China has been a powerhouse in the manufacturing industry for decades. “Made in China” has become synonymous with mass production and low-cost effectiveness. Industry Week recently surveyed manufacturers in China and the USA and determined that 54% of China manufacturers have innovation as their top objective compared to 26% of U.S. manufacturers. Plants in China invest heavily in infrastructure and some of the manufacturing plants are more modern than the most developed countries in the world. Going from less than 3% in the early ‘90s to now producing roughly 25% of the global manufacturing output is no small feat. China accounts for half of the total global manufacturing output of “Factory Asia”, a common name in correlation to the continent’s cross-border supply chains in Taiwan, South Korea, Japan, and now a much staggering significance in China. However, it is one thing to get to the top while it is another to stay at the top. This year, the Chinese government has declared China’s projected growth to be around 7%, which would be the lowest it has been in more than 20 years. Nevertheless, China is and will still prove to be the leading hub for manufacturing.
In recent years, China’s price is under pressure. Hourly wages has risen by 12% a year on average. The RMB has risen in value. The Moscow Exchange reported the Chinese Renminbi (RMB) grew 700% in 2014. Rising debt has become an obvious problem. For the past three years, China’s economy has started out sluggish. However, in each of those years, the government intervened, increasing investment and simplifying monetary policies to keep overall growth on an upward trajectory. Manufacturing in China still has its advantages and despite recent difficulties, is not going anywhere anytime soon.
Low-cost manufacturing is still the primary push for manufacturing in China. Even though the cheap labor cost is becoming less cheap with hourly wages increasing, manufacturers are yet focused on providing the lowest cost on the market by using automation to raise productivity, offsetting some of the effects of higher wages. However, the higher wages are affecting China in more than one way. Of course, as wages rise, the overall costs go up, resulting in production leaving the country, seeking cheaper alternatives. Much of this is going to large low-income populations in South-East Asia. So should this be a big concern for overall manufacturing in China? Yes and no. One thing to consider is the fact that these large low-income alternatives to China could be involved in forced labor. In 2014, an NGO reported at least 30% of working force in Malaysia’s electronic manufacturing were, in fact, partakers of forced labor. Companies do in fact want the lowest cost available, but not at the expense of fully jeopardizing their integrity and tainting their company image among consumers of their products. On the contrary, as big manufacturing providers reduce production in China and direct their attention to places such as Myanmar, Thailand, and the Philippines, they still reinforce a regional supply chain with China at the focal point of the operation. China is still the “kingpin” of demand in Factory Asia. Chinese demand is strengthening Asian supply chains even more as it increases its percentage of customer service and higher-margin marketing within Factory Asia.
China is still the nucleus and in many ways the funnel for growth in Asia. It will take much more than just higher wages in China to end its powerhouse in manufacturing. China’s factories are still far cheaper than “rich-world” rivals and “made in China” is still synonymous with low cost-effectiveness. Hosting more of the supply chain, China has increased its manufacturing competitiveness and still attracts more investments than alternatives. In addition, though there are low-cost alternatives based on wages, adding additional costs such as taxes and shipping, could actually cost more. China still wins. They are more effective and still produce better quality products than in many rival developing world countries. The potential risk for high DPPM% is higher and thus cost of rework could definitely out way the initial bargain of seeking alternatives based solely on the lure of lower wages. Labor productivity increased by 11% a year in China compared to 8% in Thailand and 7% in Indonesia from 2007 through 2012. One must not forget that China is 3.705 million square miles long. That in many cases, the easiest way to pursue cheaper labor costs is not by leaving China but rather moving deeper into China. Shenzhen is not the only manufacturing hub. Plants are being seen more in Henan and Sichuan and Dongguan provinces, even in Guiyang which is one of China’s poorest regions. Cheap land and tax breaks are still in play to lure foreign investors. Transportation is excellent and reliable and the labor pool has not decreased.
No one country will replace China’s role in Factory Asia. The 10 countries in the Association of South-East Asian Nations (ASEAN) import and export costs are 24% higher than in China as well as the customs procedures take 66% longer than the OECD average. Overall, with its abundance of both capital and labor, Asia has already established a dominance in leading manufacturing. It will only continue to grow even more and with China will still flourish as a leading manufacturing hub.
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