China's small exporters must adapt or die(3)
MOVING INWARD - OR OUT
Moving inland, where wage costs are typically at least a third lower than on the coast, can help buy time to climb the value chain, upgrade technology and boost productivity.
Haitong Food Group, one of the leading food processors in China, relocated its main production base from Ningbo to Hubei and Jiangsu and moved its sales headquarters to Shanghai, said general manager Zhou Lequn.
"It's not entirely driven by labor costs. We also want to get closer to the source of raw materials," he said.
Ningbo city government has unveiled new initiatives to cope with the export downturn, including organizing domestic and overseas trade fairs and helping factories to shift their production facilities inland or even more them overseas.
"Local governments have some concerns that factory relocations they could hollow out local industries and erode tax revenues, but they have to change their mindset and look at the long-term gains," Chen Weirong, an official at Ningbo's foreign trade and economic corporation bureau, told Reuters.
Some 1,500 Ningbo firms have invested overseas, including in the United States and Europe, Chen said. But Ningbo, home to China's second largest port, remains a magnet to exporters.
One region's loss is another's gain. Henan is among the inland provinces benefiting from the industrial shifts as it lures away more firms from Zhejiang and Guangdong, said Li Ke, Henan's executive vice governor.
"Firms in coastal areas are moving to the interior due to higher costs and environmental issues. For Henan, the trend is very encouraging," he told Reuters on the sidelines of the Boao Forum last week.
Henan's exports surged 140 percent in the first quarter from a year earlier, customs data showed, quickening from last year's 83 percent jump due to an influx of investment. Foxconn Technology Group, which makes Apple APPL.O iPhones, opened a new factory there.
Chongqing's exports jumped 150 percent while Guangxi's sales rose 41.2 percent and those of Sichuan gained 31.9 percent.
By contrast, exports of coastal provinces were sluggish: up 6.1 percent in Zhejiang, 5.4 percent in Guangdong and 2.8 percent in Jiangsu. Guandgong still retains the top spot terms of export volume, accounting for 28 percent of China's total.
MIDDLE INCOME TRAP
The glitzy shopping malls and restaurants in Ningbo are testament to growing Chinese consumption, which helps tilt the economy away from its reliance on exports and investment.
"If you give workers more money, they are going to consume more. The whole rebalancing story is moving," said Tim Condon, head of Asia research at ING in Singapore.
But the crucial question is whether Chinese exporters can move up the global value chain, which is key to escaping the so-called "middle income trap" where per capita income stagnates.
"The middle income trap is a risk if wage costs rise and cannot be absorbed within the country," Fan Gang, President of the National Economic Research Institute -- a Beijing-based think-tank, told Reuters.
Fan, a former adviser to the central bank, said South Korea and Taiwan had both successfully climbed up the income ladder because their manufacturers tapped China's cheap labor.
"Maybe China's interior plays that role next and helps absorb rising wages instead of seeing companies relocate to Vietnam, Indonesia or Bangladesh," he said. ($1 = 6.3085 Chinese yuan)
