China has the credentials to attract more foreign manufacturers, says top Deloitte executive

China still continues to be the sweet spot for manufacturing for many foreign enterprises as the overall benefits far outweigh the risk factors like rising labor costs and a shrinking workforce.

According to the 2013 Global Manufacturing Competitiveness Index by global professional services firm Deloitte Touche Tohmatsu Limited and the US Council on Competitiveness, China is not only the most competitive manufacturing nation in the world presently, but is expected to continue to retain that ranking for the next five years.

Tim Hanley, global leader of the Global Manufacturing Industry group of Deloitte Touche Tohmatsu Limited, says that although there will likely continue to be significant changes in the global competitive landscape for manufacturing over the next few years, China will still have among the best credentials to attract more investment into manufacturing.

Hanley spoke at length on prospects for the manufacturing industry and also about the survey, which polled more than 550 global CEOs. Excerpts:

Q: Though your survey ranks China as the top destination for manufacturing, there are doubts within China that rising labor costs and an aging population may dent China's competitiveness. How do you see this playing out in the near future?

A: Both these factors will be major challenges for China. However, China is moving away from competing just on cost, and instead is developing its capabilities in advanced manufacturing areas. With demand for manufactured goods continuing to grow in China, it will be important for most of these goods be produced close to demand. China will increasingly be the location owning the end solution and not just a source of low cost manufacturing.

The impact of an aging population is an issue for a number of countries, including China. The United Nations predicts that 28 percent of the Chinese population will pass the age of 65 by 2040, translating into roughly 400 million senior citizens, more than the combined population of France, Germany, Italy, Japan and the United Kingdom. Yet, with such a large population, China will still have a sizable workforce and visibly look to cultivate this workforce with higher education qualifications in order to stay competitive.

To give some context to this, between 2011 and 2020, there will be a total of 69 million workers at the tertiary level or above entering the workforce in China, a number equivalent to the total population of France.

There are 10 major competitiveness indicators in your survey. Which of these is the most important in your opinion?

There is no separate ranking for the 10 indicators in our report. However, access to talent-driven innovation was ranked by most of the participants as the leading indicator of a country's competitiveness.

Talent-driven innovation is characterized as both the quality and availability of a country's labor force including scientists, researchers and engineers - who collectively have the capacity to continuously innovate and, simultaneously, improve production efficiency.

There are reports that while China may lose its edge in low-end manufacturing (because of higher labor and land costs) to other developing nations, it will forge ahead in medium and high-end manufacturing. What are your views?

I tend to agree with these observations. China is slowly relinquishing its lead vantage in low cost manufacturing to other emerging markets. These countries, largely due to lower costs, may prove to be more competitive in some low-end manufacturing areas.

The 2013 Global Manufacturing Competitiveness Index study reveals that many CEOs and senior executives are increasingly considering frontier markets to be the ideal candidates for competitive manufacturing. Vietnam, for example, is expected to climb 8 slots and break into the top 10 rankings of global manufacturing competitive nations in five years. This Asian nation may move into the 10th position by 2018 from its present ranking of 18. Indonesia is expected to improve its ranking to 11 from 17 during the same period.

China, on the other hand, is becoming more of a competitor against developed nations than developing nations. Its efforts are more focused on bolstering advanced manufacturing knowledge and capabilities.

The government policies are targeted at supporting seven emerging strategic industries and also outline a clear development path for the manufacturing sector in China. The development success of the seven sectors will largely determine whether China can transform from a sizable manufacturing country to an even stronger manufacturing powerhouse.

There have been reports that the biggest competitive advantage for manufacturing in China is the huge domestic market, rather than low costs, established supply chains and government support. Do you agree with this viewpoint?

There is no doubt that China has a growing and dynamic domestic demand, driven by extensive urbanization over the past 30 years. Among developing economies, China has emerged as a leader in supplier networks due to focused efforts within the country to localize supply chains.

The government's commitment toward continuous investment in infrastructure such as the planned expansion of the railway network over the next few years and investment in the construction of smart grids and highways will help make it easier for manufacturers to access China's significant consumer market. In addition, the cost structure in China, while increasing and no longer the lowest globally, is still very competitive on a global basis.

It is also clear that China's increasingly robust domestic market is an important driver of global competitiveness. All these factors together contribute to the overall competitiveness of China.

What should China do to amplify its current advantages and overcome its shortfalls?

China still has relatively lower labor costs and is above average in the attractiveness of its corporate tax rates. Yet, China falls below average on labor productivity, researchers per million population and innovation index score. Economic, trade, financial and tax systems are also another area of opportunity for China.

Developed manufacturing nations such as Germany and the US have an edge in local economic, trade, financial and tax systems. More than seven out of 10 global business leaders surveyed "strongly agree" or "agree" that Germany and the US have an extreme competitiveness advantage based on these criteria, but only 61 percent say the same about China. These are some of the areas that China should look to improve its competitiveness and this can be achieved with the government policies to support its business focus.

Relocating industries has been a hot topic these days. In the US, the president and business leaders often talk about re-shoring US manufacturing. How do you see it impacting manufacturing in China?

Though "re-shoring" is an emerging trend in China, I do not see it a major threat for future investment. Demand for goods continues to grow in China, and this will drive manufacturing growth. In addition, China is still a priority investment market for US companies.

In a recent survey of about 300 members of the American Chamber of Commerce in China, 58 percent said China is among the top three investment priorities for most companies, up from 47 percent in 2011.

Re-shoring is an emerging trend that will need to be factored in at some point of time.

According to a survey conducted by the Massachusetts Institute of Technology, nearly 33 percent of the surveyed US companies said they were considering re-shoring manufacturing back to the US, while 14 percent said they had definite plans to move some of their manufacturing operations back to the US.

Among the main reasons cited by the companies for re-shoring manufacturing was the desire to get products to market faster and respond rapidly to customer orders. Other factors included the savings from reduced transportation and warehousing costs, better quality and protection of intellectual property.

zhengyangpeng@chinadaily.com.cn

(China Daily 03/01/2013 page6)