Five reasons for the rising cost of export manufacturing

According to the data released by the Ministry of Commerce recently, in 2012, the total value of China's foreign trade import and export was 3,866.76 billion US dollars, an increase of 6.2% over the previous year. Among them, exports were 2,049.83 billion US dollars, an increase of 7.9%; imports were 1,817.83 billion US dollars, an increase of 4.3%; none of them achieved the annual growth target of 10%. China's competitive advantage in exporting manufacturing appears to be disappearing.

The shortage of labor makes manufacturing enterprises afraid to take orders

According to the "Green Paper on Economic Information (2013)" jointly released by the State Information Center and the Social Science Literature Publishing House, the total labor force in China will reach 2013 by 2013. peak. Regarding the peak time, the forecasts of different institutions are slightly different. However, whether it is the "Twelfth Five-Year Plan for National Population Development" issued by the State Council, or the reports issued by the U.S. Census Bureau and the United Nations Population Office, they all believe that this time will appear during the "Twelfth Five-Year Plan" period, that is, 2011-2015.

The result of the shrinking labor force is labor shortage. For example, Liu Zhanhao, vice chairman of the Federation of Hong Kong Industries and chairman of the Pearl River Delta Industry Association, revealed that enterprises in Guangdong and Hong Kong are facing a new problem that the labor shortage is greater than the decline in orders. He analyzed: "The decrease in orders is much smaller than the labor gap. Hong Kong enterprises generally complain that it is difficult to employ labor. Although Hong Kong enterprises have reduced the amount of labor required by the reduction of orders, there is still a large gap in the supply of labor, and the reduction in labor is too great." Decreasing orders, coupled with labor shortage, the glory of enterprises in Guangdong and Hong Kong is no longer. According to data provided by Liu Zhanhao, at the peak in 2008, there were 8,000 Hong Kong enterprises in Dongguan, and now the number has dropped to 6,000. He believes that in addition to the reduction in the number of Hong Kong enterprises by 2,000, more Hong Kong enterprises have responded to the operating difficulties by reducing the scale of production.

This is especially true in factories that produce low-value goods, who are either unable or unwilling to pay higher wages. Employers often turn down orders from overseas buyers because they are worried that they will not be able to recruit enough people to complete the work on time.

Rapid rise in wages, loss of comparative advantage

Labor shortages lead to higher wages. According to data released by the Silk Road Association (SRA), the average monthly salary for manufacturing in China is currently between $200 and $550 (or even higher). Considering bonuses, marriage and other benefits, the actual monthly salary is likely to be higher.

This has led to wage levels in China already equal to or even significantly higher than those in neighboring countries. For example, monthly salary in Bangladesh is around US$55, Cambodia (US$100) and Vietnam (US$100) are also lower.

The introduction of a minimum wage by the Chinese government to reduce income disparities has also brought additional pressure. China's minimum wage has increased from $59 in 2000 to $166 in 2011.

To be fair, wages in China vary from place to place. Minimum wages in coastal provinces ($187) are 30 percent higher than those in the west ($143). The gaps between cities are even wider, with the minimum wage in Shenzhen in 2011 of US$234, compared to an average of US$203 in the rest of Guangdong province.

Pay pressure is clear and growing, whether from the market or government policy.

Rising exchange rates eat into the profits of exporting companies

The yuan has appreciated 22% in the past five years, faster than 13 other Asian currencies, affecting China's competitiveness. The renminbi has appreciated even more than China's other low-cost rivals. For example, the renminbi appreciation rate is 44% higher than in Bangladesh, Cambodia, India, Laos and Vietnam, which has important implications from a total cost perspective.

Although the nominal exchange rate of the RMB against the U.S. dollar has stabilized at around 6.22 to the U.S. dollar, the profit margin eroded by the exchange rate is so large that it will take a long time for exporters to truly adapt.

The meager profit margin even makes export enterprises need to rely on export tax rebates to survive. According to the data released by the Ministry of Finance, the annual tax rebate in 2012 reached 1 trillion yuan, and the comprehensive tax rebate rate reached 12.9%.

The high cost of land in the east has forced enterprises to relocate inland

China's export production is mainly concentrated in the eastern coastal areas, especially in three provinces - Guangdong, Zhejiang and Jiangsu, which account for 60% of the country's exports. The over-concentration of industries in the eastern region has led to increased competition for land. And due to the rapid progress of urbanization in China, land prices have also risen sharply.

Rising land prices are just one reason for the overall rise in manufacturing costs in China. Relocating factories farther from coastal ports means higher shipping costs and longer supply chains. Considering the high cost of overall logistics and transportation in China, the cost of lengthening the supply chain can erode the benefits of factory relocation.

Financing hunger exacerbates industry difficulties

China's banking system makes it difficult for the vast majority of small and medium-sized enterprises to obtain bank loans, as state-owned banks prefer to lend to well-known state-owned enterprises. In the “Small and Medium Enterprises Financing Survey” recently launched by the CEConline website, about 20% of small and medium-sized enterprise owners use “private financing channels” (including microfinance institutions, internal financing of enterprises, borrowing from natural persons, and P2P online lending platforms). , pawnshops, other private financing institutions, etc.) as the "main financing channel" of enterprises.

Due to the high risk and high financing cost of private financing, the interest rate is sometimes as high as 30%-100%. This is undoubtedly an unbearable burden for export manufacturing enterprises that are increasingly "low-profit".

In the past, businesses have preferred to invest their cash flow in capital equipment. But shrinking profits due to higher manufacturing costs means less cash is available, and many companies are more willing to put their money into speculative markets like real estate for a quick buck. Signs of "hollowing out" of manufacturing are emerging in some regions. The government has been calling for "transformation and upgrading of the manufacturing industry", but for many small and medium-sized export manufacturing enterprises, it is still a slogan.

(Extended reading: "CEConline" - Small and Medium Enterprise Financing Survey)