At a Forex forum in Shanghai last week, a group of eminent economists from China and abroad warned of the economic danger posed by ignoring the squeeze created by the pressure of escalating commodity prices, especially oil, and sluggish manufacturing.

This is already happening and, in the case of China, the world's fastest growing manufacturing base, manufacturers are absorbing the brunt of the profit squeeze.

The latest government figures show manufacturing costs in August increased by 5.3 percent from a year before, while the cost of raw materials and fuel jumped 8.1 percent.

In the first eight months of this year, raw material and fuel costs rose by 9.5 percent from a year earlier, which was almost twice the increase in manufacturing costs at 5.5 percent.

Economists at the Shanghai forum said that in other less competitive developing countries in Asia and South America, manufacturing costs have actually been falling. Because of their weak bargaining power, many factory owners in less developed countries are being hit hard by the squeeze on profits.

Demand in developed countries for a wide range of consumer goods, mainly garments and other textile products, has continued to rise. Such persistent demand, economists say, will remain a strong driving force behind the increase in the prices of fuel and manufacturing intermediary materials - especially those that are petroleum-based, such as synthetic fibres and plastics.

Meanwhile, increased competition among these developing countries in Asia and South America, keen on speeding up the process of industrialization by taking full advantage of development in the global supply chain, has kept production costs low.

As such, the only way factory owners in developing countries can stay profitable is to significantly improve productivity as many in China have been doing, with varying degrees of success.

The efficient use of energy and raw materials is, of course, an integral part of productivity advancement. This has been brought to the fore since the almost 100 percent jump in oil prices to more than US$60 per barrel in the past year or so.

To be sure, conservation and recycling of raw materials usually call for sizable investments in technology as well as in plants and machinery. In many cases, the enhancement of efficiency requires a fundamental change in management strategy and the operating process.

But this is the price manufacturers in developing countries must be prepared to pay, not so much to widen profit margins but, more importantly, to maintain long-term growth.

Manufacturing industry insiders must know there is a limit on how far labor costs can be trimmed. Many factories in developing countries are fast approaching that limit.

Enterprises in developing countries that are relatively more industrialized are also waking up to the fact that moving up the value-added chain is the only way to maintain profitability.

As a result, branding has become a favourite topic among Chinese entrepreneurs and consequently the acquisition of well-known foreign brands has become of paramount importance to some of the largest Chinese enterprises.

They know the big crunch is coming and want to be prepared for it.

(China Daily September 23, 2005)