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Why We Manufacture in China

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: Things Don’t Get Made in China Simply Because of Cheap Labor.)

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:

  1. China made it possible.
  2. 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.

  3. Cold War thaw.
  4. 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.

  5. Taiwan the middleman.
  6. 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.

  7. Globalization.
  8. 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.

  9. Technology advances in communication, transportation, and production processes.
  10. 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.

  11. Outsourcing.
  12. 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. {complink 2125|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.

  13. The “gold rush.”
  14. 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.

  15. Lower labor cost.
  16. 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.

26 comments on “Why We Manufacture in China

  1. electronics862
    October 31, 2011

    Thanks for the detailed post Bolaji. China came up with great business stragecies like globalization, outsourcing, advacne manufacturing and transportation techonologies. China is in a good momentum to beat the US market in the coming decade. US has to come up with a better plan to rule the market.

  2. Hawk
    October 31, 2011

    @Rich Krajewski, You didn't know? The Grand Canyon is now in China! It was forfeited in 2040 when the US couldn't pay its debt to China. I believe they called it the Canyon Purchase!

  3. Anna Young
    October 31, 2011

    @Rich, I think it may be a tad too late to be studying Mandarin now. If you wanted a bit of the China action you would have started learning Chinese 10 or 15 years ago. Now, the Chinese are speaking English. They started 10 or 15 years ago.

    So when we now meet them they speak English to us and Mandarin among themselves. We? We speak English to them and English among ourselves! Chinese children are learning English too, AND Mandarin!

  4. Hawk
    October 31, 2011

    @Rich, It didn't seem fair to put them in the Yangtze river, after all, these batteries were originally ours.

  5. Hawk
    October 31, 2011

    @electronics 862, I don't think Bolaji was implying China came up with all these ideas on its own. It just freed itself up to benefit from them.

  6. prabhakar_deosthali
    October 31, 2011

    I believe it was Mexico , the first beneficiary of the outsourced manufacturing from US. ut somwhow nowadays we don't hear much about this country.

    Bolaji, Can you tell us the current state of the manufacturing activty there vis a vis China?

  7. djlevy
    November 1, 2011

    One more reason to manufactruing in China dispite rising labor costs is the advantage of mature supply chains. Here, we have a plethora of material, componetnt and sub-contracting vendors all in a 100 KM radius, and all connected by good highways and port access.

    Even in some sectors of the apparel industry, China is irreplaceable despite rising labor costs (so says Finantial Times and also Li & Fung). Of course in the Electronics business, we are further insulated from the effects of rising labor costs– they are really not all that significant, and there is much we can do to offset those rising costs. I argue that adding value and reducing waste in manufacturing is the best way to do this.

     

    http://www.china-manufacturing.net

  8. jbond
    November 1, 2011

    Bolaji, I think your list is pretty accurate. These are just some of the things I have tried to explain to colleagues and friends. Of course, they always fall back on the “cheap labor” thinking. The biggest issue citizens are facing is we have politicians and the media who continue to feed the public half truths, and because it’s on TV or in the paper, it must be true. Until we have reliable people feeding the people alternative theories, citizens will continue to be oblivious to the reality of things. China is not the bad guy and China didn't steal your union job.

  9. t.alex
    November 1, 2011

    Why not China if it is so hungry for it.

  10. mstrong1
    November 2, 2011

    “cheap labor” has NOTHING to do with it.

    I have run a very small manufactring company for many years.  I have outsourced to China and other places for over 20 years.

    It NOT cost, it's HASSLE and TIME.

    A US laser cutting company that I CAN WALK TO, needs to be harrased 20 times to quote a simple part made from simple material that they keep in stock.  I need 1,000 pcs a month.

    A Chinese supplier has 10 samples on my desk, UPS #1, three days after I email the drawing to him.  The price is acceptable and the delivery is 3 weeks.

    I say fine make 1,000 and we will see.  I keep pestering the guy within walking distance in the US, a block away.

