LI & FUNG RESEARCH CENTRE China Distribution & Trading IN THIS ISSUE : I. The changing 2 manufacturing landscape II. Policy direction: 7 industry relocation and upgrade III. Implications for 14 sourcing business 13/F, LiFung Centre 2 On Ping Street Shatin, Hong Kong Tel: (852) 2635 5563 Fax: (852) 2635 1598 E-mail: lfdc@lf1937.com http://www.lifunggroup.com/ China s industry relocation and upgrading trends: implications for sourcing business China is no doubt one of the most important sourcing centers in the world. However, the business environment facing manufacturers in China has become tougher since 2007. Their profit margins are being squeezed to such a degree that some of them have been forced to shut down. There is thus growing concern over the industry consolidation and relocation trends of manufacturers in China, and the impacts on sourcing business in China. The changing manufacturing landscape - The ongoing factory consolidation will cause adjustment pain but will facilitate industrial upgrading in the long run. - Industry relocation is taking place. It is a gradual process that one should closely monitor. - On the other hand, many manufacturers are actively seeking to transform and upgrade themselves, through strengthening their core competencies, increasing investment in R&D, and upgrading their equipment and facilities, etc. - The emergence of domestic enterprises and manufacturers outside the coastal area should not be ignored. Policy direction: policies have been launched by both central and local governments to promote industry relocation and upgrade - The Ministry of Commerce plans to set up 50 designated areas by 2010 in central and western China for enterprises moving out from coastal regions. - The local governments of the central and western region regard the relocation policy as an opportunity to develop industries and boost economic development and are actively improving their business environment and offering various incentives to attract relocation. - The traditional manufacturing hubs in the coastal provinces, such as Guangdong province, also see the importance of industry relocation and upgrade and are actively promoting relocation in their vicinities. Implications for sourcing business - China remains a favorable place for sourcing. - Buyers should be cautious when looking for alternative sourcing country. - Buyers should pay attention to the sourcing potential of other emerging cities in China. - Suppliers management is increasingly important. - China is not only the world s factory, but also a consumer market not to be missed. 1
China is one of the most important sourcing centers in the world. The presence of abundant skilled labor, thousands of vibrant industrial clusters, political stability, rapidly developing transport infrastructure, etc. make its manufacturing sector highly competitive. As China s manufacturing sector grows in strength and sophistication, many foreign companies regard China not only as a place to buy cheap and quality products, but also a major manufacturing hub and research and development (R&D) centre. However, since 2007, China s manufacturing sector has been hit hard by factors like slackening global demand especially after the outbreak of the subprime crisis and financial tsunami, production cost hikes, renminbi (RMB) appreciation, processing trade policy change and tightening monetary policy. Manufacturers profit margins are largely slashed to a degree that some production was forced to cease. Factory consolidation and relocation is taking place, which has aroused great concern among buyers and retailers. In this paper, we will first look at the new developments in China s manufacturing sector, including factory consolidation, relocation and industrial upgrade. Then, we will discuss the policy initiatives launched by both central and local governments towards industry relocation and upgrade. Lastly, we will analyze the impacts of these new developments on sourcing strategies. I. The changing manufacturing landscape 1. The ongoing consolidation will cause adjustment pain but will facilitate industrial upgrading in the long run The business environment for mainland manufacturers has become much tougher. Export-oriented enterprises in these industries have encountered extremely difficult situation export growth of garments and toys fell sharply to 1.8% yoy and 3.7% yoy in 1-3Q08, compared to 20.9% yoy and 20.3% yoy respectively in 2007. In November 2008, China s industrial production growth fell to a record low of 5.4% yoy (excluding the January-February New Year factor). As a result, a number of players in these industries have ceased operations this year. Sudden closure of factories is commonplace. According to the Department of Small and Medium-Sized Enterprises of the National Development and Reform Commission (NDRC), 67,000 small and medium-sized enterprises (SMEs) above designated size in China were closed down in 1H08. Many traditional big manufacturing and export hubs have also been hit hard. According to the Hong Kong Chamber of Commerce, there used to be 70,000 to 80,000 Hong Kong manufacturers in the Pearl River Delta area, most of which are in the export-oriented, traditional light industries. However, it is reported that, since late-2007, approximately 15% of them have closed down. The ongoing factory closure has led to unemployment problems and the spillover has affected other sectors like transportation and logistics, catering, property, etc. The Chinese policy makers have taken numerous measures to ease the hardship facing the enterprises and to boost economic growth. One of its recent moves is to raise export VAT rebate rates for numerous products and thus, improve exporters margins. Further policy adjustments targeting struggling exporting industries are likely to be made, which may include supporting policies such as providing better financing access for SMEs, and broadening the value-added tax reduction scheme for fixed asset investments. Nonetheless, the consolidation trend is irreversible. The marginal players will be gradually phased out of the market while the survivors will grow stronger and bigger. In the long run, we expect to see an overall industrial upgrading. 2
