[SCMP Column] Migrating manufacturing

July 23, 2018

One of the most common “back stories” to the trade war launched against China in the past month has been the suggestion that manufacturers currently exporting from the Mainland may be forced to shift production to other parts of Asia – or, if Trump has his way, back to the US.

Except it’s not going to happen.

Of course, any persistent editor will be able to track down an anecdote or two about companies shifting some production to Cambodia or Bangladesh. I personally recall pressure from my editors in London to provide such anecdotes, intended to give substance to the “story” about foreign companies struggling with rising China production costs, or wrestling with tariff restraints or multi-fibre agreement quotas.

Even today, it still seems common journalistic practice to begin with the conclusion you want, and then seek out an anecdote or two to “prove” the point. Whatever the wider truth, all you need is an anecdote or two, and you have your story.

So it is with the claim that manufacturers will move to other countries in Asia to duck and weave around US trade war tariffs. There are at least two clear-as-day reasons why such stories are false.

First, the huge majority of manufacturers based in China – whether local or foreign-owned – are not in China just for low prices.

And second, even if there were indeed manufacturers looking to shift to other countries, there are no countries with the size or the workforce to accommodate them.
To the first point, the brutal reality is that Beijing has for more than a decade been pressing to move away from the low-skill, low-value adding work that first brought foreign investors into the country. This began,  as soon as they realised that they had been “gifted” the worst paid jobs in the long and complex international value chains that had been created by multinationals to secure their international competitiveness.

From the introduction in 2004 of a nationwide minimum wage policy, average manufacturing wages have been lifted across the Mainland by an average of 11.4 per cent a year. A fascinating study by Jun Hou, Stephen Gelb and Linda Calabrese funded by the UK’s Overseas Development Institute, tracks how average annual wages in the textile, footwear, clothing and leather (TFCL) sector have risen from RMB12,500 in 2005 to RMB31,300 in 2015. Average incomes in the toy sector have risen similarly, to an average in 2015 of RMB27,000. These are hardly king’s ransoms, but they have squeezed out the immiserating lowest-skill work, forced introduction of high technology, and boosted productivity. Some hard-pressed companies have shifted to China’s cheaper interior. Few have moved offshore.

As Hou, Gelb and Calabrese note: “Wages are not the only factor to consider when manufacturing begins to migrate. Transport networks, ICT infrastructure, and host region industry capability are critical.” And then of course there is the small matter of access to China’s massive domestic market.

In short, export manufacturers based in China today have many reasons for being based where they are, and the most important have little to do with base-line cost. The imposition by the US of a 10-25 per cent tariff will undoubtedly be an irritant, but not the kind of irritant that would persuade a manufacturer to up sticks and move to a low-cost location elsewhere in Asia.

As to the second point, the stark reality is that if there were indeed manufacturers looking to shift to other countries, there are no countries with the size or the workforce to accommodate them. Ignorance and distance make it difficult for many in the US or Europe to get their heads around the simple size of China, and the implications of this size.

With a population of around 1.4bn, China has a workforce of over 770m, with over 30 per cent of these working in manufacturing – around 230m.Taking World Bank data, you quickly find that the largest of our Asian neighbours – Indonesia – has a workforce estimated at 125m, with just 15m of these in manufacturing. Vietnam (population 96m) has a total workforce of 53m, with just 10m in manufacturing. The Philippines (106m) has a workforce of 42m, with just 1m in manufacturing.

Taking account of their limited supplies of skilled workers, generally poor transport infrastructures, and weak ICT networks, where is the “wiggle room” here to welcome footloose manufacturers from the Chinese Mainland?

Individual Chinese provinces, like Guangdong (109m), Jiangsu (79m) and Zhejiang (55m) all have manufacturing workforces on a par with any of China’s regional neighbours. Each has a strong transport infrastructure linked to other city regions and highly efficient ports, and internet communications equal to the best anywhere in the world.

Their manufacturers can also draw on an education system that supplies large numbers of technologically well-trained staff. That is why Foxconn, the Taiwanese company that makes all of Apple’s iPhones, has been able to build a 1.2m Mainland workforce spread across 19 well-connected provinces.

This is why, in the footwear sector, manufacturers have been able to develop specialised clusters – with high-end branded footwear concentrating in Guangdong, low-end shoes in Zhejiang, women’s footwear in Sichuan, and sports footwear in Fujian. It is why the Chinese Garment Association’s 100,000 manufacturers (employing 10m) spread across 50 distinct “clothing manufacturing clusters”.

As the spending power of China’s middle classes rises, so more and more export manufacturers are turning to China’s domestic market for growth – giving them few reasons to move any manufacturing offshore. More likely, they are adding new manufacturing plants in Chinese interior provinces, where the consumer population is growing, and low-cost activity can still be sustained.

As for shifting manufacturing back to the US, all I can say to the Trump administration is: “Beware what you wish for”. US manufacturers moved low-wage, low-value-adding activity in their supply chains to low-cost countries like China for good reason. If they now bring those jobs home, they will be gifting US workers with the kind of immiserating wages that China has been trying to purge for more than a decade. This surely cannot be the way to make America great again.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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