Has China Lost Its Low-Cost Eges

Workshop Code: AI

HAS CHINA LOST ITS LOW-COST EDGE? Global Trends in Supply Management Track

Laura Hodges

Director, Pricing and Purchasing Service

IHS Global Insight

Sunday, May 6, 2012, 3:30 - 4:45 p.m.

Why the Concern about China?

?Recent studies have suggested that China has or will lose its

low-cost status over the next 3 years

?Meanwhile buyers report that Chinese quality has just reached

their comfort level

?Should you be concerned?

?Labor costs are exploding but remain low and productivity is high

?The renminbi will continue to appreciate over the long-term

?No cost advantage for most material prices

?Shipping costs are at extremely low levels

?How should this impact your sourcing decisions?

?And are there other countries that you should consider?

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3

China’s Rising Profile in US Trade

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6

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20002001200220032004200520062007200820092010

China Canada Mexico Japan

Share of U.S. Nominal Merchandise Imports, By Country, %

Source: IMF Direction of Trade Statistics.

3 China Has Exploded Onto the Global Market ?Real GDP has grown by an average of 10.5% annually for the past decade driven by:

?Foreign direct investment – currently over $100 billion

?Exports – which have more than tripled in the past decade

?Government spending – which is up 19% annually since 2001

?However China is still waiting for the consumer to start spending ?Constrained by a high saving rate

?The government is hoping that higher wages will help

?China overtook the US as the world’s biggest car market in 2009, passed Germany as the largest exporter and surpassed Japan to become the second-biggest economy in 2010

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North America 27.1%Other Americas 6.3%Western Europe 25.2%Emerging Europe 6.4%Japan

8.7%Other Asia,

Pacific 20.5%Mideast, Africa 5.8%2010 US 22.9% China 9.4% India 2.7% The Chinese Economy Takes Over the Top Spot

2020

North America 20.1%

Other

Americas 7.1%

Western Europe

19.6%

Emerging

Europe 7.5%Japan 5.7%

Other Asia, Pacific

33.8%Mideast,

Africa

6.1%

US 16.9%

China 19.6%

India 5.5%

Share of world GDP , measured in nominal US dollars

5 6

China Also Plays A Larger Role In Supply Chains

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

20012002200320042005200620072008200920102011

Base Metals*Steel Cement

China as a Percentage of Global Production

*consumption

Yet, Overall Labor Costs Are Still Very Low

?The average Chinese manufacturing worker earns approximately $2.5 per hour

?This reflects a more than 12.5% annual growth over the past decade ?However wide disparity exists across the country and occupation ?Strong upward pressures on wages

?Productivity gains pushed 10% higher annually

?Minimum wages are rising by more than 20% annually in some provinces ?Inflation rising with higher food and energy costs

?Over the next decade, wages are expected to double and will grow another 15% in the next 3-5 years

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Minimum Wages Rise Strongly

- Minimum wage is approximately $1.40 / hour in Shenzhen - National requirements mandates at least a 13% rise through 2016 - Some western provinces have minimum wages still near 900 yuan per month

Monthly Minimum Wages by City and Province

Rank City Province Minimum

Wage (RMB)Date

1Shenzhen Guangdong 1500Feb 1, 2012

2Shanghai Shanghai 1450Apr 1, 2012

3Hangzhou Zhejiang 1310Apr 1, 2011

4Ningbo Zhejiang 1310Apr 1, 2011

5Tianjin Tianjin 1310Apr 1, 2012

6Guangzhou Guangdong 1300Mar 1, 2011

7Beijing Beijing 1260Jan 1, 2012

8Changzhou Jiangsu 1140Feb 1, 2011

9Nanjing Jiangsu 1140Feb 1, 2011

10Nantong Jiangsu 1140Feb 1, 20119

Productivity Gains Have Been Strong Too

10,000

20,000

30,000

40,000

50,000

2005200620072008200920102011

(Chinese output per employee, USD)

Productivity has almost doubled since 2005,

reducing the true impact of higher wages 10

No Chinese Advantage on Material Costs 020*******

800

1,0001,2001,400200220032004200520062007200820092010201120122013US E urope China Global Cold-Rolled Sheet Prices (USD per metric ton)0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

200220032004200520062007200820092010201120122013

US E urope Southeast Asia

Global Polypropylene Prices

(US$ per metric ton)

2,000

4,000

6,000

8,000

10,000

12,000

200220032004200520062007200820092010201120122013

US E urope China Global Copper Prices

(US$ per metric ton)

02004006008001,0001,2001,4001,6001,8002,000200220032004200520062007200820092010201120122013US E urope Southeast Asia Global Ethylene Prices (US$ per metric ton)11

Canadian Dollar Euro Japanese Yen Chinese Renminbi (Canadian dollars per US dollar, quarterly averages) (Euro per US dollar, quarterly averages) (Yen per US dollar, quarterly averages) (Yuan per US dollar, quarterly averages)

Continued RMB Appreciation

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…Over the Long -Term ?However, this year look for a pause

?Concerns over exporter’s margins and rising labor costs have pushed the government to ease the appreciation this year