2. Industry relocation a gradual process that one should closely monitor Taking advantage of the better transportation and the government s preferential policy towards the coastal region, exportoriented factories have long been developing along the east coast of China with major hubs in Yangtze River Delta (YRD), Pearl River Delta (PRD) and Bohai-rim region. Costs have surged as these coastal regions develop. Facing the increasingly tough business environment, manufacturers who operate in these regions have begun exploring the lower cost cities and are seriously considering moving their businesses to the less developed area. Meanwhile, the central and local governments are also actively encouraging industry relocation and upgrading. However, relocation is a complex process and is never an easy decision. So far, many enterprises still adopt a wait-and-see attitude and are not ready to move. Obstacles hindering the relocation process include shortage of skilled labor, underdeveloped infrastructure, high logistics costs and unavailability of local clusters. The industry relocation is going to be gradual and long-term: We expect the relocation to take place gradually at the moment, but will accelerate in the next 3-5 years. Buyers are advised to keep a close watch of the suppliers move and begin to explore sourcing opportunities in the emerging regions. There are also reports about manufacturers moving out of China, to seek even lower costs in countries such as Vietnam. Still, we believe China will remain a favorable place for sourcing. While buyers may also wish to source from other countries in order to diversify risk, those countries will not be able to replace China. As the world s factory, there is no substitute large enough for China in the near future. (1) Relocation preference differs among industries An enterprise s relocation decision is basically affected by two major factors, namely the degree of dependency on local industrial clusters and the level of export reliance, suggested by Professor Chen Yao and Feng Chao from the Chinese Academy of Social Sciences (see Exhibit 1). Exhibit 1 Factors affecting relocation decision Type I Type II Type III Degree of dependency Strong Relatively weak - Relatively weak - substitutes on local industrial clusters most intermediate inputs of intermediate inputs are readily are imported available elsewhere in China Level of export reliance High High Relatively low Tendency to relocate Slight Strong - mainly to Strong - mainly to other low-cost countries central and western China; some to low-cost countries nearby Source: Trade cost, local linkage and industrial clusters relocation, Chen Yao & Feng Chao It is difficult for Type I enterprises to relocate since they are deeply rooted in their original locations, where their cost advantages and efficiency are derived from strong cluster effect. As relocation is not an option, these enterprises are under strong pressure to enhance competitiveness and upgrade. 3
Type II enterprises are mainly foreign-invested processing trade enterprises with strong mobility. Given its export-oriented nature, they are unlikely to move to inner provinces of China due to the high transportation cost from the inland to the coast. They are more likely to relocate to less developed cities along the coast or other low-cost countries in South or Southeast Asia. Type III enterprises are cost-cautious. As they focus on the domestic market, they will tend to stay in China and relocate from the high-cost coastal region to the inland regions; while some may move to other low-cost countries nearby. To better illustrate, let s look at the case of shoes industry, a traditional labor-intensive industry. Shoes-making is relatively low value-added and the production chain is short and not very sophisticated. In general, shoes manufacturers do not rely heavily on the local industrial clusters. Their geographical mobility is strong. It is observed that an increasing number of Taiwanese export-oriented shoes manufacturers have moved their production facilities to other Southeast Asian countries. For those who focus on domestic sales, they tend to set up production facilities in central and western China including Sichuan, Hunan, Jiangxi, Guangxi and Henan provinces. For instance, Aokang Group of Wenzhou had already initiated a group of eight enterprises engaging in shoes making to relocate to Bishan County of Chongqing in September 2003. As of end-2007, a total of 218 shoes enterprises have set up their presence in Chongzhou of Sichuan. (2) Expansionary relocation Instead of relocating the whole factory or production base, a number of manufacturing enterprises opt for expansionary relocation. Many manufacturers maintain the original scale and operation of their production bases in the coast, while setting up satellite factories in less developed areas. The higher value-added functions such as sourcing of raw materials, product development and design are generally handled by the main factory in the coastal area in a centralized manner, while the inland facilities focus on production. In this way, the coastal and inland regions complement each other and the overall competitiveness is enhanced. Some large enterprises in coastal regions have already started to relocate part of their non time-sensitive and simple production process to inland provinces. In the long run, the coastal region is going to be development-focused while the outlying regions will be more production-focused. Exhibit 2 Expansionary relocation Source: 4
