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CHINA: "China Automotive Monthly: Executive Summary (September 2011)"

CHINA: "China Automotive Monthly: Executive Summary (September 2011)". 9-page report by J.D. Power Asia Pacific.

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backCHINAtalk June, 2012

China manufacturing moves up the value chain, as labour and currency costs rise, says survey

Rising costs in Mainland China have triggered a shift of labour-intensive manufacturing further inland and in some cases, overseas to lower cost countries across Southeast Asia and South Asia, according to a recent global manufacturing survey by KPMG.

The report, titled 2012 Global Manufacturing Outlook: Fostering Growth through Innovation, surveyed 241 senior global manufacturing executives across sectors. It finds that 76 percent of global respondents are optimistic about their business outlook over the next 12 to 24 months.

The US is expected to lead growth according to 40 percent of respondents, followed by China, India, Brazil and Germany. This is despite concerns about the impact of the current euro zone debt crisis, which survey respondents ranked as the biggest obstacle to global growth.

In China, double digit growth over the past few years has transformed the country into the manufacturing hub of the world, but there are some challenges.

Aaron Lo, Partner, KPMG China, says: "Labour costs have increased by 15-20 percent per annum on average over the past four years. This together with an appreciating Chinese currency has meant that China is no longer a low cost manufacturing base. This in turn has forced the pace of transformation and a transition to greater levels of automation and innovation in order to drive margin growth. This is a positive change and is also in alignment with China's current policies."

Price volatility on cost inputs, risk in the supply chain, and uncertain demand are the main challenges highlighted by a majority of survey respondents. In order to reduce costs, some global manufacturers are positioning their facilities close to end-markets. A majority of respondents worldwide believe near-shoring is either "effective" or "highly effective" at improving agility, lead times, risk management, information flow/synchronization and total cost.

They are also becoming more sophisticated about where they locate their offshore facilities. Many, for example, now use a "China +1" strategy - adding an additional production base in a lower-cost country in Asia. This is in order to maintain their responsiveness to the Chinese market but also help to reduce the impact of wage inflation.

China is also moving up the value chain for manufacturing activities, in line with objectives outlined in its 12th Five-Year Plan. Over half of respondents who plan to increase sourcing activities in China and India, selected "R&D" for China, while over three fourths said "product development/design" for India.

Aaron Lo added: "China is going through an unprecedented transformation and will likely emerge stronger, with a greater focus on moving up the value chain in terms of productivity and labour input. There are clear signs that the country is moving in this direction, with a key focus on qualitative growth versus quantitative growth of the past."

The report also notes that global manufacturers are also increasing activities in innovation and collaboration, keeping a longer view of a return to sustainable growth. A majority of respondents (72 percent) said transformational innovation is either in full swing or will be in the next 12-24 months, as manufacturers increasingly look to invest in expanding their product and service offerings in order to remain competitive.

China's12th Five Year Plan, for example, has placed more emphasis on value added manufacturing across seven priority industries: new energy, energy conservation and environmental protection, biotechnology, new materials, new IT, high-end equipment manufacturing, and clean energy vehicles.

Aaron Lo concludes: "Our view is that we will see significant investment in high-value manufacturing for traditional industries and for government-backed investments in advanced technology industries."

Source: KPMG - GAI

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