Production costs are rising when doing business in China
Production Challenge
At a press conference today detailing the results of the two reports, HKTDC Deputy Chief Economist Pansy Yau said Hong Kong manufacturers operating on the mainland are facing increased wages, rapid rises in raw materials and energy prices, inflation and increased pressure for the renminbi to appreciate.
“These are eating into their thin margins,” said Ms Yau. “Nevertheless, the mainland’s share of manufactured exports in world trade continues to increase, from 4.7 per cent in 2000 to 12.7 per cent in 2008. It shows that the mainland’s competitiveness as a production base is not due to price alone.”
Ms Yau said that while buyers were sourcing more goods from such emerging Asian production bases as Vietnam, India, Bangladesh, Indonesia and Cambodia, where labour costs are lower, the trend does not pose a significant threat to mainland exports.
“China’s well-established industrial clusters, highly efficient and skilled labour force and infrastructure systems are able to offset the disadvantage of rising costs,” she said.
Rising Costs
The HKTDC survey found that, because of increased export orders, more than half of the Hong Kong manufacturers operating in the Pearl River Delta (PRD) experienced a labour shortage in the first half of 2010. To retain skilled labour, wage levels in the PRD increased by an average of about 17 per cent over the last six months, a rise in total production costs of four per cent to six per cent.
Another challenge was an increase in retail prices of gasoline and diesel fuel, which rose 4.1 per cent and 4.5 per cent respectively in April 2010. Those figures were up 28.7 per cent and 29.5 per cent respectively from the end of 2008.
Further indications came from the mainland’s producer price index (PPI), which reversed a declining trend in December 2009, posting positive growth that accelerated to 6.8 per cent in April 2010. In addition, the Economist Commodity-Price Index revealed that general metal prices at the end of April were up by more than 120 per cent compared to their lowest levels at the end of February 2009. Prices of copper, aluminium alloy, cotton and pulp also rose.
Local Content, Renminbi Pressure
The HKTDC survey also found that the local content, or portion of production costs settled in renminbi, has increased from an average of 30 per cent a few years ago to 48.9 per cent for Hong Kong companies producing on the mainland. A rising Chinese currency poses a major challenge for them.
Ms Yau said that while the market expects only a gradual renminbi appreciation of three per cent to five per cent in the coming year, the marked increase in local content means that even a five per cent rise in the currency’s value against the US dollar would translate into a 2.5 per cent rise in production costs.
Cost Transfer, Continued Competitiveness
The survey also found that some Hong Kong manufacturers were able to pass rising production costs along to buyers overseas. The mainland’s export price index, after declining throughout 2009, recorded a positive increase in March this year. The decline of US import prices from the mainland has also slowed sharply in recent months.
Despite rising production costs, the mainland’s share of manufactured exports in world trade continues to increase. The figure rose from 4.7 per cent in 2000 to 12.7 per cent in 2008, which emphasises that the competitiveness of the mainland as a production base is not linked to prices alone.
That competitiveness is also reflected in the second HKTDC survey, which compared suppliers on the mainland and those in the rest of Asia. The survey, also released today, examined how emerging Asian production bases are supplementing the mainland in terms of supplying labour-intensive goods, and how the region is evolving into a network of suppliers.
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