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On July 18, Adidas confirmed that it will close its only company-owned factory in China, signaling a strategic transition by the German sportswear giant. The factory in Suzhou, east China’s Jiangsu Province, will close in October this year to allow the company to realign its global resources.
The closure was partly caused by rising salaries in China, which drove Adidas to relocate its production line to Southeast Asia where labor costs are lower. Similar incidents occurred during the past several years. For instance, in March 2009, Nike closed its only shoe factory in China located in Taicang, Jiangsu, causing a massive layoff of 1,400 workers. The factory was relocated in Viet Nam. In 2011, Top Form, a listed Chinese company for lingerie and bras, moved its high-end production line out of China and expanded its production in Thailand and established a new factory in Cambodia. UNY Co. Ltd., a Japanese retail company, will reduce its proportion of clothing production in China against global clothing production from 74 percent to 65 percent in 2013. It will also enhance the proportion in Thailand and start new production bases in Bangladesh.
A key cause for the increasing costs of manufacturers is soaring real estate prices. Sharp rises of housing prices have pushed up the price of land and rentals. More importantly, it will bring about salary hikes as well. In many cities in east China, even if local governments grant preferential land prices to companies to build factories, workers can hardly survive due to the high housing and rental prices.
Southeast China’s coastal region is a frontier of the country’s opening up. The Yangtze River Delta and Pearl River Delta are dubbed base camp of “made in China.” These regions will receive a heavier blow from rising cost.
Aside for rising costs, another side effect of continuous housing price hikes is that it will channel industrial capital into real estate. Since 2003, continuous rising prices have made companies and individuals with real property extremely richer. In 2011, for instance, investment in real estate totaled 6.2 trillion yuan ($970.3 billion), accounting for 14 percent of the GDP. That’s much higher than Japan in 1989 and in Spain in 2007, when the real estate sector in both countries peaked.
In 2011, total sales revenue of new homes amounted to 6.1 trillion yuan ($954.7 billion), accounting for 60 percent of the newly added household savings that year. Among all newly added loans, 20 percent are used for housing mortgage and real estate development. Adding trust loans, at least 40 percent of the total amount of financing was used in real estate industry. The industry attracts the largest amount of capital. During the prime time, state-owned and privately owned enterprises are enthusiastically engaged in real estate development. Technological improvement and innovation have totally been forgotten and transformation of economic growth pattern has become a vain slogan.
In order to gain tremendous achievements in the upcoming decades, China has to get rid of its over-reliance on real estate. Japan’s rapid economic development after the World War II was attributed to its manufacturing sector. Since the 1980s, Japan has been mired in a 20-year recession after a real estate bubble collapsed. Japan has yet to solve this problem. In Europe, after adopting the euro, many countries have witnessed soaring of housing prices, Spain and Greece in particular. Later, those countries are mired in severe debt crisis. Germany was an exception during the housing price hike and the crisis. The main reason lies in its stable housing price, which ensures its strong competitiveness in the manufacturing sector.
China has to pay a lot to get ride of its overreliance on real estate. But we should have the courage to do so. Otherwise, Chinese economy will face a destined failure during this round of rebalancing of global economy.
The closure was partly caused by rising salaries in China, which drove Adidas to relocate its production line to Southeast Asia where labor costs are lower. Similar incidents occurred during the past several years. For instance, in March 2009, Nike closed its only shoe factory in China located in Taicang, Jiangsu, causing a massive layoff of 1,400 workers. The factory was relocated in Viet Nam. In 2011, Top Form, a listed Chinese company for lingerie and bras, moved its high-end production line out of China and expanded its production in Thailand and established a new factory in Cambodia. UNY Co. Ltd., a Japanese retail company, will reduce its proportion of clothing production in China against global clothing production from 74 percent to 65 percent in 2013. It will also enhance the proportion in Thailand and start new production bases in Bangladesh.
A key cause for the increasing costs of manufacturers is soaring real estate prices. Sharp rises of housing prices have pushed up the price of land and rentals. More importantly, it will bring about salary hikes as well. In many cities in east China, even if local governments grant preferential land prices to companies to build factories, workers can hardly survive due to the high housing and rental prices.
Southeast China’s coastal region is a frontier of the country’s opening up. The Yangtze River Delta and Pearl River Delta are dubbed base camp of “made in China.” These regions will receive a heavier blow from rising cost.
Aside for rising costs, another side effect of continuous housing price hikes is that it will channel industrial capital into real estate. Since 2003, continuous rising prices have made companies and individuals with real property extremely richer. In 2011, for instance, investment in real estate totaled 6.2 trillion yuan ($970.3 billion), accounting for 14 percent of the GDP. That’s much higher than Japan in 1989 and in Spain in 2007, when the real estate sector in both countries peaked.
In 2011, total sales revenue of new homes amounted to 6.1 trillion yuan ($954.7 billion), accounting for 60 percent of the newly added household savings that year. Among all newly added loans, 20 percent are used for housing mortgage and real estate development. Adding trust loans, at least 40 percent of the total amount of financing was used in real estate industry. The industry attracts the largest amount of capital. During the prime time, state-owned and privately owned enterprises are enthusiastically engaged in real estate development. Technological improvement and innovation have totally been forgotten and transformation of economic growth pattern has become a vain slogan.
In order to gain tremendous achievements in the upcoming decades, China has to get rid of its over-reliance on real estate. Japan’s rapid economic development after the World War II was attributed to its manufacturing sector. Since the 1980s, Japan has been mired in a 20-year recession after a real estate bubble collapsed. Japan has yet to solve this problem. In Europe, after adopting the euro, many countries have witnessed soaring of housing prices, Spain and Greece in particular. Later, those countries are mired in severe debt crisis. Germany was an exception during the housing price hike and the crisis. The main reason lies in its stable housing price, which ensures its strong competitiveness in the manufacturing sector.
China has to pay a lot to get ride of its overreliance on real estate. But we should have the courage to do so. Otherwise, Chinese economy will face a destined failure during this round of rebalancing of global economy.