By Chris Devonshire-Ellis
As the cost of manufacturing in China continues to rise, the search for ever-more competitive products becomes increasingly important. While the China situation has an upside – the creation of a 600 million strong middle class consumer base by 2020 – a combination of rising wages, welfare and operational costs is encouraging the Asian supply chain to move.
However, with high productivity levels, China has largely proven itself a capable manufacturer for global supply. Although the country’s well-developed infrastructure began to deteriorate when moving toward inland manufacturers, the coastal regions remain a hotbed of global production and supply. China’s cost-effectiveness has benefited foreign investors to the extent that many multinational corporations have moved an increasing percentage of their overall global manufacturing capability to the PRC.
However, China wages – and the associated welfare costs – have been rising an average of 15 percent for the past six years, and those profit margins are fast being eroded as China works to create a more consumer-based economy. This makes long-term strategic sense for China, but while global manufacturers can look forward to a large and developed Chinese middle-class consumer society, this is being achieved at the expense of low-cost manufacturing.
As a result, China-focused purchasing managers need to start looking elsewhere.
How much are wages in Asia?
Wage levels across Asia are becoming extremely competitive when compared to China. India and Indonesia have very large and available workforces. Both are downstream in creating and managing factories staffed with several thousand assembly line workers at a time. The Philippines and Vietnam are also emulating China and organizing large factory premises with facilities for thousands of workers.
Chinese workers earn at least double that of workers in other emerging Asian manufacturing hubs, a significant enough amount to justify considering alternative locations for production capacity.
Salaries across Asia-Pacific are expected to increase and a report by Towers Watson shows China leading the way in 2015, at 5.2 percent, followed by Vietnam 4.1 percent; India 3.5 percent; Indonesia 3.3 percent; Malaysia 2.2 percent; and Singapore 2.2 percent.
The significance of ASEAN’s FTAs with China and India
ASEAN has FTAs in place with both China and India. These have removed import/export tariffs on 90 percent of all goods manufactured between these countries to essentially zero. As a result, manufacturing in ASEAN gives access to the entire ASEAN bloc, and China and India, providing access 3.2 billion, with an estimated 1 billion of those obtaining middle class consumer standards by 2020.
ASEAN’s 10 nations have largely cancelled all import and export duty taxes on items traded among them, with the exception of Cambodia, Laos, Myanmar and Vietnam. However, these will be lifted as of Dec. 31, 2015.
ASEAN also has a combined FTA with Australia and New Zealand, known as the AANZFTA. The deal has eliminated tariffs on 67 percent of traded products between the regions, and will expand to 96 percent by 2020. It is the first time ASEAN has embarked on FTA negotiations that covers all sectors, making it the most comprehensive trade agreement that the bloc has ever negotiated.
Further ASEAN treaties are being negotiated, including with Japan, which already has a series of Comprehensive Economic Partnerships. South Korea, meanwhile, already has an FTA, both of which include the reduction of more than 90 percent of all traded goods.
ASEAN is the ideal location to reach out to countries both within and outside of Asia. While the productivity gap closes between China and manufacturing facilities in India and countries such as Vietnam, wage considerations and the abolition of duties on goods manufactured in ASEAN will continue to have an increasing impact on where China sources its low-cost components and products. The Asian supply chain is evolving fast, and both sourcing companies and manufacturers need to be aware of the dynamics to remain competitive.
This article was first published on http://www.china-briefing.com/
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and managing partner of India and Singapore. Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.