Rebalancing China

Most of the chatter about China’s rebalancing its economy centers around the structural side, from exporters to consumers. But there’s any side of the story as well, that of geographical rebalancing. The FT has a decent article on the rise of Central China. It’s also been reported in the local media that Foxconn’s , that of the suicide fame, new plant in Henan Province has come on stream and ready to churn out more iPhones.

What’s interesting in this phenomenon is that Central China has traditionally been the heartland of Chinese civilisation…and wealth. Chinese economy centered around its rivers and canals rather than along the seaboard. So, could this be the harbinger of de-globalization?

Foxconn and rebalancing

The rebalancing of Chinese economy is going on at warp speed.

On the heel of its wage concession, Foxconn, of the suicide fame, has announced ambitious plans to relocate inland. A brand new plant at Henan, China’s most populous province, is slated to create 300,000 positions when it comes fully onstream. Existing facilities at Tianjin in the North and Chongqing in the Southwest are also undergoing major renovation and expansion.

Most western commentators, like the FT here, automatically assume that the relocation is to take advantage of wage disparity between the inland regions and Shenzhen. However, wages at Foxconn Henan, are reported to be at par with that of Shenzhen. What motivate Foxconn apparently is a slew of other incentives and government regulations, for example, its Chongqing plant will operate without the obligatory dormitory which has become the hallmark of many an exporters’ town. A new generation of workers prefer to churn out iPods at their home provinces and relax in their own homes after work.

But the FT is right in noting that wealth is being spread more widely within the nation and the expected climb in value-chain:

Starting with Japan, country after country grew rich by following the same playbook: step on to the lowest, dreariest and most labour-intensive rung of industrialisation and gradually move up the value chain as you build up skills and capital, letting poorer countries take on the tasks you shed. This is how the “Asian tigers” copied Japan, and how successive generations – including China itself – followed. The current relocations are no less momentous for happening within a single country.

In fact, there has been rumor that Foxconn has been effectively pushed out of Shenzhen by the local government to make way for a car manufacturer. China’s game plan for the coast is to upgrade to higher value-added manufacturing and service. To encourage automation, the government has offered tax incentives for capital goods. Japan’s relatively robust recovery in this current round of malaise is largely riding on Chinese demand for advanced machinery. Reuters has a good article on the expected beneficiaries of this automation drive.

“The automation equipment industry is growing very, very fast. Sensors, frequency converters, conveyor belts, pneumatic systems, power tools — you name it,” said Raymond Tsang, head of consultancy Bain & Co’s Greater China industrial practice.

“We’re seeing anywhere between 20 to 30 percent growth in those sectors year over year.”

According to Nomura Securities, the ratio of machine tools in China that use numerical controls, a good measure of the level of automation, climbed to 27 percent in the quarter to May, up from 22 percent in 2009 and 19 percent in 2008.

This brings China to the level of Japan in the 1980s when it was in still in a phase of strong economic growth. Japan’s numerical control ratio has since risen to a world-leading 82 percent, offering a glimpse of where China may be headed as its economy develops.

Bottom line, the look of Chinese industries and societies is changing rapidly. China participates in the global extend and pretend game basically to buy time for this transformation. However, given the likelihood of a double-dip, there just may not be enough time even with China’s astonishing speed.

Foxconn to relocate to inland China

Hong Kong media has reported that Foxconn is to close most of its Shenzhen (that’s the suicides factory located along the eastern coast) operations and relocate to factories more inland, like the one up north in Tianjin and to the southwest in Chongqing. There are also reports that it’s reviewing opportunities in India. So perhaps some operations will eventually move out of China all together.

Company spokesperson maintains that the relocation has been in planning for a long time, and is in accordance with Guangdong government’s plan to upgrade coastal industries. However, while the upgrade proposal has been out for two years, it’s only recently that Foxconn is seriously considering relocation. So this is clearly driven by increased costs along the coast. Wages at inland factories located in Tianjin and Wuhan, for example, are only half of that at Shenzhen.

This type of relocation will most likely be welcomed by the government (the central government anywayz. Not sure about that of Shenzhen) which is busy rebalancing the economy, both geographically and structurally. It also helps put a lid on coastal workers’ wage demand to less than explosive and hence more adaptable for the exporters.

Besides wage concern, China’s pending new trade agreement with Taiwan, which will eliminate most tariffs, prompt some Taiwanese companies ling Ting-Yi to consider relocating back to Taiwan to cut down on transportation costs to Southern China.

So all in, major shifts in economic make up is at hand right now.