Last updated August 26th, 2018.

China usually comes to mind when Asia’s economic growth is mentioned – and for good reasons. China is now the world’s largest exporter and manufacturer by a wide margin.

With that said, several factors point to a lack of competitiveness in Chinese exports. Rising wages, transportation expenses, upkeep costs, and sheer inconvenience may lead some of the largest importers of Chinese products to look elsewhere.

These include members of ASEAN (The Association of Southeast Asian Nations) such as Vietnam, Thailand and Indonesia. Countries closer to the United States, such as Mexico, are also attractive.

Many of these places offer better incentives, less bureaucracy, greater convenience, and 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

China is the largest manufacturer and exporter in the world by far. However, they certainly don’t dominate international trade. In fact, even a minor pivot toward some of China’s competitors could be a major hindrance for its economic growth.

There’s proof in 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, China would lose 8% of their exports if they lost the equivalent of 1% of world’s total exports.

Such a pivot could occur for several reasons. But one of the most important is the rising cost of wages relative to other manufacturing hubs.

China’s labor costs reached an average of US$6,734 (41,400 Yuan) per year in 2014. This makes 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. Laborers in neighboring Vietnam make an average of only US$2,602 (16,000 Yuan) per year.

The American Chamber of Commerce in Shanghai recently asked members about their biggest challenge. 91% mentioned “rising costs”, making it the number one issue for U.S. firms in China.

To compare, a similar survey from 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.

 

Factories are now opening all across Asia’s frontier markets, such as this one in Vietnam. Manufacturers like LG are relocating due to strict regulations and rising costs in China.

 

Intellectual Property Rights in China Not Up to Par

Difficulty enforcing intellectual property (IPR) laws is another problem in China. It could be a significant barrier to moving up the value chain and manufacturing more advanced products, which is crucial to China’s export growth.

Tech firms may look toward other countries if they fear patents and IPRs could be stolen with little chance of successful legal action.

Yet another problem for foreign companies in China is the difficulty of doing business in the country. These issues manifest in several ways.

Some are hard, if not impossible, to improve to acceptable standards. For example, a lack of English proficiency, different legal and political systems, and difficulties getting visas all hold China back.

In summary, availability of low cost production, strong intellectual property laws, and ease of doing business globally are all crucial in determining a nation’s competitiveness. China struggles when it comes to many of these factors.

 

The 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, could be an even greater threat to Chinese exports.

This is especially true when comparing Mexico’s geographical and cultural advantages to China’s.

Cost is perhaps the most important factor in Mexico’s attractiveness. China manufacturing wages caught up to Mexico’s back in 2012 and the gap has only widened since then.

Factory upkeep and electricity costs are cheaper in Mexico too. That’s because Mexican natural gas prices are tied to the United States’ which are now lower than in a very long 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.

Mexico also has free trade agreements covering 44 countries – the most in the world – spanning Europe, Japan, and the United States. Doing business with Mexico is 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, a plentiful supply of qualified workers, and the Peso’s relative stability 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. However, they’re arguably a better play for the long term.

 

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About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's an accomplished stock trader and property investor in Thailand, Cambodia, and many other places. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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