Asean countries to benefit from China's waning competitiveness

Just over one-third of the manufacturers in China's Pearl River delta - the country's export powerhouse - plan to shift production capacity to cheaper locations within the country or to bases in Southeast Asia, Bangladesh, India and Sri Lanka, a survey of manufacturers shows.

The main motivation for the capacity relocations is labour shortages that are driving wages higher and reinforcing pressures for more generous social welfare payments, according to a survey of 290 manufacturers in the delta region conducted by Standard Chartered in February and March this year.

Survey respondents said they expected migrant worker wages to rise 8.4 per cent this year, up from 8.1 per cent last year (see chart) - suggesting a real wage growth of 6.8 per cent after allowing for a projected inflation of 1.6 per cent, according to Kelvin Lau, an author of the Standard Chartered report.

The finding corresponds with a nationwide survey of blue collar wages in April by China Confidential, an FT research service, which showed a year-on-year wage increase of 7.8 per cent.

Plans to relocate factories away from the delta area - which generates 27 per cent of the country's exports and receives almost 20 per cent of its inward foreign direct investment (FDI) - reveal a divergence in destinations between some relatively low-cost inland areas of China and countries across Asia.

Some 20 per cent of survey respondents said they would move inland, down from 28 per cent in the same survey last year, while 11 per cent said they would move overseas, down slightly from 13 per cent in last year's survey. Although the findings suggest a big further shift out of the delta area, most companies opted to stay put while boosting automation and other equipment investments to defray rising labour costs (see chart).

The 10-member Association of South East Asian Nations (Asean) is set to become the biggest beneficiary of the delta area's waning competitiveness, the survey found. This is underlined by other advantages Asean enjoys; its labour force is expected to expand by 70m workers between 2010 and 2030, while China's is likely to contract by the same margin, according to United Nations projections.

"ASEAN is likely to benefit from comparatively low wage costs and abundant labour supply over the next 20 years," the Standard Chartered report says. "Manufacturers shifting production to Asean are also positioning themselves to capture a share of the region's growing consumer market, driven by high economic growth and a rising middle class," it adds.

Given the weight of the delta area in global FDI flows, even a relatively minor relocation could have a big effect on investment into recipient countries. In 2013, for example, a total of $106.1bn in FDI entered the Pearl River delta, nearly four times the amount flowing into India, nearly five times that into Indonesia and 12 times that into Vietnam. Similarly, the delta area's annual exports - of $607bn in 2013 - vastly exceed those from each Asean country.

Among survey respondents who said they plan to move manufacturing capacity overseas, 36 per cent favoured moving into Vietnam, 25 per cent into Cambodia, 10 per cent into Bangladesh, 10 per cent into Indonesia, 5 per cent into India, 5 per cent into Sri Lanka, 5 per cent into Thailand and 3 per cent into the Philippines, Standard Chartered said.

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