China Works blog: China manufacturing news, analysis and insights

Chinese manufacturing output increased at its slowest rate for 17 months in July – in line with a general production slowdown across much of Asia – according to the HSBC China Manufacturing Purchasing Managers Index.

The Index revealed that Chinese manufacturing output contracted from 52.1 in June to 51.2 in July (figures of 50 or above represent growth), the first such contraction since the economy began to rebound from recession in March 2009. The Chinese Federation of Logistics and Purchasing and the National Bureau of Statistics concurred with the figures.

The reason for the slowdown is being attributed to the government’s greater controls on bank lending, which have forced Chinese banks to reduce lending to businesses amid renewed fears of significant loan defaults. The tightening of bank lending has stifled booming property prices and affected manufacturing. The Chinese government has also reigned in its stimulus spending on construction projects, and placed new controls on investing in high-energy consuming and polluting factories. Analysts are split as to whether this represents just a short-term slowdown in Chinese manufacturing, or is a sign of slower growth to come later in 2010.

The manufacturing sector “will remain a major part of the Chinese economy for at least the next 100 years despite strikes and increased labour cost,” according to comments published in an article in Chinese state media.

Manufacturing in China accounts for around 47 percent of GDP, but rising costs, particularly for wages, have prompted speculation that cheaper labour locations, such as Vietnam, Sri Lanka, Bangladesh and some countries in Africa, are poised to benefit from a transfer of manufacturing investment away from China.

This may happen to some degree, especially in highly cost-sensitive products manufacturing, but larger operations targeted at increasingly confident Chinese consumers, rather than produced for export, seem determined to maintain their presence in China. After all, retail sales in China for the first five months of 2010 rose 18.6 per cent year on year, according to the National Bureau of Statistics.

The article published by People’s Daily, states that it now costs “nearly four times as much to employ a Chinese worker in the garment sector than someone from Vietnam.”

By contrast, the average annual manufacturing wage in China’s Guangdong province “increased by 144 per cent from 1998 to 2008,” according to figures from the Economist Intelligence Unit. Wages in lower-cost provinces are rising even faster in percentage terms – up by 263 percent in Hunan province during the same period, and by 258 percent in Guizhou.

It is a theme that we often refer to, but it is little surprise that auto manufacturing stories continue to grab headlines in China. The industry is experiencing an ongoing sales boom.

Total sales in the world’s largest auto market increased 47 percent year on year in the first half of 2010, according to the China Association of Automobile Manufacturers. This equates to 9.02 million vehicles sold between January and June, of which 3.18 million were “home-made passenger vehicles”, according to the CAMM.

The top five selling Chinese carmakers in the first half of 2010 were SAIC Motor, Dongfeng Motor, Changan Automobile, First Automobile Works, and Beijing Automobile Works. Meanwhile, General Motors’ vehicle sales in China during the first half of outstripped those in its home market for the first time in history. It sold 1.21 million units in China, and 1.08 million in the United States.

There is some concern, however, that Chinese auto manufacturers are expanding output too fast, despite the fact that more and more Chinese are owning their first car or trading up to a newer model. Auto output in China also rose significantly, up 49 percent year on year, for the first half of the year, but car sales in June slowed compared to previous months, prompting fears of possible overcapacity towards the end of the year.

China’s Purchasing Managers’ Index (PMI), which is regarded as a key measure of manufacturing industry performance, dropped for the second consecutive month in June, but remained above 50 points (which marks the point of economic expansion), according to the China Federation of Logistics and Purchasing.

The June PMI fell 1.8 percent month on month, to 52.1 percent. It has now registered above the 50 mark for 16th consecutive months, since last dropping below in February 2009. The Chinese PMI dropped to an all-time record low of 38.8 percent in November 2008, as the global economic crash impacted on both Chinese manufacturing order books and output levels.

