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That China is the world’s biggest exporter of appliances is not a revelation. Nevertheless, it is striking that when it comes to major appliances and air conditioners, in 2010 China alone accounted for over half of the world’s exports in volume terms, according to Euromonitor International’s research on trade statistics due to be published in November 2011.

China’s leading export position, built on its low-cost labour force and the availability of a local network of suppliers, has been boosted by the government’s active support of local manufacturers through programmes such as the “World Top Brand”, “Famous Export Brand” and “China Name Brand”.

These controversial programmes were designed to increase sales of Chinese-branded products globally through the use of subsidies contingent on export performance. At the end of 2009, under increasing pressure, in particular from the US, the Chinese government has agreed to end them, as subsidies to exports contravene WTO regulations.

China’s rising labour costs challenge competitiveness

One of China’s biggest attractions for investors has traditionally been its cheap labour costs and ability to provide economies of scale. However, the cost of labour has been rising due to the new labour legislation protecting workers through enforcing contracts, job security and minimum wage compliance.

Additionally, workers have also been demanding higher wages amid rising inflation, with labour disputes in 2010 resulting in pay rises and increases in minimum wages. China’s shortage of highly skilled workers has also exacerbated the problem, pushing wage demands up. There has also been a slowdown in rural to urban migration as rural workers find more opportunities closer to home.

Chinese appliances companies such as Haier appear to have lost much of their advantage in terms of production costs in recent years, which came from manufacturing being based in China. This is because regional competitors, notably Taiwanese producers like AOC, Proview and Quanta, have significantly cut their costs. It is in this context that Haier plans to gradually spin off most of its production businesses to lower-cost counties like Taiwan, initially via joint ventures.

The outlook for manufacturers

According to Euromonitor’s market research data, China retains several advantages, which will continue to make it an attractive place to do business:

  • China benefits from a more advanced infrastructure than many other countries in the region. Infrastructure bottlenecks in India, for example, are a major problem for the business environment. China ranked 79th out of 183 countries in the World Bank’s Ease of Doing Business index overall in 2011, compared to 134th for India and 121st for Indonesia.
  • The skills shortage poses a challenge for the business environment but skills are set to improve in the longer term. English is compulsory in Chinese schools, and there have also been more technical universities and business schools opening up. The country’s huge population means it has the largest number of graduates in the world (6.4 million in 2010).
  • The move away from low-cost manufacturing to value-added products is expected to boost innovation in China. Research and Development (R&D) expenditure is still small compared to in advanced economies, at 1.5% of GDP in 2010 (compared to 3.7% in Japan), but it has increased in the past decade.
  • Higher wages will ultimately provide a boost to domestic consumption. China aims to move away from export-oriented growth in order to rebalance the economy. The continued expansion of the middle class in China is likely to unleash significant business opportunities through the potential for higher discretionary spending.

Are Chinese exports levelling off?

Despite a decline in 2009 due to recession in developed markets, from 2006 to 2010 volume exports of major appliances and air conditioners from China grew at an average of 7% each year. In 2010 Chinese exports bounced back, with shipments to US and Japan, the country’s largest export partners, growing by 19% and 15% respectively.

It is true that China is suffering from competition from neighbouring and cheaper countries, but it is too early to say that China’s export business has levelled off. Over the mid-term how big Chinese appliances export grows will ultimately depend on the volatile demand from developed markets.

 

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