All in all, most enterprises will adopt a gradual approach instead of relocating the whole production at one go. Many companies tend to relocate the labor- or resource-intensive processes to inland cities as the first step. Once the supporting facilities in the inland cities have improved, they will consider relocating the more complicated processes. This approach allows a transitional period for adaptation of new production sites, lowers operation risks and eases their financial burden. (3) Factors constraining relocation At present, there are a lot of constraining factors discouraging manufacturers from relocating. Numerous surveys showed that many manufacturers in China are not ready for relocation and most of them adopt a wait-and-see attitude. The Hong Kong Trade Development Council (HKTDC) interviewed about 4,000 manufacturers in the PRD in June 2007 and found that over 60% of the respondents did not have plans to relocate in the next three years (2008-10). Federation of Hong Kong Industries (FHKI) interviewed about 200 enterprises in the PRD in March 2008 and found that shortage of skilled labor, high logistics costs and inadequate support from local governments of the less developed regions were the major obstacles barring enterprises from relocating at the moment. However, as the transport infrastructure develops, the increasing penetration of highways and rail lines into the inland regions should be a catalyst for relocation. 3. Industrial upgrade On the other hand, we witness an upgrading trend of manufacturers in China, not only because of the growingly challenging business environment but also because of the increasingly stringent government policies on product quality and environmental standards, as well as the rising global calls for safer and quality products. Many manufacturers are actively seeking to transform and upgrade themselves, through strengthening their core competencies, increasing investment in R&D, and upgrading their equipment and facilities, etc. HKTDC has conducted a survey with about 2,000 Hong Kong traders and manufacturers and the results were announced in September 2008. The findings reveal that the major reasons driving the respondents to upgrade included meeting the market demand for the development of new products, exploring new business opportunities, and fighting against competition from the Chinese Mainland (see Exhibit 3). Exhibit 3 Reasons for industrial upgrade Reasons for industrial upgrade % of respondents Keep abreast of market/ customer requirements on product development to avoid falling behind 55.2 Develop new products to explore new business opportunities 53.8 Withstand competition from Chinese Mainland enterprises 47.0 Develop higher value-added products to ensure profitability 46.7 Comply with ever more stringent overseas requirements on product safety/specification 38.8 Demand for high quality products from Chinese Mainland consumers as their income level rises 17.6 Withstand competition from other regions 9.8 Higher Mainland production capability can support production of higher value-added/ high-tech 9.5 products by Hong Kong enterprises Mainland industrial upgrade will boost demand for high quality precision industrial products 8.2 Others 4.3 Source: Hong Kong Trade Development Council (HKTDC), September 2008 5
Exhibit 4 demonstrates possible ways of industrial upgrade, including improving product quality and efficiency, expanding along the supply chain to embrace more high value-added functions like R&D and marketing, and produce higher valueadded products. Exhibit 4 Industrial upgrade Source: According to the HKTDC s survey in September 2008, 84.7% of the respondents had invested in different areas in the past three years to upgrade their production. Most of them have strengthened quality control, improved design and engineering capabilities, and further developed competence in R&D (see Exhibit 5). Exhibit 5 Strategies to transform and upgrade Areas received investment in the past three years % of respondents Strengthening quality control 72.7 Improving design and engineering capabilities 68.8 Enhancing product R&D capabilities 56.1 Complying with green production requirements 47.3 Raising production technology and automation levels 40.6 Source: Hong Kong Trade Development Council (HKTDC), September 2008 Apart from self-initiated enterprises, the government also makes efforts to promote industrial upgrade. For example, the Dongguan government has committed to channel five billion yuan in the coming 5 years to assist Dongguan enterprises in R&D and innovations. 6
