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China No Longer Manufacturing Powerhouse nor Attractive Consumer Market
Changing Perspective
China No Longer Manufacturing Powerhouse nor Attractive Consumer Market
  • By Jung Suk-yee
  • March 6, 2017, 05:30
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Global companies are continuously leaving China again this year largely due to Chinese worker’s rising wage and uncertain production and business environments in addition to lowered local consumers’ demand.
Global companies are continuously leaving China again this year largely due to Chinese worker’s rising wage and uncertain production and business environments in addition to lowered local consumers’ demand.

 

Global companies are continuously leaving China again this year. U.S. tech giant Oracle Corp. has decided to lay off around 200 research and development (R&D) staff at its Beijing office, while U.K. retailer Marks & Spencer Group said it would close all of its stores in China. Seagate Technology PLC, one of the two largest manufacturers of hard disk drives (HDDs) in the world along with Western Digital Corp., also announced in January to shut down its factory in Suzhou, China, but it is planning to make an additional investment of US$470 million (543.79 billion won) in Thailand. The latest move is largely due to Chinese worker’s rising wage and uncertain production and business environments in China as well as lower consumers’ demand in the Chinese market.

With China escalating economic retaliation on South Korea over the deployment of the U.S.-led Terminal High Altitude Area Defense (THAAD) missile defense system, some experts say that South Korea also need to find a “post China.” The concept that China is the world’s factory and the world’s largest consumer market is being broken down as well. This is because China puts local companies first and it is about to enter the era of high cost and low growth rate of less than 6 percent. The U.S. protectionist measures and the Fourth Industrial Revolution using artificial intelligence (AI) are accelerating such changes. As China, which was once the global factory, has become less attractive as an investment outlet, a direct investment in the nation is also dramatically decreasing. According to foreign media reports on March 5, the net inflow of foreign direct investment (FDI) to China rapidly dropped from US$45.9 billion (53.11 trillion won) in 2010 to US$8 billion (9.26 trillion won) in 2015.

China has no advantage in terms of production. Last year, the average wage of Chinese workers in the manufacturing industry was US$3.6 (4,165 won) per hour, much higher than US$2.7 (3,124 won) in Brazil and US$2.1 (2,430 won) in Mexico. The rise in productivity, which comes from AI, is also shortening the advantage of China. German sportswear company Adidas built its AI plant in Germany after it shut down the plant in China in 23 years since opening.

In addition, China’s attractiveness as a consumer market, based on its population of over 1.3 billion, is also reducing. Samsung China Investment Co. (SCIC), which returned a loss of 77.6 billion won (US$67.07 million) in 2015, posted a deficit of 70 billion won (US$60.5 million) in the third quarter last year due to the rise of Chinese companies such as Huawei and Haier. In fact, China has designated information technology (IT), robot, aviation and biotechnology as top 10 strategic industries and is driving forward ”China Manufacturing 2025 Strategy” to enter the global level by 2025. The U.S. protectionism is also the key. U.S. President Donald Trump said, “We will impose a 45% tariff on Chinese imports.” In this case, Chinese exports to the U.S. can drop by as much as 39 percent. The economic paradigm toward China, which has been the world center of production, consumption and R&D over the last two decades, is changing.

Therefore, many say that the current situation in South Korea caused by the THAAD issue can be rather the opportunity to improve the nation’s economic constitution. It means that it is the right time to break illusions of two-faced China as well as its fear. At the same time, India, the Association of Southeast Asian Nations (ASEAN) and Iran are emerging as the alternative Chinese markets. A senior official from the government said, “Even without the THAAD issue, China is already in the end of the season. This is time to review the true competitiveness of domestic products.”