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April 25, 2010

Three Megatrends in China for the Next Five Years

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Bloomberg Business Week - aside from increasing domestic consumption, there are two further megatrends developing in China over the next five years that senior executives need to keep in mind.

1. Increasing domestic consumption
2. Instead of moving to find work in manufacturing centers in southern China or such first-tier cities as Shanghai and Beijing, more young people are moving to second- and third-tier cities such as Wuhan, Hefei, and Shenyang, where they can find good white-collar jobs closer to home.
3. A further megatrend unfolding in China is the upgrading of quality and capabilities in Chinese factories. Many factory owners are looking at how to move away from simply being outsourcing manufacturers and toward building their own brands, just as Taiwanese computer vendors such as Acer and Asustek have done



As cheap labor becomes increasingly scarce and as fear of a Chinese yuan appreciation rises, Chinese factories are retooling to become more automated. Companies see that owning their own brands gives them better margins than mere manufacturing does. It also lets them sell to the fast-growing domestic market.

Chinese factories are improving oversight and quality control. Advances have been made to such an extent that even German companies renowned for demanding perfectionism are starting to relocate production of higher-end products to China, which partly explains why China last year replaced Germany as the world's biggest exporter.

The key takeaway: If low-cost labor is a priority, companies need to look to other labor pools such as those in Vietnam and Bangladesh to manufacture low-end products. They also need to realize that old manufacturing partners in China might quickly start competing directly with them on brand image, not just price


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