China's IT manufacturing hub status safe

Asian giant remains key manufacturing hotspot despite rising wage costs, currency appreciation, and competition from rival markets due to country's move up the manufacturing ladder, watchers note.
Written by Liau Yun Qing, Contributor

China will remain an integral manufacturing destination for many tech companies despite growing wage costs and a strengthening yuan. However, its edge will not be on low-cost, labor-intensive work but on high-end manufacturing requiring higher-skilled workers, observers note.

Leon Perera, CEO of Spire Research & Consulting, said China is still the predominant IT manufacturing hub for global exports and companies such as Apple, Hewlett-Packard, Lenovo, and Acer continue to undertake a huge volume of their manufacturing in the country.

This is because the Asian giant's nimble, scalable supporting industries, as well as companies' legacy investments in production lines and equipping of the local workforce, are elements that are hard to replicate overnight, Perera noted.

That said, China's position can and will be challenged, he said. Currently, manufacturers adopt a "China plus one" strategy for their regional and global manufacturing capacity, but this could change to "China plus two" in the mid-term.

In the long run, though, China could see its standing be downplayed to being just one of four main manufacturing hubs for companies. This would mean them having one factory in North America and Europe time zones, with another two in Asia, in order to manage their volume of products and avoid over-concentration in Asia, he explained.

Clement Zhang, country manager of China for industrial component distributor RS Components, added the country's manufacturing industry has been facing challenges due to the increasing cost of operations which has led to companies exploring other low-cost manufacturing hotspots in the region. Those who do move away from China tend to be on the low end of the manufacturing scale though, he qualified.

Perera said wage inflation in coastal cities, and the lag in infrastructure and connectivity development within inland cities are big factors for companies choosing to move their manufacturing operations out of China.

"Municipal governments like Beijing, Tianjin, and Shenzhen have raised the minimum wage very recently, [which is] a huge problem facing foreign multinational corporations in China now. But this is localized to specific areas such as Shanghai and the surrounding regions," he added.

Other longstanding issues such as the country's less-than-stringent intellectual property protection regime, as well as the rising value of the yuan against the weakening euro or U.S. greenback are driving companies to look beyond China for manufacturing, he said.

India, Vietnam viable competitors
Asked which other regional markets could usurp China's manufacturing hub title, Perera identified India and Vietnam as potential candidates. He did qualify that while India has the potential to overtake China in 10 years' time, it is unlikely to do so as the relationship will be complementary.

"India will probably complement China, with more strength in certain product categories that are more IP-intensive such as smartphones," he said.

Vietnam, too, has attracted a great deal of IT investments from companies such as Intel and Canon. However, it does not have the size or skill base to compete with China in the way India has, Perera noted.

Move to high-end manufacturing
Zhang pointed out the loss of low-end manufacturing projects may not be consequential in the long run. This is because in its latest five-year plan, the Chinese government has implemented incentives to push the local industry toward high-end manufacturing. As such, the focus would now be on improving technology and equipping the local workers to handle higher-end machinery, he said.

"There are of course other places which are more cost-competitive than China, seeing as how the low-cost model is easy to replicate. However, China's technology and local talent pool is fast becoming a strong competitive advantage and this is something that is less easy to replicate," the RS Components executive said.

This move up the manufacturing scale has helped the electronics distributor offset the impact of shrinking demand from low-end manufacturers, he added.

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