    My Chinese parts show up in 2 weeks, I use them, they are fine, but I want to buy US made and pester the first US guy and have a salesman from a second US supplier come in, get drawings and he says he will get me a quote.

    No one gets me a quote and I reorder the Chinese parts.  Good for another month, pester the two US guys some more, nothing.  I reorder a larger quantity of Chinese parts, screw the US guys I have other things to spend my time on.

    Are the Chinese parts cheaper?  I don't know and may never know.  Frankly I don't care anymore, I'm not going to beg people to quote me anymore.

    Why not hire people and make my own?  My health plan already went up 35% and Blue Cross attached a letter telling me the price increase is due to Obamacare.  The socialists are going to raise ALL my taxes more, why would I hire ANYONE ?

    My MD no longer takes ANY insurance, he may spend an hour with me, hand me a $600 bill and tell me to deal with my insurance company on my own because he isn't going to hire staff to do it.  Says he lost 1/3 of his patients when he quit taking insurance, but he can practice medicine the way his grandfather did, says he will barter for service as well but will not take insurance or medicare. 

    I think I'm becoming John Galt and part of the 1% (not the biker 1%)

     

     

     

  11. mstrong1
    November 2, 2011

    Mexico simply has no serious job shop industry.  You can go open a plant to make stuff and deal with all the crap, but are there job shops, like machine tool, sheet metal, plastics, etc., that will look at your parts, quote and make stuff for multiple customers?  In general NO.  It's a cultural thing, not much entreprenurial vibe down there.  My brother is a fluent spanish speaker, international manufacturing MBA with a house in Mexico, he can't track much down in the way of job shops / CM's in Mexico either.

    At least they should build a deep water container port and put containers on trains so there will be a non-union alternative to Long Beach

  12. Taimoor Zubar
    November 2, 2011

    Interesting post, Bolaji. What about factors such as low tax rates, less strict labor and industrial laws, less paperwork involved in setting up new factories etc. Didn't that come into play when companies compared setting up factories in China versus opening them in their own countries?

  13. Wale Bakare
    November 2, 2011

    Thanks Bolaji for the post. Infact, nearly everything about China captured. I think, factor that has also been contributing to manufacturing in China – research. Quiet large numbers of them(chinese) are doted around the world leading research institutions and top tiered universities focusing primarily on research activities, in particular science and engineering. 

     

  14. Adeniji Kayode
    November 4, 2011

    ve Good point wale,I feel China got aggressive in research around science and technology and determined to really be at the fore-front and I think they beat India at it.

  15. Wale Bakare
    November 4, 2011

    Thanks Adeniji. That's contributing lagerly to its growth & developments.  Hardly can any other nations surpass China in years ahead.

  16. Adeniji Kayode
    November 5, 2011

    Hmm, You are right Wale, It amaze me now how China has been able to come this far despite her population density.How has China been able to manage her resources and manage the population too?

  17. Clairvoyant
    November 5, 2011

    Yes, good point Wale. With China concentrating on sectors such as science and engineering, this will keep them ahead of other nations and secure their markets for the future.

  18. bolaji ojo
    November 6, 2011

    @djlevy, Absolutely correct. A mature supply chain support structure is critical to China's continuing success in attracting manufacturers. It is also one of the reasons manufacturing centers in other regions of the globe have been less successful in upstaging China. A whole industry of plastic molding, test and assembly, etc., has developed in China to support manufacturers and they are quite good at this. Any other part of the world that wants this business would have to ensure the support structure is as vibrant and cost-effective.

  19. JADEN
    November 9, 2011

    China with success has used its labour cost advantage and manufacturing skills to attract overeseas investments and causing a massive shift of manufacturing to their country.

  20. mario8a
    November 9, 2011

    Wow, very goog article about China and TW, I think we also need to include their ability to work with their local goverment.

     

    I could not agree more with mstrong1  I saw that many times with PCBA suppliers in San Jose, we could source PCBA with better quality and cheaper from China than over the hill.

