Sports/Olympics / Feature and Column
Motor racing-Hungary a very different place 20 years on
(Reuters)
Updated: 2006-08-04 16:37
BUDAPEST, Aug 3 - Monaco
WORLD / Wall Street Journal Exclusive
China loses some allure as a manufacturing hub
By ANDREW BATSON (WSJ)
Updated: 2006-08-07 10:02
http://online.wsj.com/public/article/SB115489994036428120-x8gD_CqWa81zuWhbb
TYVRE4oByw_20060813.html?mod=regionallinks
BEIJING -- Foreign investment in China's manufacturing sector has started
to slowly decline after years of strong gains, suggesting the country is
losing some of its luster as a base for inexpensive production.
China has for years been one of the world's biggest recipients of foreign
direct investment, money that has helped turn the country into the
world's factory floor. Yet China's take of direct investment dropped
slightly in 2005, excluding a series of one-time deals in the financial
sector. After a 12% plunge in June, the figure is down a further 0.5% for
the first half of 2006. Given that China's economy is continuing to
expand at a rate of about 10% annually, the size of foreign investment as
a proportion of the whole economy is shrinking even faster.
Total investment coming into the country remains huge -- roughly $60
billion a year -- a testament to how China has been able to diversify its
industrial base and keep attracting new money. But even a flattening in
the trend is striking, given the reputation China has developed as an
irresistible magnet for foreign companies' money.
Many factors are at work. At this point, much of the manufacturing that
can be profitably shifted to China has already moved, while the
lowest-end production is starting to migrate away to less-expensive
locations. And while multinationals' interest in China is broader than
just export-driven manufacturing, the difficulty of buying domestic
companies and the limits on foreign participation in service businesses
are keeping those channels from becoming big new drivers of investment.
"China should think about how the country is going to position itself for
the next 10 years," says Xiang Bing, dean of the Cheung Kong Graduate
School of Business. "Multinational corporations won't put all their eggs
in one basket. There are incentives for diversification."
Government officials say they aren't worried by a modest drop in
investment, but acknowledge that some foreign companies are starting to
look elsewhere as wages and land prices have risen. "It is possible that
the costs for some foreign investors have increased," says Zheng
Jingping, spokesman for the National Bureau of Statistics. "Other
countries are also stepping up their efforts to attract foreign
investment."
Foreign investment in Southeast Asian nations such as Malaysia and
Indonesia is starting to pick up after languishing for years in the wake
of the regional financial crisis of 1997-98. Even once-closed Vietnam has
become a new hot spot for manufacturing, as it can offer even
less-expensive conditions than China.
No one is predicting an exodus from China, as the country's huge domestic
market and high-quality infrastructure continue to attract many
businesses. But some entrepreneurs, like Wang Lih-hwa of Taiwan, have
begun shifting operations abroad in search of more competitive prices.
Ms. Wang and her husband, who run a food-ingredients business, opened a
factory in the southern province of Guangdong in 1995.
At the time, the move helped them cut production costs by 50% from the
level in Taiwan. But steadily rising wages have since eroded that
advantage. So in 2004, she and her husband opened a factory in Vietnam,
and it now accounts for 60% of the company's output. Ms. Wang expects
average costs in their Vietnam operation this year to be at least 35%
lower than in China, thanks chiefly to inexpensive labor and rent. "It
was time for us to consider a new spot outside China to protect our
company and maintain our slender profits," Ms. Wang says.
Taiwanese companies, which were among the first to recognize and exploit
the mainland's advantages in low-cost manufacturing, are now putting much
of their new investment in other Asian countries. Thanks to big projects
from the likes of petrochemical company Formosa Plastics Group and
contract shoemaker Yue Yuen Industrial (Holdings) Ltd., the Taiwanese are
now the biggest foreign investors in Vietnam.
In a way, China has become a victim of its own success. So much of the
Asian electronics industry has already relocated to China that there is
little left to move. And for other big investors, there are limits to how
much more they can realistically put in.
Total investment from Japan, South Korea and the island of Taiwan -- a
group that has collectively been a bigger investor in China than either
the U.S. or the European Union -- dropped 6.5% in 2005 and has plunged
31% in the first half of this year. Foreign direct investment into China
from the U.S. has fallen every year since 2003, according to Chinese
statistics. (Figures for foreign direct investment measure money that
goes into building or buying businesses, not purchasing stocks or bonds.)
At this point, many Japanese companies have "more or less completed"
their major manufacturing investments in China, says Tomoharu Washio, a
Tokyo-based researcher at the Japan External Trade Organization. For
instance, Honda Motor Co. in 2004 started investing to double its
car-making capacity in China, but plans to complete the program this
year. With the Japanese economy reviving, many companies are now focusing
on adding to higher-end production capacity in their home market, Mr.
Washio says.
Yet, stagnation or a small decline in foreign direct investment isn't
necessarily bad news for China. At a time when the biggest worry is that
the economy could be growing too fast and authorities are trying to slow
down domestic investment, a reduction in foreign inflows is probably
welcome. Less foreign investment could also trim the external imbalances
that created pressure on China to push up the value of its currency, the
yuan.
It wouldn't be hard for the government to attract even more foreign
investment -- if its leaders really wanted to. A hint of investors'
appetite for China was given by the recent sale of stakes in the major
state-owned banks to overseas institutions, a program that drew an
additional $12.1 billion in direct investment in 2005. But those landmark
deals are unlikely to be repeated, and authorities are keeping limits on
foreign investment in other key service sectors and have shown reluctance
to approve some major acquisitions.
Optimists see in all this a welcome stimulus for Chinese companies to
move out of low-cost production. "You don't want to be a place that can
only attract low-end industries," says Nicholas Kwan, an economist with
Standard Chartered Bank in Hong Kong. For foreign investment, he says,
"Increasingly, the quality matters more than the quantity."
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without the houses is one popular way of
describing the twisty Hungarian Grand Prix circuit.
Forget glamour and glitz. If some drivers stifle a yawn when they
contemplate a visit to the hot and dusty Hungaroring, it is because of
its reputation as the second slowest track in the championship.
Races can be processional, due to the extreme difficulty in overtaking,
and dull in comparison to others at more flowing circuits.
"Watching paint dry, counting the grains of fluff in your belly
button...filling in your tax return form; all these things can be rather
more exciting than watching the Hungarian Grand Prix," declared a Red
Bull handout on Thursday.
It was not ever thus.
There was a time, 20 years ago, when a visit to the Hungaroring
represented, in the words of the Times newspaper's then Formula One
correspondent, 'motor racing's boldest experiment for many years'.
When the travelling circus arrived in Budapest for the first grand prix
behind the then-Iron Curtain in August 1986, there was a palpable sense
of excitement about the place that seems unthinkable in the current era
with its new races in China, Malaysia and Bahrain.
Hungary, now an EU member state, was then firmly in the embrace of the
old Soviet Union and light years away from the free-spending extravagance
and luxury represented by the high-tech world of Formula One.
Eastern Europe had seen nothing like it.
SMOKE-BELCHING
The governing body put the race day turnout at 200,000 spectators, many
of them stripped down to their underpants in the scorching heat on an
afternoon unlike any other.
"I recall standing on the grid and being aware that there was something
very different, very strange about the scene," Briton Martin Brundle, who
finished sixth for now-defunct Tyrrell, wrote in his book "Working the
Wheel".
"At first I couldn't work out what it was. Then I realised it was the
silence.
"I felt like a gladiator in the ring. All those people were looking on in
almost complete silence, not knowing what was going to happen
next...there were a lot of people present who had never seen a grand prix
live before."
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