China is losing its edge as the world's cheapest place to manufacture goods, a new report suggests. Indonesia and Bangladesh are benefiting most as rising costs in China force firms to switch production, it says. The report by consultants KPMG says that minimum wage levels in China are now four times greater than other places in South and South East Asia. However, the report says China can defend its position because of its productivity and infrastructure. China is still dominant in the production of goods such as consumer electronics and furniture.
But the report says that production of clothing and footwear is now more widely dispersed across Asia, with Indonesia and Vietnam specialising in the production of footwear and India developing a niche in hand-stitched fabrics and metalware. According to KPMG estimates, Indonesia's footwear exports grew by 42% in 2010 to $2.1bn (£1.3bn), while Bangladesh saw textiles exports grow by 43% to more than $18bn in the year to July 2011. "Sourcing goods in China purely because of ultra-low costs is a thing of the past," said Nick Debnam, KPMG's Asia-Pacific chair. "With demand still soft in many Western consumer markets, it is also proving difficult for companies to pass on higher costs to consumers. This changing environment is forcing companies to reassess sourcing strategies."
China is battling its highest rate of inflation in three years although the latest consumer prices data from August suggests that the rate is beginning to ease. While much of China's manufacturing has begun to migrate westwards from the south and east of the country to cheaper provinces such as Sichuan, the report says the cost advantages from such moves inland may be short-lived. KPMG says that China's increasing manufacturing costs are more to do with the country's demographics.
China's one-child policy has resulted in a "sudden and serious" shortage of the labour that gives workers in both the richer coastal provinces and poorer inland areas the leverage to demand higher wages. The report was based on interviews with 12 major multinational companies including Ikea, B&Q-owner Kingfisher and Hong Kong's Li & Fung, which sources goods for big-name clients including Wal-Mart.