China Cuts Asia Imports as Korea, Singapore Lose Jobs

By Michael Dwyer

Oct. 22 (Bloomberg) -- The U.S. isn't the only country watching jobs and manufacturing migrate to China. Increasingly, so are China's closest neighbors.

The nation is reducing its reliance on imports from the rest of Asia as it makes more of the higher-value-added intermediate and capital goods it previously bought from abroad. That is threatening growth in countries whose export sales are already in danger of erosion from the U.S. slowdown.

More than 13,500 electronics-product workers in Singapore have lost their jobs since 2004, according to Ministry of Manpower statistics. The International Monetary Fund last week forecast Singapore's growth rate will fall to 5.8 percent in 2008 from an estimated 7.5 percent this year and sees weaker expansion in the Philippines, Malaysia, Taiwan and South Korea.

``China is moving up the supply chain,'' says T.J. Bond, chief Asia economist at Merrill Lynch & Co. in Hong Kong. ``The view that China produces labor-intensive goods but purchases high-value-added goods from abroad may be roughly correct today, but it need not last forever.''

China is already providing fewer ``positive spillovers'' to other East Asian countries, according to the IMF.

``The structure of China's external trade in the last few years looks very different from 10 years ago,'' IMF economist Li Cui said in a September report. ``As China begins to specialize in more parts of the production chain, its imports of intermediate goods from the region could start to fall.''

Transferred Production

The move by Tokyo-based Toshiba Corp., Japan's largest chipmaker, to transfer notebook-computer production to China cost its former source, the Philippines, as much as $1 billion in lost exports annually, according to figures from the industry's national trade association.

China's President Hu Jintao, in his policy speech at the Communist Party congress in Beijing last week, reiterated his goal of moving the nation's manufacturers from simple assembly of final products to designing and turning out high-technology goods.

``Fifteen to 20 years ago, China could only make 20 to 30 percent of the components it needs to assemble products,'' says J.R. Ong, managing director of Singapore-based First Engineering Ltd., which supplies Palo Alto, California-based Hewlett-Packard Co., the world's biggest maker of personal computers, and Seagate Technology Inc. of Scotts Valley, California, the top maker of hard-disk drives. ``Today, that's climbed to 80 to 90 percent.''

Fewer Jobs

First Engineering employs 950 workers in six plants in China, Singapore and Malaysia. Ong says it has cut manufacturing jobs in Singapore by as much as 90 percent, moving most of them to China.

Some countries in the region are already taking steps to reduce their dependence on exports of manufactured goods. Singapore's government is promoting pharmaceutical, biomedical and petrochemical production, moving away from electronic components. Malaysian Prime Minister Abdullah Ahmad Badawi is seeking to develop service industries to diversify the economy.

``The region will have trouble maintaining growth momentum over the long term if it continues to rely primarily on traded goods.'' says Kim Eng Tan, a credit analyst at Standard & Poor's in Singapore.

The IMF forecasts that the growth rate in the Philippines will fall to 5.8 percent in 2008 from 6.3 percent this year.

`Import Substitution'

China's so-called ``import substitution'' took off after its entry into the World Trade Organization in 2001, according to Grace Ng, an economist at JPMorgan Chase & Co. in Hong Kong. WTO membership brought a ``surge'' of foreign investment that helped lift China ``up the production chain,'' she says.

China's average annual import growth rate declined to 10.5 percent in 2005-2006 from 24 percent in each of the previous four years, while exports kept growing at about a 25 percent annual rate, according to United Nations statistics.

``The evolution of the new production networks in Asia is something that we need to watch,'' says Deepak Bhattasali, chief Asia economist at the World Bank in Washington. ``We need to make sure that all the countries in Asia participate equally in it.''

That's far from guaranteed. Moving operations to China often comes at the expense of workers and suppliers who are left behind.

Shuttered Factory

Maxtor Corp., owned by Seagate, closed its Singapore plant in 2005 with the loss of 5,500 jobs as the maker of hard-disk storage products shifted output to China. Seagate and National Semiconductor Corp. of Santa Clara, California, the maker of chips for mobile devices such as Apple Inc.'s iPhone, have also transferred production to China from Singapore.

Eng Teknologi Holdings Bhd., a Malaysian maker of hard-disk drives and consumer-electronics parts, used to buy components and castings from suppliers in Penang, where the company is based, says Alfred Teh, executive chairman. Now, Eng Tek's Chinese plant in Dongguan is switching to Chinese suppliers, ``which are cheaper, faster, minus all the shipment costs.''

The Dongguan factory in southern China buys about half its components from outside China, down from as much as 80 percent two to three years ago, and that share may fall to 20 percent to 30 percent, he says.

New-Generation Phones

Osaka-based Matsushita Electric Industrial Co., the world's largest electronics maker, closed its mobile-phone assembly factory in the Philippines in 2005 to focus on new-generation phones it will make in China.

Even Asia's more-developed economies, such as Japan and South Korea, aren't exempt from China's import-substitution strategies, says JPMorgan's Ng. Exports from Japan and South Korea to China have slowed ``markedly'' in the last two years, she said in a report earlier this year.

The Chinese government is encouraging steelmakers, including Shanghai-based Baoshan Iron & Steel Co. and Wuhan- based Wuhan Iron & Steel Co., to make more higher-grade metal to replace imports from rivals such as Tokyo-based Nippon Steel Corp. and Pohang, South Korea-based Posco.

Growth in South Korea's shipments of electronics to China fell to 9.4 percent in the first 11 months of 2006 from 62.2 percent in all of 2003, according to JPMorgan. Japan's machinery exports to China have also decelerated, rising 19.5 percent through November last year compared with 41.9 percent in 2003.

Seoul-based LG.Philips LCD Co., the world's second-largest maker of liquid-crystal displays, plans to cut as many as 1,500 jobs in South Korea this year and relocate some manufacturing to Guangzhou in southern China, the Seoul Economic Daily reported in August.

``You have to be in China to survive,'' says First Engineering's Ong. ``There is no other choice. Most of the players are already there.''

To contact the reporter for this story: Michael Dwyer in Singapore at Mdwyer5@bloomberg.net