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Core strengths shine through cost conundrum

With outlay expected to increase further in the months ahead, China makers are banking on experience, government funding and streamlining measures to buoy exports.

Realizing it can no longer bank on being the lowest-cost factory to the world, China is now highlighting key competitive advantages to shore up sales amid rising production expenses.

Core strengths shine through cost conundrum
Anionte, which exports RoHS-compliant handheld massagers, does not believe higher manufacturing outlay will affect its bottom line.

One of the main points being emphasized is the country's rich and long experience in the export manufacturing industry. Its thousands of factories in the Pearl and Yangtze River Delta regions, and the Bohai Bay Rim Economic Region have established a well-oiled supply chain spanning at least 10 years. The range of products available, and the mature sourcing and aftersales services are incomparable with those in other competing production hubs in Asia.

There are at least 365 factories and more than 3,000 individual workshops producing sweaters in the Shandong province city of Haiyang alone. The 1,886sqm hub is home to other types of apparel makers, machinery suppliers and auxiliary industries as well.

Further, such businesses have been able to form long-term relationships with clients globally. The familiarity between supplier and buyer is one reason customers continue to source health and personal care products from Wenzhou-based Anionte Electric (Zhejiang) Co. Ltd despite higher prices. The trader even projects 2010 exports will not be impacted significantly by rising labor and raw material costs.

Local, national support

A competitive supply chain is not enough to stave off contraction, however, and the government has taken steps to encourage businesses to move upmarket and boost product quality.

The central administration, for instance, set out incentives to entice local and overseas manufacturers to the thin-film solar cell industry and raise the current total yield of 500MW. These include the Implementation Suggestion on Promoting Solar Energy Architecture Application and Preliminary Methods on Financial Subsidiary for Solar Energy Architecture.

One of the major household appliance hubs in the country, Shunde is the world's largest export manufacturing center for air conditioners, microwave ovens and electric cookers. Home to 1,328 suppliers, this city in Guangdong province now has three professional testing laboratories that operate following international standards. Set up by the provincial government along with the Shunde Inspection and Quarantine Bureau, Guangdong Inspection and Quarantine Bureau and the South China Household Electric Appliances Research Institute, the 40 million yuan ($5.85 million) laboratories also help makers glean the latest technology and improve their R&D capability.

Performance testing of household appliances is carried out in one facility, where there is equipment for the vibration and sound attenuation rooms, and safety and lighting inspection.

Energy efficiency evaluation is done in another room.

The third laboratory conducts EMS and EMI testing. It is said to be the most advanced one of its kind in Southeast China.

To encourage companies to invest in high-technology businesses, Beijing doles out a corporate income tax rate of 15 percent to such operations. The CIT is normally set at 25 percent.

City governments provide funding to support various endeavors as well. The Guangdong city of Dongguan has set aside 1 billion yuan ($146 million) to help purely processing plants upgrade to fully manufacturing entities. More than 9,000 companies benefited in 2009.

Also in Guangdong, Nanhai released a 1 billion to 2 billion yuan ($146 million to $293 million) special fund in October 2009 for the development of the city's semiconductor lighting industry. This spurred major player SemiLEDs to invest in a $350 million LED chip project in Nanhai.

The Wenzhou Entry-Exit Inspection & Quarantine Bureau, on the other hand, expedites crayon pigment evaluation based on US and EU standards. Doing so reduces testing fees and product recalls.

Reducing outlay

Suppliers are not relying solely on China's export manufacturing strengths and government support to survive cost challenges. Many are devising ways to minimize expenses.

Electric shaver maker Superhuman Group Co. Ltd has estimated EuP, RoHS and REACH testing costs add 10 to 20 percent to total outlay. Since this is a necessary step, the company decided to scale down on R&D expenditure instead.

The supplier used to launch an average of 10 models per year. Not all items, however, were popular in the export market. As such, product releases have been cut to just five or six well-researched designs. Fewer units also mean overall testing fees are lower.

Xiamen Comfort Science & Technology Group Co. Ltd, on the other hand, tries to use the same accessories and raw materials for its massager models to reduce procurement costs.

Thin-film solar cell manufacturers are investing in R&D and equipment to boost performance and reduce prices. At present, the power efficiency of a-Si and μc-Si thin-film solar cell is 6 to 8 percent, while that of cadmium telluride and GIGS varieties, 8.5 to 10.5 percent and 10 to 12 percent, respectively. By 2015, local players aim to achieve an efficiency of 15 percent for the first, 13 percent for the second and 15 percent for the last.

Expenses continue to climb

Manufacturing in China is increasingly becoming expensive and may be even more so as the industry matures further. No longer limited to materials, land and labor, expenses related to technology and shipping are on the rise as well.

Stricter product and safety requirements in key markets have resulted in higher R&D and testing fees. Suppliers now have to allocate 10 to 20 percent more to improving and evaluating energy efficiency, functionality, ease of use and safety than they did two years ago.

Ocean freight charges are also on an upward trajectory. On May 21, the China Containerized Freight Index soared 41 percent year-on-year to 1125.78.

Further, the cost of major materials such as metal, cotton and wood is increasing. Melamine-laminated board rose 8 to 10 percent after the Chinese New Year. Some types of engineered board went up 10 to 15 percent on March 1. Imported iron ore grew 30 percent, which in April resulted in a 200 to 500 yuan ($29 to 73) per ton hike on various related items.

Moreover, the need to expand production has pulled up land prices in Shenzhen from 600 yuan ($88) per square meter in 2007 to between 900 and 1,600 yuan ($132 to $234) this year. The situation is true for most types of industrial land within the Pearl and Yangtze River Delta regions.

Note: This article "Core strengths shine through cost conundrum" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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