Thursday, April 26, 2012

China moves up the value chain

From being the consumer goods factory of the world, China is fast becoming the infrastructure contractor to developing countries. As domestic wages increase and labour market diversifies, China is ceding ground to other lower-cost consumer goods manufacturing countries and moving over to heavy equipment, especially infrastructure-related, manufacturing.

The massive domestic infrastructure investment boom of the past decade-and-half has equipped many Chinese firms, public and some private, with expertise in heavy equipment manufacturing and construction of huge infrastructure projects. The FT describes this push and its implications

Between 1998 and 2010, consumer goods exports from China to the rest of the world grew at a rate of 13 per cent a year. Heavy industry exports to the developing world, by contrast, grew by 25 per cent annually over that period... Chinese companies have had difficulty adding value in high-end consumer products (that) require a complex mix of design, branding and marketing skills that are in short supply in a relatively low-income country like China. On the other hand, using the huge construction boom for the past couple of decades as a training ground for selling excavators and bulldozers to the rest of the world at lower prices than their developed world competitors is easy enough...

The so-called China price now applies to industrial goods, not just consumer goods. Cheap China exports could provide a boost to investment in the developing word, just as they once did to consumption in the developed world... This ought to be a near unalloyed positive for the developing world, except that financing may prove more difficult as the developed world’s banks retreat from lending overseas.
The article also highlights the potential for trade disputes that could arise from this aggressive push with heavy equipment exports. Countries like India, which have their own fledgling heavy equipment industries, are more likely to resist this Chinese push

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