     

    Cheers

     

  21. syed salahuddin
    November 13, 2011

    The development of an activity engulfs many a factors sucvh as Government policies, the regulations for control of its economy, more so the enterprenuers, business houses, and the culture which is practiced by its working papulation.

    The factors why manufacturers choose China as a hub for manufacture is  that many of the governments lost control of their own manufacturers, the greed to acquire wealth in short term with due consideration to the local conditions, especially the employment scenerio, Since the genration of huge wealth in a different country is generated this is channlised to their own destinations not caring the economic condition of the country, ofcourse certain countries never vouched this for they do not have for they are tax exempted, the reason for this exemption is that they would provided employment by investments etc  to the locals but the surveys and statistics never  endorsed.

    A number of working boys were deployed elsewhere, hence killing the skill and dynamism and enterprenuership. what the working class available are only people who have surpassed this age group.

    China with Govt. support, had the opportunity to develop a full infrastructure and also earned huge surpluses to challenge the bigger economies this develpments is so massive you find them in every field, invested huge amounts in R&D, and have taken up projects which were possible only by advanced economies earlier.

    The labour culture which was slogging with no higher technology could catch up and the Govt. has concentrated in educating them and developing the skills, besides the working age is much lower overcoming language and geogrphical barriers.

  22. dsengle
    November 18, 2011

    I'd mention a few cautionary notes regarding the manufacturing conversation about China.  First, China's banking system is anything but transparent.  The relationship of the banking system to strategic economic goals is not well understood by western companies, thus creating a very unpredictable and risky capital environment.  From what I've read, very few western companies are really making money in China.  They hope to, but for now the story is not encouraging.  Next, in my travels to China over the course of several years now, I can say without reservation that there are no environmental safeguards in place.  China is literally and figuratively cashing in its environmental capital.  Water problems are now very present throughout China, air quality is a disaster in all urban areas (Xian, Chongqing, Beijing are all desperately bad places to be breathing) and deforestation and desertification are rapidly gaining ground.  The economic expansion is coming at a terrible price and manufacturing without constraint is a large contributor to that 'debt'.  These are not imaginary issues, they are real and escalating.  With a population of over a billion people, the amplification of these problems in terms of the human community are going to be staggering.  Right now the Chinese government is interested in one primary concern…job creation.  That government lacks the foresight and expertise (as do most governments on the planet, including ours in the US) to support job creation in ways that don't undermine future viability.  I think it's dishonest to discuss China's manufacturing lead without talking about the larger context that is in place.  I didn't even discuss the problem with China's position on intellectual property.  They seem to be taking the same “stripmining” mentality to this essential component of manufacturing.  Given another decade of current practices in stealing, or turning a blind eye to IP theft ought to put most western business partners out to pasture in terms of giving IP crown jewels to Chinese manufacturing partners.  Just ask Boeing how that's working out for them.

  23. itguyphil
    November 23, 2011

    All the manufacturing companies, including electronics and industrial, are attracted to China because of their cheap labor force. Their greed to gain more wealth in a small period hides the costs of the working people who are involved, without age criteria.

  24. electronics862
    November 23, 2011

    Inexpensive manufacturing labor will not be a factor for long with the acceleration of technology in manufacturing processes. Our manufacturing is moving to a technology driven operation rather than a labor one..

  25. Anna Young
    November 23, 2011

    @dsengle, You highlighted many points and you were correct in focusing on all of these as they impact Chinese people, the environment and business partners. Investments in the country have been driven over the last decades by the hope that Western companies will eventually make money there. Some are and some aren't as you noted but there are hefty costs to the profit obsession.

  26. Kunmi
    November 24, 2011

    I want to agree with you that profit obsession is the driving force. It is not the issue of banking transparency as said by one contributor. It is basically greed and short sightedness. Economic strength has been give to China and it is very difficult to retrieve. We have put our heads under their harmpit and it is difficult to pull off. We did not realize that shifting manufacturing to China is like selling the birthright until now that we are hit with economic crisis and unemployment. It is a wake up call for America.

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