4. The emergence of domestic enterprises and manufacturers outside the coastal area Today, domestic enterprises are growing both in scale and strength. They are now spending more efforts in product development. They are also benefited from the Corporate Income Tax reform, which reduces their tax rate and puts them on a level playing field with foreign enterprises. In the less developed regions, many manufacturers are growing fast amid the rapid economic growth. We saw an increasing number of labors who used to work in coastal regions went back to their hometowns (mostly in inland provinces) and started their own business there after accumulating sufficient experience, network and capital. Also, after some years of efforts, some retailers managed to get a foothold in the inland provinces, and they set up production facilities in the vicinity of their retail sites to take advantage of proximity to market. II. Policy direction: industry relocation and upgrade The Chinese government sees industry relocation and upgrade as a strategic step to push forward economic restructuring and achieve balanced growth of different regions. Many government policies have been launched by both central and local governments to promote industrial upgrade and relocation. 1. Central government s policy initiatives According to the Chinese development plan, the large coastal cities are positioned to develop high value-added industries and modern services such as producer services and commercial services. Therefore, the government wishes to move out the edge-losing labor intensive and low value-added industries from the coastal regions so that space and resources can be released to develop higher value-added industry, while at the same time boost the economic development of central and western China. The Ministry of Commerce (MOFCOM) plans to set up 50 designated areas by 2010 in central and western China for enterprises moving out from coastal regions. Measures such as loans from State Development Bank, tax incentives, and building supporting facilities (e. g. water supply, electricity supply, waste management, sewage management, education, warehousing and transportation) will be implemented to encourage relocation. So far, the MOFCOM has announced two batches of designated areas, i.e. a total of 31 sites (See Map 1 and Exhibits 6 & 7). 7
Map 1 Designated areas for industry relocation by the Ministry of Commerce as of end-2008 Source: Ministry of Commerce (MOFCOM), 8
Exhibit 6 The first batch of designated relocation areas, MOFCOM, 2007 The first batch of nine key relocation destinations was selected by the MOFCOM in April 2007. All of them are located in central China. Province City Hubei Wuhan Hunan Chenzhou Henan Xinxiang Jiaozuo Jiangxi Nanchang Ganzhou Shanxi Taiyuan Anhui Hefei Wuhu Source: MOFCOM Exhibit 7 The second batch of designated relocation areas, MOFCOM, 2008 The second batch of designated relocation areas was announced in April 2008. Most of the 22 selected cities are located in central and western parts of China. Region Province/Municipality City Central Hubei Yichang Xiangfan Hunan Yueyang Yiyang Yongzhou Henan Luoyang Zhengzhou Jiangxi Yian Shangrao Shanxi Houma processing zone Anhui Anqing Western Guangxi Nanning Qinzhou Sichuan Chengdu Mianyang Chongqing Shaanxi Xi an Ningxia Yinchuan Yunnan Kunming Others Hainan Haikou Inner Mongolia Baotou Heilongjiang Harbin Source: MOFCOM 9
2. Initiatives launched by local governments The local governments of the central and western region regard the relocation policy as an opportunity to develop industries and boost economic development. To attract enterprises seeking to relocate, local governments of these designated regions are actively improving their business environment and offering various incentives such as tax breaks, subsidies and funding support. Exhibit 8 shows the various incentives offered by the designated regions to attract relocating industries. Exhibit 8 Examples of the incentives provided by some inland provinces/cities to attract relocating industries Provinces/cities Examples of the incentives Hubei Designated funds to support relocation; improving transport infrastructure Hunan Designated funds to support relocation; improving services in logistics centres and customs; simplifying the approval procedures of relocation projects Guangxi Improving government services; providing financial support; promoting electronic monitoring systems at customs Yueyang Tax breaks; simplifying customs procedures Chenzhou Subsidies on construction of production plants; improving transport infrastructure Haikou Waiving administration fees of some of the government services during the course of relocation Sources: Compiled by from various sources The traditional manufacturing hubs in the coastal provinces also see the importance of industry relocation and upgrade. However, aggressive relocation to other provinces will bring harm to the local economy. Thus, they are actively promoting relocation in their vicinities. Guangdong province is a case in point. In late May 2008, Guangdong announced the Decision on Encouraging Industry and Labor Relocation ( ) (also known as Double Relocation ) in which measures and funds are designated to facilitate industry and labor relocation within the province. To summarize, Double Relocation refers to: (1) Industry relocation: relocation of traditional labor-intensive industries, resources-consuming industries, processing industries from the central PRD to less developed regions in the province, i.e. the eastern and western PRD and northern Guangdong; (2) Labor relocation: relocation of labor engaging in primary industry to secondary and tertiary industry; and relocation of skilled labor from less developed regions to developed regions in PRD. Map 2 illustrates the Double Relocation strategy of the Guangdong province. More than 40 billion yuan has been earmarked for measures encouraging Double Relocation in the coming five years (2008-2012). Resources will be allocated to improve transport infrastructure, develop industrial relocation parks, develop pillar industries, set up an award fund to encourage relocation, provide training to nurture skilled labor, improve productivity of farmland and increase land supply in less developed regions in the province. 10
