Has China Lost its Cost Competitive Edge?

More than ever and in light of current events with news surrounding tariffs and trade wars, business decision makers are re-examining their China strategies. There has been a huge shift internally which is laid out in China’s 13th five year plan with initiatives for innovation-driven development, higher value-added manufacturing, “green growth” and environmental improvements.

What is causing the cost of goods to increase?

There are three key things that have impacted costs in the past five years.

1. While China’s hourly wages pale to those in the U.S. (avg. $USD 250 per month vs $1,160 ) there are layers of operating costs and fixed overhead that have been added primarily in the areas of increased managerial salaries and social costs (healthcare and China’s version of social security).
2. China is automating positions that once utilized manual labor.
3. Regulatory compliance is having a profound effect. Factories that employed thousands of workers are being closed due to non-compliance. Only the ones who can afford to update will remain in business. This means fewer factories to produce the same categories of exports.

China may be losing its historic cost edge but this is not simple economics of supply and demand. Even, prior to President Trump there were these considerations:

• China’s acknowledgement in the latest five year plan to become a more consumer driven economy
• China’s innovation initiatives meaning more IP development in tech, clean energy and health care
• Improving the environment with a focus on air and water quality
• Drastically reducing exports on “smokestack” or polluting industries
• Reducing a dependence on shadow banking (which would reduce bad loans on failed projects)
• Incentives on FDI (presumably for tech transfer)

Because of this, our clients are having us immediately mitigate risk in their supply chains by exploring hosting manufacturing outsourcing in Southeast Asia. We are visiting Vietnam, Thailand, Taiwan and India to establish small offshoring offices for work still deemed low value add and not feasible for U.S. manufacturing.

Most of our business involves new product startups where it:

(A) Doesn’t make sense to invest in assets until a project is proven

(B) When there are multiple manufacturing disciplines that need to be coordinated and managed. This model does not yet exist in the U.S.

In conclusion

While continued change is imminent, we still see China as a sound opportunity for business and new product startups.

Interested in learning more about the Pros and Cons of manufacturing in China? Click to read our full article here.