Still Made-in-China

Manufacturing in China is alive and well. Sneaker maker Adidas’ decision to close its last factory in the country last July raised concerns about whether “Made in China” still made economic sense. Yet while it’s true that companies are feeling the pinch from rising wages, lower commodity prices and the stalling yuan are helping those that can use automation to keep costs down.

Three factors have been pushing up the cost of making things in China. First, labour costs have risen double-digit rates for several years: the average wage for migrant workers rose by 15 per cent in the first six months of 2012, official figures show. Second, Chinese demand pushed up commodity prices. Finally, the stronger yuan, which has risen by three to five per cent a year since 2005, has lifted the cost of Chinese exports.

Yet China’s weakening economy has reversed two of those three trends. Producer price inflation has turned negative: prices at the factory gate were down 2.9 per cent in July, compared to a positive figure of 7.5 per cent a year earlier. As consumer prices are still going up — they rose 1.8 per cent in July — corporate margins are improving. Transfarchem, which produces dying agents, managed to expand its margins in the first half despite weaker demand from clothing makers and higher wages. Lower input costs have also helped the likes of noodle and beverage maker Tingyi and hypermarket chain Sun Art Retail Group to report higher profits and better margins.

Moreover, the yuan has stopped rising. The Chinese currency has fallen almost one per cent against the US dollar this year. This is a welcoming change for exporters in China. Luggage maker Samsonite cited a weaker yuan and lower plastics prices for its profit rise.

Of course, China’s slowdown is hardly welcome: corporate earnings are down across the board. But it has benefits: local governments, which had increasingly been turning up their noses at low-tech factories, have become less picky, according to Samsonite. Although wage pressure shows little sign of abating, companies that can use automation to contain costs still have a lot to gain from manufacturing in China.