Upmarket response to low-cost challenge

中国制造业向高端转型

The Austrian-run Rondor housewares factory in Shaping, Guangdong, opened in 1978, becoming one of the first foreign companies to enter China after the Cultural Revolution. Its first product was a $1.50 whisk.

Since then, Rondor housewares has transformed. Now it makes designer candlesticks for Scandinavian lifestyle brands, which can retail for more than $1,000.

Just down the road, Rondor textiles, a sister company, tells a similar story. Its first product, a tracksuit for a western sportswear brand, retailed for about $30. Now it makes high-end ski suits for niche European brands, which retail for as much as $1,700.

Rondor shows how China’s manufacturing has responded to the challenge of increased competition from low-cost neighbours, and moved towards producing goods that require more investment and more skills.

While notions of China’s move up the value chain may conjure images of high-tech industries such as electronics, the reality is rather different.

China’s high-tech manufacturers have relied heavily on imported know-how, but worries about intellectual property mean foreign companies are increasingly hesitant about transferring technology to Chinese partners. Much of the high-tech manufacturing in China is still confined to assembling components produced elsewhere – adding little value to the end product.

A report last year by the Asian Development Bank estimated the different costs and components that went into producing an Apple iPhone. It found that, of the $178.96 a single handset costs to produce, more than $60 went to companies in Japan, $30 to Germany, and $23 to South Korea. China’s contribution was limited to just $6.50 – the cost of assembly.

But in areas such as textiles and household goods China has been making big strides.

Li Cui, China economist at RBS, wrote in a recent research note: “China has remained very competitive in its exports, especially in light manufacturing. Product upgrades and productivity gains have countered the rise in the unit labour cost. There are regional competitors in these markets, but evidence of China losing out is still absent.”

In the years since 2005, when the renminbi has appreciated by almost 25 per cent against the US dollar, China has increased its global share of light-manufacturing exports from 22 per cent to about a third, according to Ms Cui.

Yet the need to keep specialising and increase margins is pressing. Between 2004 and 2009, unit labour costs rose 50 per cent. Small manufacturers, many of which operate on wafer-thin margins, are faced with a simple choice, go up the value chain, or go bust.

The average monthly salary across Rondor’s factories is Rmb3,000 ($470), comparable to what factory workers earn in Romania, and made possible by the wider margins retailers enjoy on the more sophisticated products.

“‘Made in China’ is now a sign of real quality in the ski wear market. We used to leave the labels out. But now we make sure people see them,” says Patrick Waibel who manages Rondor’s factories in Guangdong.

As a foreign-owned family-run company, Rondor has an advantage over its local competitors: access to capital.

Over the past year, China has raised interest rates five times and increased the amount of capital banks have to deposit with the central bank. China’s big banks have become more selective in lending – favouring large, longer-term loans to big state-backed enterprises.

For SMEs, this change has led to a credit squeeze, which is pushing many to the brink of bankruptcy,

Some SMEs have been forced to turn to the informal banking sector – where interest rates can reportedly reach 70-80 per cent.

Unable to meet payments, some local businessmen in manufacturing hubs such as the eastern city of Wenzhou have simply skipped town.

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