Threats to Chinese manufacturing exaggerated

BEIJING -- Chinese manufacturing is faced with threats from emerging rivals such as Vietnam and Bangladesh, but such threats are exaggerated, Singapore-based banking multinational DBS Bank said Friday in a report.

Rising labor costs and the strengthening Chinese currency Renminbi are prompting overseas investors to seek alternatives to manufacturing in China, DBS Bank said in the report written by its Hong Kong-based economists Chris Leung and Lily Lo.

In China's biggest export markets -- the US and the EU, China's market share began to fall for the first time in 2011. China has lost a little import market share in labor intensive manufactured goods, particularly textiles, fibers and clothing, it said.

China is facing no serious threat from Bangladesh and Cambodia regardless of their cost advantages. Bangladesh and Cambodia's market shares in both the US and EU are very low and seemingly stagnant.

It will likely take years before these countries can achieve the level of vertical integration that China has established over the past 20 years. There are serious concerns about these countries' safety records and political stability, according to the report.

The DBS report said Vietnam may be a threat to Chinese manufacturing as it is gaining market share in both the US and the EU. However, its import market share is still low.

Foreign investors, such as Intel, are adopting a "China plus one" strategy to diversify their production bases as China's labor costs rise, it said.

"If China only had low value-added manufacturing, the threat from other countries would be much greater. But China's manufacturing is no longer confined to low value-added goods," said the report.

Tougher conditions for manufacturers have induced positive shifts while Renminbi appreciation and wage increases have deterred entrants into labor intensive segments.

Meanwhile, improvements in innovation, education and higher margins have attracted entrants into more capital intensive industries in China, it said.

The prospects for Chinese manufacturing still look good. While China lost market share in the US and EU in the past two years it has not lost any market share globally. The share of world exports has increased in all categories by level of capital intensity and technological sophistication.

"Looking forward, we are encouraged by the fact that China has moved up the value-added chain well before neighboring countries forced their way into low value-added segments."

In addition, manufacturing is not just about exports. It is also about producing for locals, and China is a huge market in itself. Manufacturing will remain a key part of China's economy for years to come, according to the report.

The gradual decline of low value-added manufacturing in China is the natural result of evolving comparative advantages and the consolidation process will continue for quite a while, it said.

"Nothing suggests an imminent demise of China's manufacturing sector," the report concluded.

DBS is a leading financial services group in Asia, with over 250 branches across 16 markets. Headquartered and listed in Singapore, DBS has a growing presence in the three key Asian axes of growth -- China, Southeast Asia and South Asia.