When Asia’s economic growth is mentioned, usually China comes to mind – and for good reasons. China is now the world’s largest exporter and manufacturer by a wide margin. In 2013, US$2.21 trillion worth of Chinese products were shipped throughout the world. By comparison, The United States exported only US$1.57 trillion worth of their goods as the world’s second largest exporter. This is even as China’s exports grew by 31.6% from the years 2009-2012 and the United States’ grew by 13% during the same timeframe.

These statistics seem to imply that China is poised to remain as the world’s most important exporter for the foreseeable future and indeed, there is a lack of a major “up-and coming” competitor. With that said, several factors point to a lack of competitiveness in Chinese exports as increasing wages, transportation expenses, factory upkeep costs and lack of convenience may lead some of the largest importers of Chinese products to look toward less costly and more practical destinations. These include members of ASEAN (The Association of Southeast Asian Nations) such as Vietnam, Thailand and Indonesia, as well as destinations closer to the United States, such as Mexico. Many of these countries offer better incentives, less bureaucracy, greater convenience and a closer geographical proximity to the United States and the European Union, where Chinese exports consist of 17% and 16% of their totals respectively.


China Manufacturing: A Big Fish in an Even Bigger Pond

While China is again, the largest manufacturer and exporter in the world by far, they certainly do not dominate international trade. In fact, even a comparatively minor pivot toward some of China’s competitors could be a major hindrance for the lasting growth of the country’s trade. This is established by the fact that China’s US$2.21 trillion worth of exports only represents 8% of the world’s total value of exports, which were US$17.78 trillion during the same year In other words, if the equivalent of 1% of total world exports were shifted away from China, it would lose 8% of its exports.

Such a pivot could occur for several reasons, but one of the most important is the high, and still rising, cost of wages in the country relative to many other manufacturing hubs. China’s labor costs reached an average of US$6,734 (41,400 Yuan) per year in 2014 making the salary of workers in Southeast Asia look like a bargain in comparison. Workers in the Philippines command US$4,581 (28,200 Yuan) a year and laborers in neighboring Vietnam make an average of only US$2,602 (16,000 Yuan) per year.

When the American Chamber of Commerce in Shanghai recently asked members about their biggest challenge, 91% mentioned “rising costs” which made it the number one issue for U.S. companies operating in China. To compare, a similar survey by various American Chambers of Commerce in ASEAN found that 74% of U.S. companies in the Philippines, 65% in Cambodia and 59% in Vietnam are satisfied with the availability of low cost labor.


Intellectual Property Rights in China Not Up to Par

Another issue is what some consider to be difficulty enforcing intellectual property (IPR) laws in China, which could be a significant barrier to moving up the value chain and manufacturing more advanced products, which is crucial to China’s export growth. If tech companies fear that their patents and IPRs could be stolen with only a small chance of successful legal action, this may cause them to look toward countries with a more efficient justice system.

An additional problem for foreign companies in China is the difficulty of conducting business in the country compared to its competitors. These issues manifest in several ways and some are hard, if not impossible to improve to standards which would be acceptable to the largest importers of Chinese products. These include a lack of spoken English, completely different legal and political systems from that of the western world, cultural differences, and the difficulty in obtaining a visa for expats or workers who are required to conduct business travel.

All in all, the availability of low cost production, transparent and enforceable intellectual property laws, and the ease of doing business internationally are all crucial factors in determining the competitiveness of a country’s exports and manufacturing sector, and are some of the criteria that China’s rivals should be judged on.


Southeast Asia, Mexico Seen as Alternatives to China Manufacturing

Southeast Asia is the most obvious alternative to China manufacturing. But Mexico, just to the southern border of the United States and across the Atlantic from Europe, could be an even greater threat to Chinese exports. This is especially true when taking into account its geographical and cultural advantages.

Cost is perhaps the most important factor in Mexico’s attractiveness. China manufacturing wages caught up to Mexico’s in 2012.  A 2014 report by the Boston Consulting Group predicts that wages in Mexico will be 6% lower by 2016. Factory upkeep and electricity costs are also cheaper in Mexico. This is due to Mexican natural gas prices being tied to the United States’, which have been unusually low for a prolonged time. Chinese factories often pay over 50% more for their natural gas and approximately the same amount more for electricity. This translates to costlier exports.

In addition, Mexico has free trade agreements covering 44 countries: the most in the world. These span the European Union, Japan, and the United States. This makes doing business with Mexico tax effective and convenient for some of the largest importers of Chinese products.

Other benefits include Mexico’s availability of English speakers, the ease of obtaining a work permit, a closer link to the U.S. and European economies, better inspection of products, a plentiful supply of qualified workers, and the stability of the Mexican Peso compared to the Chinese Yuan.

Companies will soon notice the increasing competitiveness which exporters outside of China offer. That is, if they haven’t joined the ranks of Samsung and Nike who have already begun moving production to Vietnam and other countries.  Emerging economies in Southeast Asia and Latin America may not have as much hype surrounding them as China does, but are arguably a better play for the long term.


About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

You Might Also Like

Share This