In this week’s interview, Shaun Rein, managing director of China Market Research Group, weighs in on the minimum wage debate in Cambodia and discusses the impact that China’s increasing costs will have on the manufacturing industry here, as investors look beyond the world’s second-largest economy.
As the title of your book, The End of Cheap China: Economic and Cultural Trends that Will Disrupt the World, makes clear, China is no longer the highly desired manufacturing location it once was. What happened?
Chinese factory salaries have gone up 15 to 20 per cent annually for the past five years. High salaries, combined with soaring rents and an ageing population, have squeezed margins for manufacturers, forcing them to relocate to lower cost countries like Cambodia, Indonesia or internally within China to provinces such as Sichuan. Nike, for instance, gets 37 per cent of its products from Vietnam versus 35 per cent from China.
What does such a shift mean for the region?
There are great opportunities for Cambodia and ASEAN in general to grab market share in the manufacturing sector, especially in light industry. Many apparel and footwear companies are looking to relocate to ASEAN as long as they can find the proper infrastructure and stable government policies. Thailand is attracting more auto sector investment, Bali and other resort areas will benefit from more outbound Chinese tourism.
Where does Cambodia fit in?
Cambodia is well-poised to benefit from China’s rising costs. China-Cambodia relations are strong, so Chinese businessmen feel comfortable operating. Of concern, however, are the recent labour protests, which worry businessmen thinking about rising costs and low labour productivity. Lack of infrastructure is another issue. In today’s world, where brands like Zara release new clothes every two weeks rather than every quarter, the speed of getting product from factory to point of sale is critical.
Is it all about low costs?
I was speaking with bankers recently who are setting up branches in Cambodia in order to help finance the expansion of apparel manufacturers. Cambodia needs to provide low-cost yet skilled labour for at least 10 years to make it worthwhile for companies to relocate. In my book, I actually track a furniture company that relocated to Vietnam but eventually moved back to China because of too many defective products. Cheap is not enough – it needs to be good enough quality too.
Will Cambodia really suffer if it raises the minimum wage immediately to $160?
Cambodia has a low-cost advantage right now over many of its neighbours which will allow it to attract more FDI. If the minimum wage was increased to $160 a month, that would make companies think twice about whether or not to invest in Cambodia as it lacks the infrastructure to lower costs in other ways and is farther from the end consumer than Thailand.
Has China lost its status as a manufacturing hub completely?
China will not lose its manufacturing dominance overall, and its share of world exports has risen in the past decade. It has far superior infrastructure and ecosystems than any other country. It is just the type of manufacturing that will change. Factories are automating factory lines and producing aerospace parts rather than T-shirts.
The relationship between Cambodia and China is stronger than ever. How is Cambodia benefiting?
Right now China is having increasingly tense relations with many of its neighbours, so it is a good opportunity for Cambodia to cooperate with China and thus attract investment and trade opportunities. China waves economic carrots to friendly nations. The prime minister of Japan’s ill-advised rhetoric combined with inevitable South China Sea friction is causing too much tension – China can benefit from a nation like Cambodia in international bodies.
This interview has been edited for length and clarity