Chinese manufacturers increase trade figures, but multinationals enjoy most margins

Updated: 2011-01-03 11:40
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SUZHOU, Jiangsu - Even though the factory he works for produces 2 million computers for various global brands each month, Jin Zhiqiang does not intend to buy a computer assembled by himself for a simple reason.

To Jin, a migrant worker from east China's Anhui province, having a laptop computer seems too luxurious.

"A computer we've assembled costs about 4,000 yuan ($604) in the market. The price is three times what I can earn in a month and I just cannot afford it," said Jin, a 37-year-old migrant worker at a laptop computer assembly line at Singapore-headquartered Flextronics' manufacturing base in Suzhou city of east China's Jiangsu province.

Jin's frustration described the unparalleled chasm between what thousands of his colleagues give and take at Flextronics's Suzhou branch.

Flextronics and many Chinese electronic manufacturers, including Foxconn , the country's largest contract electronics manufacturer, helped China shine its charts of exports in 2010 with their dominant positions in the country's contract manufacturing services and processing trade with world top brands in the computing, industrial, and mobile phone sectors.

Among China's $170.4 billion of trade surplus in the first 11 months of 2010, $112.5 billion came from foreign-funded enterprises in China, according to statistics released by the General Administration of Customs last month.

To break down the entire foreign trade figures, China's processing trade surplus hit $291.1 billion from January to November in 2010, an equivalent of 1.7 times its total trade surplus. This meant China reported a trade deficit in its exchange of goods and services with other countries, excluding the processing trade.

The processing trade refers to the business activity of importing all or part of raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad , and re-exporting the finished products after processing or assembly by companies within China.

Yuqing Xing and Neal Detert, researchers at the Tokyo-based Asian Development Bank Institute, found in their recent study that traditional ways of calculating global trade simply produce a number, but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries, reported The Wall Street Journal on Dec 16, 2010.

The academic researchers found that trade statistics in China and the United States consider the iPhone to be a Chinese export to the United States, even though it is entirely designed and owned by the US company Apple, and is made largely of parts produced in several Asian and European countries.

China's contribution is the last step - assembling and shipping the phones.

That statistic alone reflects how the reality of global commerce is distorted in national trade data and it exaggerates trade imbalances between nations, the journal quoted the researchers as saying.

Edy Jianto, General Manager at Flextronics Electronics Technology (Suzhou) Co Ltd, estimated that many multinational companies enjoy a gross profit margin between 50 to 60 percent while Chinese contract manufacturers have an average margin of around 3 percent.

"Compared with multinational upstream companies, our profit margin is definitely on the low side," Jianto told Xinhua. "We are still at the bottom of the Smiling Curve."

The Smiling Curve is a theory proposed by Stan Shih, the founder of Taiwan-headquartered Acer company, to illustrate value-added potentials of R&D, production and brand marketing of the value chain in an IT-related manufacturing industry.

According to the theory, R&D and brand marketing form both ends of the value chain and command higher values added to the product than the middle part of production or assembly of the value chain.

If this phenomenon is presented in a graph with a Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a "smile".

Observers say China's huge trade surplus, whether the data is distorted or not, brings only meager benefits to the Chinese, and its industrial workers, in particular.

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Zhang Yansheng, director of the Research Institute of Foreign Economic Relations with the National Development and Reform Commission, said China's contribution to the value-added chain of international trade was limited in migrant workers' assembling and shipping of electronic products, the last step in original equipment manufacturers (OEMs).

Most profits of the "made-in-China" OEM products were taken out of the country by multinationals that own those brands, Zhang said, adding: "This is an irrefutable fact I've underscored for many years."

He said China is now under pressure due to rising costs of labor, land, resources, energy and other factors of production, undermining the low-cost advantage of "made-in-China" products.

"In about five to ten years, such low-cost advantages will be over for China, so we need to seek our new competitiveness in the future," he added.