?Renminbi has remained near 6.3 yuan / USD since November ?Once the Chinese and global economies are on better footing, the currency should resume its long-term appreciation ?Policy on exchange rates has been mixed

13 Shipping Rates Are Not A Concern

2,000

4,000

6,000

8,00010,00012,000

2003M12005M12007M12009M12011M1

(Baltic Dry Index, 1985=1000)

Abundant supply should

keep rates low for at least

the next three years 14

How Does this Impact China’s Cost Advantage? Cost ('000s)Share Payroll 5,412,79330.42% Production 3,880,98121.81% Management 1,531,8128.61%Energy 1,499,6728.43%Material 10,881,76561.15% Scrap 5,651,20231.76% Ferrous shapes & forms 2,560,41514.39% Sand 512,083 2.88% Industrial equipment 292,619 1.64% Nonmetallic products 292,619 1.64% Nonferrous shapes & forms 329,196 1.85% Other 1,261,9197.09%Production Costs 17,794,230100.00%Value of Shipments 27,100,17565.66%

US Production Costs for Steel Castings (Source: 2010 Annual Survey of Manufacturers)Assume material costs are roughly equal

The average Chinese manufacturing worker is only 40% as productive as the same US worker The average Chinese manufacturing wage is only 10% of the US wage Cost ('000s)Share

Payroll 1,353,1989.85% Production 970,2457.06% Management 382,953 2.79%Energy 1,499,67210.92%Material 10,881,76579.23% Scrap 5,651,20241.15% Ferrous shapes & forms 2,560,41518.64% Sand 512,083 3.73% Industrial equipment 292,619 2.13% Nonmetallic products 292,619 2.13% Nonferrous shapes & forms 329,196 2.40% Other 1,261,9199.19%Production Costs 13,734,635100.00%Chinese Production Costs for Steel Castings (Source: 2010 Annual Survey of Manufacturers)15 Cost Saving Still Exists But For How Long? ?Using this example, casting production costs in China are approximately 23% lower than those in the US

?Shipping costs, exchange rate appreciation, and supply chain risks do cut into these savings

?It still currently makes sense to source from China, but the margins are narrowing

?Over the next decade, Chinese wages are expected to move from 10% of US wages to 25%

?This is enough to make China uncompetitive for your basic manufactured goods 16

Lower-Cost Countries Are Available

0.00 5.0010.0015.0020.0025.0030.0035.0040.0045.0050.00

Norw ay

Germany Australia Netherlands Sw eden

Ireland

Canada Finland

France Japan

United Kingdom United States

Italy

Spain Israel Korea, South Argentina P ortugal

Czech Republic South Africa

Slovakia

Hungary Brazil

Taiw an

P oland Chile

Russia

Saudi Arabia Mexico

Malaysia

Romania Turkey

Ukraine

Venezuela China

P eru India Morocco P hilippines Thailand E gypt Indonesia Vietnam P

akistan

Global Manufacturing Wages (USD per hour, 2011)

Depending upon your

location, Indonesia, and

Mexico may be good alternative sourcing options

Indonesia Offers an Attractive Option

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4

6

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10

201020152020

China Indonesia Mexico

(Manufacturing w age, USD per hour)

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No Country is Without Risks

Mexico - Exporter Risk Rating - 10 (1-Year) / 23 (5-Year)

- A cumbersome bureaucracy and endemic corruption persists

- Increased violence from drug gangs and a clampdown on organised crime

- A labour surplus exists but shortage of technically skilled workers is a problem

- Renewed efforts to make labour laws more flexible but political resistance is strong

Indonesia - Exporter Risk Rating - 11 (1-Year) / 34 (5-Year)

- Endemic corruption, inefficient bureaucracy, and red tape are a challenge

- Reform on business regulations has slowed markedly over the last few years

- A 40-hour limit on the working week is comparative disadvantage

- Indonesia's labour force is under-educated

The Risk Scores represent a subjective probability of a range of business risks in a given

country, and the numbers range from 0 to 100, with lower numbers representing lower risk

The China risk score is currently 14 (1-Year) and 33 (5-Year)

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The Bottom Line

?China will retain its low-cost status over the next five years ?Labor was the primary advantage in China

?And those costs are rising along with the exchange rate

?Expect a pause this year for exchange rates but wages will grow 15% ?But China is approaching the end of its low-cost status

?For low-end, low-margin goods, start looking for alternative

low-cost countries (Indonesia) or ones closer to home (Mexico) ?For higher-quality goods, China is still an attractive option

?Be aware of the unique risks in each country

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Thank you

Laura Hodges

Director, Pricing and Purchasing Service

laura.hodges@https://www.wendangku.net/doc/d78802105.html,

Track 4: Global Trends

in Supply Management Sunday

AI 3:30 – 4:45 Has China Lost Its Low-Cost Edge?

Monday

Global Trends in Supply Management

BI 9:20 –

10:20

Tuesday

FI 3:00- 4:00 Managing a Global Supply Chain: The Cisco

Perspective

GI 4:15 – 5:15 Mastering the Effects of Globalization

Wednesday

HH 7:45 – 8:45 The Imperative of Supply Chain Flexibility in a

Volatile World