Losses to Manufacturing
Significant losses of manufacturing and concurrent downturns in exports are expected to create significant drags on the Chinese economy by Q4 of 2008. Real GDP growth is expected by the end of 2008 to be less than eight percent, which could accelerate social distortions within China that are already becoming visible. Specifically, increases in unemployment rates are expected with growing income inequality between the country’s coastal and rural areas. A continued lack of IP and patent-protection laws, and a lack of quality controls within the manufacturing and food-processing sectors will also hurt exports in 2008.
In 2006 an estimated $90 billion worth of counterfeit products flooded the Chinese market and China exported more than $40 billion worth of counterfeit products in this same year alone. The U.S. FDA has also mandated the inspection of various types of Chinese seafood imports as a result of systemic contamination to include antibiotics and chemical additives. China could avoid the extreme end of the economic downturn if the Chinese government takes steps to increase domestic consumption, but this still seems unlikely in the near-term. While the appreciation of the Chinese currency will have a negative impact on the Chinese economy, it will also have a short-term negative impact on the global economy as Chinese sourced goods and services will become more expensive, in turn curbing the global demand. The negative impact on the global economy should quickly abate as companies begin to source from other countries which will create a much more balanced picture for global GDP growth.
There’s no doubt China is headed for a major economic downturn. The only question now: The severity of the downturn and its impact on the global economy. For companies involved in outsourcing that have been using China as a primary platform for sourcing of both finished products and parts, immediate attention should be given to identifying alternative locations for the sourcing of the products, parts and services. Wal-Mart, which has more than 6,000 global suppliers of which more than 80 percent are based in China, is a prime example. Wal-Mart sources more than $40 billion worth of products from China, so any significant appreciation of the Chinese currency would have a direct negative impact on Wal-Mart’s profit margins and sales. Many of Wal-Mart’s suppliers, like Mattel and Hasbro, also manufactures the majority of their products in China. Global brands like Nike, Liz Claiborne and others also do the same. The Chinese economic miracle has been built in part on a house of cards driven by an under-valued currency. That miracle will soon meet the economic realities of free trade. The implications for companies using China as a primary base for outsourcing could be significant.
William Nobrega is president and founder of The Conrad Group, an emerging market strategic planning, and merger and acquisition facilitation firm based in Miami. He has more than 10 years experience in this field and is widely credited for initiating global business models in emerging geographies including Brazil, India and China. He is co-author of the book, “Riding the Indian Tiger; How Companies can Optimize Success in a Market that will Outperform China,” which is scheduled for publication this winter.
