Following the Communist Party Congress and the new leaders’ promise of doubling China’s average salaries by 2020, this is the second of our series of analysis looking at three important, but common, misperceptions about China:
- Slowing growth makes China a less attractive opportunity than previously (or than other emerging markets)
- Fast rising wages mark the end of low production costs in China
- China copies intellectual property and will not turn into a scientific and technological power
The explosion of the middle class (expected to grow 10-15 fold from 2010 to 2020) and its high income expectations, the 3 to 4 fold increase in minimum wages planned for this decade and the peaking of the young work force due to the one child policy have lead many to the conclusion that China will soon no longer be a competitive, low-cost production base. This is illustrated in the many headlines that announced the “end of China’s low costs”, “the drying up of China’s endless pool of labor” and articles about international manufacturers moving their productions out to Vietnam, Indonesia or Bangladesh, or about the difficulties of factories in coastal regions to recruit enough workers.
This appears to be reassuring, particularly for manufacturers in developed countries, finally seeing in China more market opportunities from consumers with increasing spending powers, than competition from rising producers. But while the market opportunities are clearly materializing, China’s peak in production competitiveness may not be reached for many years, if not decades.
While the cost of exported Chinese products is no longer going down (in US dollars terms), the cases of foreign companies relocating their production out of China are still very anecdotic. Only a limited number of industries where automation cannot replace unskilled labor are seeing a transfer of production out of China, typically the apparel and plush toys industry, for which no machines can replace the sewing work. Other cases arise for very low quality products or potentially polluting industries, for which China starts enforcing international standards while other emerging countries do not yet enforce a sustainable manufacturing regulatory frame.