The End of Cheap China?

In this week’s Business Surgery, Stephanie Teow assesses whether the appeal of China is on the wane or as strong as ever

I read with interest recently an article in The Economist which questioned the extent to which China can continue its position as a low-cost base of manufacturing in an era of rapid social and economic change:

“China is currently the world’s largest manufacturing power…China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.”

According to the article, many experts suggested that the cost to manufacture in China could soar twofold or even threefold by 2020, when it may be just as cheap to manufacture things in North America as in China. Our experience carrying out research across different markets in China indicates that costs in China have been rising for some time now, and the era of ‘cheap China’ has actually been at an end for a while. Rising labour costs and the growing costs of key raw materials, means that China’s previous competitive advantages as a location for manufacturing are gradually being eroded.

However, although it is likely that the future will see a growing proportion of China’s low cost manufacturing moving to other developing economies in the region (or even back to Western countries), it does not necessarily follow that most B2B manufacturing will suddenly up sticks and leave China in the immediate future. As this article notes, China has a number of key advantages as a manufacturing base which other countries in the region find very difficult to emulate, such as:

  • The proximity of the booming Chinese market. No other country has so many new consumers clamouring for consumer goods.
  • Although wages are rising, worker productivity in China is also rising. No other country in the region can match China’s worker productivity.
  • A large labour force allows greater flexibility than other countries. This enables companies to respond quickly to changes in production requirements and urgent lead-times.
  • China’s supply chain is ‘sophisticated and supple’. No other country has the well-developed supply chains that China has, and in terms of reliabilities and efficiencies in production, China remains the first choice for B2B manufacturers.

It is clear that China will remain the manufacturing location of choice for some time to come for manufacturers in most business-to-business markets. While rising costs in China will clearly make exporting from China more prohibitive in the future, it is increasingly the lure of the large Chinese domestic market that is attracting the attention of manufacturers.

Equally, the manufacturing complexity and technical expertise required for many b2b manufacturers, along with the importance of reliable supply chain infrastructure, means that for many companies China still represents the most viable manufacturing location. A growing cohort of business-to-business companies are now demanding market intelligence to better understand China less as a manufacturing base for export, and more as a dynamic marketplace of the future.

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