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Increasing Costs Put Squeeze On Chinese Manufacturing

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By ELAINE KURTENBACH, The Associated Press

Published: February 22, 2008

SHANGHAI, China - The teddy bears selling for $1.40 in Shanghai's IKEA store may be just about the cheapest in town, but they're not made in China - they're stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: Its huge economy, which long has offered some of the world's lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by rising prices for energy, materials and labor.

Those expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai think China is losing its competitive edge.

The higher costs mean Western consumers are bound to face steeper prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.

"Americans continue to want to buy at lower prices," said Kevin Burke, president and CEO of the American Apparel and Footwear Association. "They are used to going to the store during Christmas and getting something cheaper than a year ago."

That's no longer a sure thing.

For instance, American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 to 10 percent for the 2008 holiday season, largely because of rising manufacturing costs.

Costs in China are climbing nationwide, but the greatest pain is being felt in the south, where about 14,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which neighbors Hong Kong.

To adapt, many multinational manufacturers - including Intel Corp., iPod-maker Hon Hai Technology Group and Japanese companies such as Canon Inc. and Sony Corp. - are expanding operations in Vietnam.

Auto parts makers are decamping for the Middle East and Eastern Europe, textile-makers to Bangladesh and India.

Meanwhile, Chinese inflation has risen to its highest point in more than 11 years, jumping 7.1 percent in January as snowstorms worsened food shortages. The biggest price jumps have been for food, but analysts say longer-term pressures on prices for manufactured goods will persist.

"China needs to reprice its exports, and that has to be accepted by international buyers," says Andy Xie, an independent economist based in Shanghai.

But raising prices may be tough for Chinese manufacturers given the suspicions about product quality raised by a slew of scandals over tainted or potentially dangerous products.

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