In a previous blog, I noted what I believe is the erroneous notion that Western manufacturers moved production to China because they could drastically reduce total costs and thereby improve their competitive edge. Nothing could be further from the truth, in my opinion.
If cost was the defining reason for moving production to China, what will manufacturers do if or when most companies shift to the region, a development that will neutralize that advantage? (See:
Stop leaning on the cost-crutch. It's intellectually lazy and strips us of the critical need to ask the more important question of why China is so much more competitive than other regional manufacturing zones. It also makes it difficult for us to acknowledge the fact that the Chinese are doing something right, perhaps even things worthy of emulation. It's been so much easier to hide behind the "China-is-unfair-in-wages-and-exchange-rate" concept. Why give China any credit when we can charge it with unfair labor practices and drone on about Western corporate executives who take the decision to relocate plants there?
Playing up the cost factor must be soothing for politicians and folks who want to bash business executives. As promised in the blog referenced above, I want to take a stab at understanding the "China manufacturing edge" so we can also avoid overplaying its shortfalls in other areas. No Chinese city, despite the "cheap labor" argument, is about to overtake New York, London, or Zurich as the world's financial center. Not even if we can cheaply recruit business and financial graduates and if China floats its currency. So, some other factors must be at play in luring manufacturers to China. The following list is not exhaustive -- please add to it in the comments section below:
- China made it possible. China opened up its economy to Western manufacturers and fostered the environment that supports their operations in the country today. It drove the creation of this environment at all levels of government and businesses, including in banking and finance.
- Cold War thaw. The thawing of the Cold War forced China to open up its economy. While this started before the former Soviet Union collapsed, cracks in the relationship between Beijing and Moscow, as well as strains in the ability of the Soviets to support fellow Socialist nations, made it clear that the Chinese needed new economic partners. The West was the obvious choice.
- Taiwan the middleman. The role of Taiwan as the middleman in bringing China into Western embrace cannot be overstated. It is the crucial facilitator that made the West's re-engagement with China possible. Many Western OEMs established local operations in Taiwan first or partnered with Taiwanese PCB makers, contract manufacturers, and other service providers to re-enter China. Re-entering China would have otherwise been near impossible for many companies. In addition, Taiwan took the overflow of business it was getting from Western electronics manufacturers, for instance, and pushed these across the Formosa or Taiwan Strait into China.
- Globalization. China's embrace of the imperatives of globalization warmed Western hearts to the nation. Despite the likelihood of another global war or simmering hostilities among nations, it was always inconceivable that a large chunk of the world's population could be shut off from global commerce. Once China opened its doors, businesses flocked in and found numerous economic opportunities.
- Technology advances in communication, transportation, and production processes. China as a manufacturing hub became a plausible idea with the advent of the Internet and the spread of wireless communication. Monitoring of plants and training can be conducted remotely. Companies that may not have considered China as a manufacturing center were convinced once they realized they could communicate instantly via always-on devices.
- Outsourcing. Outsourcing accelerated because of China, but it existed long before the country opened up to foreigners. The first electronics contract manufacturers, for instance, set up shop in the 1960s in the United states to handle product prototype and basic printed-circuit-board (PCB) work. Industry veterans will remember, in fact, that Western OEMs were in large part introduced to China by outsourcing partners in Taiwan and Hong Kong. As demand for outsourced work increased, the Taiwan PCB makers in turn moved operations to China to secure labor resources and lower costs. Foxconn Electronics Inc. , the world's biggest EMS company, for instance, has more than half a million employees at a single facility in China. Few other countries can offer this leverage.
- The "gold rush." I worked in Hong Kong in the early 1990s for a regional business publication that chronicled the region's economic expansion and was amazed at the massive flow of foreign direct investment into China. With the foreign funds also came Westerners -- companies and individuals -- eager to make their fortunes in the country. The mouthwatering prospects of selling products and services to China's 1.3 billion people drew not just the likes of Cisco, Intel, Dell, and Apple, but also McDonald's and Walmart.
China used a trump card that has helped it develop a large manufacturing economy: foreign companies were not allowed to establish wholly-owned ventures. Companies like UPS, for example, had to partner with local operators. They ploughed ahead anyway, assured this was a small price to pay to play in what they believed would become the world's biggest economy. They were right: China is on track within a decade to surpass the US as the number one global economy.
- Lower labor cost. Many would have been disappointed if I had not added cost to the factors behind China's prominence as a manufacturing center. Labor is, of course, significantly cheaper in the country, and this permeates the entire manufacturing chain, helping to boost margins for manufacturers. However, Chinese labor cost is beginning to rise, but this still won't result in a wholesale reverse migration. China is compelling on its own.