will be able to maintain or even boost productivity by embracing new methods and upgrading products.

Better quality goods and a rapidy developing domestic consumer market will allow the growth of the economic regions to be maintained.

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