When the developed economies were in busy in formulating policies for catching up the falling hand of economies in to the well of recession, emerging economies were making a paradigm shifts in its domiciles of production plants. China is again the leader in its first step towards this paradigm shift of its production base.
Africa is the name of the land where china along with World Bank is keen to establish its base for manufacturing. The World Bank and Beijing are in discussions about setting up low-cost factories in new industrial zones in Africa. This will benefit not only china or Africa in terms of economic factors but will also show a new path to the new decade after post recession. World bank is very keen to develop this new paradigm so as to make the weak economies parallel to the emerging economies .World Bank and China is very keen to make a shift of its production base.
For China it stands out to be very much economical. Chinese officials and academics have been debating in recent months proposals to use the country’s vast foreign exchange reserves. These reserves will be used to stimulate demand as well as develop emerging economies like Africa to become parallel with the world economy.
• Chinese industries will have the benefit of cheap cost of production as compared to other economies.
• The pressure on china to increase the valuation of its currency might materialize in the coming years as international pressure increases day by day.
• Once currency valuation goes up the Chinese cost of production will increases making the Chinese economy under severe threat. Industries in china will no longer enjoy the cheap cost of production and making abnormal gains from export.
• Hence by shifting production plants to Africa will make the Chinese manufactures under low cost regime of production and finally helping them to retain the place of abnormal gains.
• At the same time we all know that US and Europe are very much aware of the fact that Chinese goods have replaced their products in their own country shops.
• So various ways have been adopted in the recent one year time frame where we have witnessed ban on Chinese products by these two nations followed with other nations too out of fear. Chinese low cost of production and export have stopped manufacturing plants of many importing nations. As a result ban on Chinese goods have been imposed.
• So the demands of Chinese goods are getting reduced and making it more vulnerable for the Chinese manufactures in the long term.
• Hence by shifting production base in Africa will also help them to create demand and reduce dependence on US and Europe primarily.
World Bank desires to make African economy to grow and prosper just like Asian economies. This is the only prime reason that both of them are now busy to formulate plans of making this paradigm shift.
But in the opposite direction some African leaders are not willing much to have china establish its base of manufacturing. The prime reason behind is that they fear Chinese competition in areas such as shoes and textiles are undercutting Africa’s weak industrial base. This competition might damage the domestic industries of Africa is the fear within the minds of Africa.
China’s domestic market is closed to many foreign-made products. Chinese goods are getting strong resistance from these overseas goods. Hence china is focusing to put stronger emphasis on domestic consumer demand to create new markets for Chinese goods. So this time we might see that china might go for some ban of its overseas products entering to china.
If we look at another nation Japan we find same type of paradigm shift of production base.Major Japanese carmakers increased foreign production to record highs in December, as they continued to move factories abroad. China has been their main production base. Production of automobiles outside Japan increased 69% in December.
If we make a quick look we will find that many other nations and companies are making a production base shift.
• Toshiba Corp. will cease producing television-sets in Japan by the end of March and shift all production to China.
• At least three toy companies from Canada, Britain and Hong Kong plan to shift order for toy production from China to Indonesia.
• Evergreen Solar to shift some operations to China.
• General Motors Corp. will shift more production of vehicles bound for the U.S. market to China, Mexico, South Korea and Japan
Its not only china looking forward for shifting its production base out of its own land but also other nations and coming up to make a shift of its production base too from china and into china.
At the same time many companies are moving out of china shifting its production base. The reasons are yet to be disclosed why they are making a move out of china, but in the near term we will find many companies making a move out of china once the currency pressure on china becomes irresistible .They might be moving out of china as they might anticipate the end of the low cost production days very soon.
In gamut China needs new markets and low production base to sustain otherwise if competition comes in to playa at equal levels then china might have to face some ugly days.
Indranil Sen Gupta
Financial, Economic Writer and Research Analyst