Ten of the PMI’s sub-indices, including production, new orders and purchasing prices, all fell in June. The overall slowdown was attributed to “a moderation in the pace of China’s manufacturing expansion because of the country’s macro regulation policies and slowdown in global economic recovery,” according to the National Bureau of Statistics.

Opinion has been divided on the deafening decibels generated by the vuvuzela horns, which have been an inarguable part of the 2010 World Cup. The trumpet-like horns have also sold well around the world, as football fans try to recreate the atmosphere of South African stadiums at home and in bars.

But who would have guessed that an instrument promoted as distinctively South African was mass produced in China? According to Chinese state media “up to 90 percent of the vuvuzelas in South Africa were made in China.”

One of the manufacturing companies quoted in the report, Zhejiang-based Jiying Plastic Products, said it had sold more than one million vuvuzela horns since April. The report added that “nearly all of the vuvuzelas blown by World Cup fans come from five factories in Guangdong province and Zhejiang.”

The horns are exported “at prices ranging from RMB0.6-2.5,” state media writes, and are sold for between RMB18-53. The good news for manufacturers is that the vuvuzela craze may endure beyond the World Cup – London Mayor Boris Johnson has hinted that the buzzing bee sounding horn might be welcomed at the London Olympics in 2012.

Despite a positive spin by Chinese state media, China’s manufacturing output growth slowed in May, raising further concerns of overheating in key economic metrics.

Asian stock markets reacted negatively to the news on fears that sluggish global demand for Chinese manufactured products in May maybe indicative of a further slowdown in the months ahead.

The official China Federation of Logistics and Purchasing managers index dropped to 53.9, from 55.7. While this still represents growth (for the 12th consecutive month), the rate of growth was below many analysts’ predictions. The official export orders sub-index fell to 53.8 in May, from April’s 54.5. Differing slightly from the official government statistics, the HSBC China Manufacturing Purchasing Managers Index dropped considerably from 55.2 in April to 52.7 in May.

Chinese media said the slower rate of manufacturing output growth showed “that the government’s tightening measures, including a crackdown on the property market, are starting to impact manufacturing activity.”

How do you make RMB16 billion by manufacturing refrigerators during a recession? Not an easy question to answer unless you are Qingdao-based white goods maker Haier, which has just announced that its 2009 net profit rose 49.64 per cent to RMB1.15 billion.

Haier achieved RMB16.28 billion of its RMB33 billion 2009 revenues by selling refrigerators, plus RMB8.65 billion from air conditioning unit sales and RMB2.71 billion from freezer appliances, according to its annual report released to the Shanghai Stock Exchange.

One reason cited for the increased sales during the global recession was the Chinese government’s RMB6.3 billion rural subsidy programme which was designed to boost purchases of home goods such as televisions, refrigerators and washing machines in poorer rural areas. “We will continue to expand our sales network especially in the rural areas,” says the Haier report.

The Qingdao headquartered appliance maker, which employs around 60,000 people worldwide, was last year ranked as the world’s leader in refrigerator sales, with a 12.4 per cent of global sales, according to Euromonitor International.

International manufacturing companies active in China are increasingly focused on accessing growing Chinese mainland markets, rather than using the country as an export base, according to a new report.

The 2009/10 China Manufacturing Competitiveness report, co-produced by the American Chamber of Commerce in Shanghai and Boo z & Co, reveals that 83 per cent (up from 71 per cent two years ago) of surveyed companies said their primary objective for locating manufacturing operations in China was to access the rapidly diversifying Chinese marketplace.

As cost and wage differentials in inland areas of China become more attractive compared to the higher rates in coastal areas, 28 per cent of respondents are considering relocating production facilities to central and southwest China. This serves two functions, helping to reduce factor costs and locating facilities closer to rapidly growing markets across China.

“This report is a snapshot in time of a picture that is rapidly moving,” said Ron Haddock, co-author of the report, “but the old paradigm that China is just a place for cheap labour is changing.”