Map 2 Double Relocation of Guangdong province, 2008 Source: Guangdong Government, Subsequently, the Guangdong government released the Guidelines on the Layout of Industry Relocation Regions in Guangdong Province ( ) (the Guidelines) in June 2008 to guide relocation of industries in central PRD to the less developed areas within the province in a coordinated manner. In the Guidelines, the government stipulated that the relocation process is going to be a coordinated one a number of selected industries will be encouraged to relocate to designated areas to achieve a clear division of work and to avoid direct competition among regions; while an array of industries, especially those causing serious pollution, will not be allowed to relocate. Also, the government has identified more than 20 industrial relocation parks within Guangdong as shown in Exhibit 9 and Map 3 below. 11
Exhibit 9 Provincial industrial relocation parks identified by the Guangdong government Region (M-Mountainous area; E-Eastern PRD; Industrial relocation parks* W-Western PRD) Approved industries to be relocated 1 Shenzhen Yantian (Meizhou) M Electronic information, electrification and automation 2 Shenzhen Futian (Heping) M Watches and clocks, electronic and telecommunications equipment 3 Shenzhen Nanshan (Chaozhou) E Machinery and new materials 4 Shenzhen Longgang (Wuchuan) W Electronics and toys 5 Dongguan Shijie (Xingning) M Automobiles and metal machinery 6 Dongguan Shilong (Shixing) M Electronics, precision machinery and equipment 7 Dongguan Dongkeng (Lechang) M Machinery and furniture 8 Dongguan Fenggang (Huidong) M Shoes and household electronic appliances 9 Dongguan Qiaotou (Longmen Jinshan) M Apparel and furniture 10 Dongguan Dalang (Haifeng) E Electronic information and bio-technology 11 Dongguan Dalang (Xinyi) W Textile and processing of agricultural products 12 Dongguan Changan (Yangchun) W Electrical appliances and apparel 13 Zhongshan Sanjiao (Zhenjiang) M Electronic information and machinery e.g. auto parts 14 Zhongshan Dachong (Huaiji) M Furniture and metal products 15 Zhongshan (Heyuan) M Telecommunications equipment and machine tools 16 Zhongshan Torch (Yangxi) W Textile, apparel, food and pharmacy 17 Zhongshan Shiqi (Yangjiang) W Electronic information and household electronic appliances 18 Foshan Chancheng (Yuncheng Duyang) M Machinery and furniture 12
Region (M-Mountainous area; E-Eastern PRD; Industrial relocation parks* W-Western PRD) Approved industries to be relocated 19 Foshan (Qingyuan) M Machinery and pharmacy 20 Foshan Shunde (Yunfu Xinxing Xincheng) M Machinery for light industry and telecommunications 21 Shunde Longjiang (Deqing) M Lighter (tobacco tools) and furniture 22 Foshan Chancheng (Yangdong Wanxiang) W Metal machinery and furniture 23 Foshan Shunde (Lianjiang) W Manufacturing and processing of small household appliances 24 Guangzhou Baiyun Jianggao (Dianbai) W Electrical appliances, textile and apparel Source: Guangdong Government * The name of the industrial relocation parks provides information on the original location of industries as well as the location of the industrial relocation park. The place in the bracket refers to the location of the relocation park. For example, Shenzhen Yantian (Meizhou) means that enterprises in Shenzhen Yantian are encouraged to relocate to the relocation park in Meizhou. Map 3 Industrial Relocation Parks in Guangdong Source: Guangdong Government, 13
Apart from boosting relocation to its vicinities, the Guangdong government also regards Southeast Asian countries as partners for industry relocation and upgrade. To foster closer economic ties, in September 2008, a Guangdong delegation, led by the Party Secretary-General Wang Yang, paid a visit to the ASEAN Secretariat and some of its member countries, and signed an agreement aimed at deepening and widening cooperation and business platform between Guangdong and ASEAN. Trade contracts worth billions were signed and dialogue mechanism with the ASEAN Secretariat and some of the member countries was established. Moreover, Guangdong has successfully presented the business opportunities brought by its relocation plan: some of Guangdong s labor intensive industries could relocate to countries such as Vietnam and Indonesia while enterprises with competitive edges in services and management from countries such as Singapore are encouraged to invest in Guangdong. III. Implications for sourcing business 1. China remains a favorable place for sourcing While sourcing from other countries may be necessary for diversifying risk, and will take over some shares from China, those countries will not be able to replace China as the manufacturing hub. Earlier in 2008, PricewaterhouseCoopers carried out an interview with about 60 companies from eight countries on their sourcing