Why Manufacturing in China May Still be Your Best Outsourcing Option

Many U.S. companies that outsource manufacturing to China have feared that China’s ongoing move from a “developing” to a “developed” country would result in a less favorable manufacturing environment. This spurns the question, “Is it time to move manufacturing out of China?”

China’s economic rise has been one of the great dramas over the last few decades. Since Deng Xiaoping inaugurated a series of sweeping reforms in 1979, China’s share of global GDP has risen from two percent to more than 16 percent.1 This incredible rise was largely built on the backs of foreign inbound investment into China – much of it from the United States. Ask any U.S. company that outsourced their manufacturing operations to China in the early years and you will undoubtedly hear enough horror stories to fill a novel. Most of them stayed in China, however, and over time the majority of U.S. Fortune 2000 companies followed suit.

In this article, we will examine three key reasons why China remains a viable option for U.S. investment over other Asian countries:
Three reasons why China remains a viable option for U.S. investment







Cost

We’ve all heard about the increased cost of doing business in China, particularly in regards to labor, as the average manufacturing wages have more than tripled since 2006.2 However, minimum wages are now stabilizing, fuel costs have decreased, and other price hikes are being offset by the devaluation of China’s currency, the RMB. Additionally, commodities have fallen significantly within the last 12 months—some by more than 40 percent.3 Lastly, automation and increased technology are now being used to offset the labor component of manufactured goods.  A culmination of these factors is showcased in the “Producer Price Index” (PPI), a broad indicator of the cost of producing goods before any profit is attached. Based on a report released by China’s National Bureau of Statistics, the country’s PPI fell in January for the 46th consecutive month.4 As a result, manufacturing in China is actually getting cheaper for U.S. companies by as much as 20 percent year-over-year in certain industries.

Improved Professional and Ethical Practices

Improved Professional and Ethical PracticesWhile western businessmen may continue to get frustrated when dealing with their Chinese counterparts, we should consider the strides that have been made. First of all, the number of English speakers in China has increased drastically in recent years. This will be compounded in the near future as the number of Chinese students in U.S. universities has increased fivefold since the 2004-2005 academic year.5

Second, China’s anti-corruption campaign, launched by current President Xi Jinping in 2012, resulted in more than 43,000 government officials being investigated in 2015 alone.6 While the results of the anti-corruption campaign have been alarming, they are driving a level playing field for foreign and domestic businesses.

Thirdly, China’s legal system has evolved significantly over the past 20 years. Admittedly, the country still operates in a “form over substance” world with mounds of paper and “chops,” the Chinese equivalent of an “original signature.” However, processes such as company registration, prosecution and trademark infringement have become more efficient, formalized and transparent. China’s professional progression is resulting in a more favorable business environment for U.S. companies.

Evolution of Quality and Perception

It wasn’t that long ago that it seemed everything was “made in Korea” or “made in Taiwan.” Initially, it was China’s cost that began the gradual change to products being “made in China.” However, the evolution of skilled labor, infrastructure and the domestic market have catapulted the tangible product industry to nearly exclusively using China.

Over the last few decades, China has built the largest vocational education system in the world with more than 15,000 vocational institutes.7 This new generation of skilled labor will be a welcomed relief to the thousands of U.S. businesses that outsource their manufacturing. Additionally, China now has some of the world’s most modern infrastructure and the central government has committed to continued heavy spending by recently approving more than 1,000 new projects totaling $300 billion+8 in value.

Finally, and perhaps one of the most significant elements of encouraging U.S. operations in China, is the growth of the local market. With affluence comes disposable wealth, which has spurned demand for foreign products among China’s middle class. Although on opposite spectrums, the improved U.S. perception of “made in China” goods, the fact that China’s middle class is now larger than America’s,9 plus the reliable infrastructure for timely deliveries puts China in a class by itself compared with other Asian countries.

Not much, if anything, can occur on a global stage without significant involvement from either the U.S. or China. Despite the political animosity that exists between the U.S. and China, the two countries are economical juggernauts that have become nearly co-dependent. The history that yielded this co-dependency has enabled China to become the de facto manufacturing workshop of the world. Let me be clear: China is far from perfect. However, when considering all areas, China will likely remain a global manufacturing hub for years to come. Costs are not what they once were, but increased quality and professionalism make China a worthy investment venture.

For more information, contact your trusted DHG advisor or Keith Giddens.

1. http://foreignpolicy.com/2014/05/16/is-china-the-fastest-rising-power-in-history/?wp_login_redirect=0 http://www.tradingeconomics.com/china/gdp
2. http://www.cnbc.com/2015/09/21/why-us-manufacturers-are-nixing-the-us-for-china.html
3. http://www.indexmundi.com/commodities/
4. http://www.ibtimes.com/china-economy-consumer-inflation-edges-factory-prices-continue-fall-2257800
5. http://foreignpolicy.com/2015/11/16/china-us-colleges-education-chinese-students-university/
6. http://www.ibtimes.com/chinas-anti-graft-watchdog-says-anti-corruption-campaign-being-undermined-local-level-2247449
7. Page 17 of http://www.ncee.org/wp-content/uploads/2015/03/CHINAVETFINAL1.pdf
8. https://www.washingtonpost.com/news/innovations/wp/2015/05/28/chinas-big-bet-on-infrastructure-shows-a-commitment-to-innovation/
9. http://money.cnn.com/2015/10/14/news/economy/china-middle-class-growing/