Rising Costs Eroding China'S Competitive Edge

At the IKEA store in Shanghai, the $1.4 teddy bear may be the cheapest in the city, but they are not made in China, but are made and stuffed in Indonesia.

This fluffy Brown toy reflects a new change in China: its huge economy has long caused the manufacturing cost of some products to be the lowest in the world, but as factories are squeezed by the rising cost of energy, materials and labor, it is now losing its cheap ground.

These costs, coupled with higher tax rates and stricter labor laws and environmental standards, are prompting some manufacturers to turn to cheaper markets such as Vietnam, Indonesia and India.

The cost is rising all the way, so that 3 / 4 of the enterprises surveyed by the American Chamber of Commerce in Shanghai think China is losing its competitive edge.

Higher costs mean that Western consumers will pay higher prices for the purchase of iPod, televisions, vests and many other imported products made by Chinese subcontractors.

"Americans also want to continue to buy bargains."

Kevin Burke, chairman of the American clothing and Footwear Association, said, "they are accustomed to shop during the Christmas season and buy something cheaper than the previous year."

But that may not be the case now.

For example, American toy manufacturers heavily dependent on Chinese manufacturers estimate that commodity prices will rise by 5 to 10% in the holiday season in 2008, mainly due to rising production costs.

In China, the rise in costs is nationwide, but the most serious is in the south. It is estimated that there are about 1.4 factories in Hongkong that may be closed in the next few months.

In order to adapt to the new situation, many multinational enterprises are expanding their business in Vietnam.

Auto parts manufacturers are also moving to the Middle East and Eastern Europe, and textile companies are moving to Bangladesh and India.

Jonathan Wurtzel, one of the authors of Operation China, said it would be the last choice for many companies to evacuate China, especially those aimed at the potential big markets in China.

He said, "that is the same thing, and there are still many opportunities to reduce costs.

What we are seeing is extending the supply chain to inland China, such as establishing final assembly lines in inland areas.

In inland China, wages are still far below the wealthier southeastern coastal areas.

But Jonathan Anderson, economist at UBS, believes that despite these strategies, the price of Chinese products will probably continue to rise in the next few years.

"In the medium term, where should we invest in building factories?

Maybe it's not China anymore.

It could be Bangladesh, Vietnam, Indonesia or India. "