activities, and found that 83% of the respondents still regarded China as their first choice for global sourcing. The HKTDC survey in September 2008 shows similar result: 64% of some 2,000 Hong Kong traders and manufacturers said they would expand the sourcing base in China. Indeed, in the foreseeable future, there is no substitute large enough to replace China as the global factory. Besides, as the manufacturers in China are constantly upgrading and the government tightens its control over product quality and safety, the quality of Chinese-made products are set to improve rapidly. The ongoing factory consolidation should also be conducive to an overall industrial upgrading. Furthermore, the Chinese Government s aggressive steps in developing the logistics and infrastructure in the central and western regions and the preferential relocation policies should facilitate the growth of manufacturing sector in the less developed regions. A large pool of competitive manufacturers outside the traditional manufacturing hubs is set to emerge. Besides, over the long run, China has two key advantages. First, its large domestic market can generate sufficient demand required for efficiency enhancement or technological advancement in manufacturing. Second, the relatively sophisticated manufacturing capabilities of China and its well-established industrial clusters in the PRD and YRD strike an excellent balance between low cost and high quality, which is also difficult to be replicated by elsewhere quickly. In any case, buyers are advised to keep a close watch on the suppliers move and begin to explore sourcing opportunities in other parts of China or even other emerging economies. 14
2. Buyers should be cautious when looking for alternative sourcing country China plus one is a strategy intended to mitigate risk and control costs. Companies are expanding their sourcing bases elsewhere in Asia so as not to be overly dependent on factories in China. When extending sourcing network to low-cost countries, one should not solely look at production costs. Factors such as availability of industrial clusters, manufacturing capabilities of different countries, political and economic environments, quality of labor force, transportation and logistics, business practices and culture should also be taken into account. For example, though the labor and rental costs are low in Vietnam, high inflation and poor infrastructure may well offset the unit cost advantages. India is a populous country with very cheap labor, yet investors will face problems such as limited geographical mobility of labor due to cultural factor and poor transport infrastructure. Production cost is low in Bangladesh, but its supporting facilities are still immature. Thailand and the Philippines are often politically unstable. 3. Buyers should pay attention to the sourcing potential of other emerging cities in China Buyers should no longer concentrate solely on the traditional manufacturing areas. As the manufacturing sector in the less-developed regions develops and the industry relocation process continues, more competitive factories and a wider range of product will be available for the buyers to select. Though currently many factories in those regions are still in infant stage, their long-term potential cannot be ignored. Buyers should start exploring and nurturing relationship with these emerging suppliers. 4. Suppliers management is increasingly important Since 2007, cases of sudden closures were observed. Buyers are advised to stick to quality suppliers with sound management and up to standard production, enhance communication with suppliers, and keep a close watch on their operating and financial conditions. On the other hand, an increasing number of suppliers in China are upgrading themselves and they now have stronger product design and development capabilities. Buyers could therefore leverage on the growing strength of their suppliers, for example, by involving their suppliers in their product design and development processes. 5. China is not only the world s factory, but also a consumer market not to be missed China s retail sector is expanding fast and has maintained double-digit growth for the past few years. Exhibit 10 shows China s total retail sales of consumer goods from 1990 to 2007. The total retail sales of consumer goods hit 7,788.6 billion yuan in 1-3Q 2008, representing an increase of 22.0% yoy. 15
Exhibit 10 Total retail sales of consumer goods, 1990-2007 Source: National Bureau of Statistics, China Seeing the huge potential of China s consumer market, many buyers and manufacturers which are originally exportoriented are now flipping their supply chains over and targeting at the domestic sales opportunities instead. According to the HKTDC s survey in September 2008, 46.5% out of some 2,000 Hong Kong traders and manufacturers indicated that they would consider expanding their retail business in China. On the other hand, some export-oriented buyers want to tap into China s lucrative consumer market but often found it difficult as many of their suppliers in China are processing trade factories with no domestic selling right. However, as we observed, this situation should be improved gradually as many processing trade enterprises in China are now transforming to foreign-invested enterprises (FIEs) with domestic selling right amid the weakening global demand. Copyright 2008. All rights reserved. Though endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. 16