In the News: Chinese exports have their limits

The nation has a firm grip on electronics manufacturing, but UAE firms find there is room to compete in other areas. Tony Glover reports

University students in the United States play a game called "I spy something not made in China". The game involves looking around a room to spot an item that was not made in China.

The prevalence of the game is an indication of the extent to which US consumers have come to rely on cheap Chinese manufactured goods during the financial downturn and subsequent global recession.

Between January and August of this year, US imports from China totalled more than US$255 billion (Dh936.6bn), according to the US Census Bureau. During the same period, US exports to China totalled just over $66bn, revealing an underlying trading deficit of more than $189bn.

Computers and laptops top China's list of exports to the US, followed by children's toys. Ever since the Chinese company Lenovo bought IBM's PC arm in 2004, China has become a hub for computer hardware manufacturing. The growing global appetite for smartphones and tablet computers has also fuelled Chinese export growth.

China is now also the world's second-largest economy and is predicted to overtake the US by 2027. But, although China may be leading in the manufacture of high-end electronics, the global recession is limiting its ability to export other types of manufactured goods to countries such as the UAE.

Despite claims by bodies such as DragonMart, a Dubai-based gateway for Chinese products that is owned by Retailcorp Malls, the retail property division of Dubai World, that Chinese exports are increasingly appealing to UAE customers, Chinese trade to the UAE is limited by economic factors. And some firms in the Emirates are now finding it easier to compete with Chinese manufacturers compared with a few years ago.

Rasha Shehada, from the UAE, was a delegate at last month's Global Women Vendors Exhibition and Forum (WVEF), held in the city of Chongqing, in south-west China.

Organised by the International Trade Centre, a joint agency of the World Trade Organisation and the UN, Ms Shehada attended the forum on behalf of her company, Diamond Line, where she is the business development executive. As well as supplying the UAE's domestic market, the Dubai-based family owned and operated hotel supplies company has operations in 21 countries, including the US.

"Our main challenges are from China and India, where manufacturers have lower overheads," Ms Shehada says.

"[But] the financial crisis has had a silver lining for companies like ours. In order to have the economies of scale needed to offer low prices, local traders have to invest in importing a whole container ship full of kitchen products from China.

"It is not economical to order a few pallets and a full container is now seen as too risky an investment in the current climate. This means traders in the UAE now rely more on local suppliers like ourselves."

Although low-cost Chinese manufacturers may have taken the US by storm, some Middle Eastern suppliers such as Diamond Line are discovering that it is still possible to develop a long-term American client base.

"While Chinese manufacturers may win the large contracts in the US, we cater for a more niche market composed of smaller hotel companies," Ms Shehada says.

Even in IT manufacturing, a sector in which China dominates, international trade is more complex than many US university students playing I Spy might imagine.

While China itself is a big exporter of electronics hardware, it also imports many of its components from other Asian countries. In doing so, China's electronics manufacturers are no different from companies such as Apple, which sources many of the components for its hugely successful iPhones and iPads from Shenzhen, the booming Special Economic Zone in the southern province of Guangdong. On the strength of its Apple contracts, Foxconn, a Chinese electronics manufacturer, has become one of the country's largest private employers with a workforce that is reported to be more than one-million strong.

Western companies like Apple and most of its rivals in the IT industry increasingly outsource manufacturing to countries such as China to drive down costs and drive up profit margins. But this means that the biggest US exports to China are American jobs and technology.

The tendency of western companies to have manufacturing facilities located in emerging countries has been one of the factors behind that vast country's great technological leap forward in recent years. This has resulted in a Chinese industry that caters effectively not only for its own huge and rapidly expanding domestic market, but also makes cheap exports for western consumption.

But, according to the Federal Reserve Bank of New York, a large proportion of China's exports consist of finished goods fashioned from imported parts and components, most often sourced from elsewhere in Asia.

Yilmaz Akyuz, a special economic adviser and chief economist at The South Centre, a Switzerland-based intergovernmental policy think tank of developing countries, says in recent years, the average import content of Chinese exports has been between 40 per cent and 50 per cent. This makes China far more dependent on its Asian neighbours and other manufacturing regions than is generally understood.

Not only does this make China's export growth seem less impressive, it also leaves the world's second-largest economy vulnerable to the same fate suffered by the US.

By outsourcing production to countries less developed than itself, China runs the risk of going down the same road taken by the US when it started to outsource to China. By exporting technological and manufacturing know-how to countries where costs are low, China could itself start to be undercut by other emerging countries.

In this scenario, China could soon be in the unenviable position of being the middleman between western brands and low-cost manufacturing bases.

The history of Foxconn shows how difficult this strategy is to follow in practice. According to Reuters, Foxconn's $12bn investment in new manufacturing facilities in Brazil is in doubt. Despite a subsequent statement by a senior member of Brazil's government that Foxconn's plans are on schedule, some industry watchers are still sceptical and believe that the company's strategy of outsourcing its manufacturing of western products to other regions, where labour is cheap and worker protection is limited, is essentially flawed.

The subject is a sensitive one for electronics manufacturers. Just as consumers are becoming increasingly aware of the ecological effect of the manufacture of products ranging from food to automobiles, so they are becoming increasingly sensitive to the working conditions under which products are made.

But, aside from moral concerns, there is also the danger of Chinese manufacturing becoming too dependent on the success of a handful of global brands such as Apple and Microsoft. At a time when the internet is going through a second incarnation, commonly referred to as Web 2:0, data storage is moving to remote hosted computer banks.

Cloud computing, as it is called, is widely expected to eventually result in today's powerful and overly complex hand-held computerised devices such as smartphones and tablets being replaced by less complex, cheaper "dumb" terminals that act as receptors for software and data managed by companies like Google and Microsoft.

These vast computer banks, known as "server farms", require few staff and can be located anywhere. Because they burn large amounts of energy, these facilities are increasingly unpopular in developed economies, where governments are imposing ever stricter regulations. Even if companies outsource these facilities to other countries, they will not be labour intensive and will not create the kind of manufacturing boom China has witnessed in the era of complex, largely stand-alone consumer computing devices.

In addition to smartphones and laptops, China's top exports to the US include video games, computer monitors and flat-panel TV screens. The future take up of all these devices in sophisticated western markets are dependent on two variables: technology fashion and expendable consumer income.

Buying the latest smartphone or expensive video game becomes less attractive for consumers at a time when most people's real incomes have been falling. In the struggle to win market share, western technology giants are prepared to introduce new strategies that are less labour intensive and more cost-effective.

And that silver lining could grow even further for UAE exporters, who could soon find that the threat of low-cost Chinese manufacturers will diminish even in today's key areas of IT and home entertainment.

pf@thenational.ae