Changes in China Sourcing

Many picture manufacturing in China as dominated by endless armies of workers toiling at low wages, but reality is far more complicated than that. China’s economic growth in recent decades has lifted many boats including those or many factory workers. This, combined with changes in currency and other factors, means that manufacturing in China is undergoing dramatic changes.  However, with the many advantages China offers in manufacturing, it is likely to remain a factory of the world.

When China first opened to the West, living standards were a fraction of those of the outside world. A seemingly endless pool of workers happy to work for wages others would reject and favorable investment laws made it very attractive to businesses looking to compete through lower labor costs. While issues such as bureaucracy, corruption and different attitudes toward business and quality often made conditions less than ideal, the benefits outweighed the costs for many willing to brave the risks.

In time, as the investment regions and supply chain developed, China become more attractive and accessible to the less brave. It became possible for more businesses to take advantage of what China had to offer, and the quality of the manufacturing improved as China moved up the supply chain and began to produce higher-value goods.

With this success came problems both from within China and without. With its massive trade surpluses, more nations have pushed China to lower them. In response, China begun letting its currency rise (most analysts say it was kept at an artificially low rate to make exports cheaper) and eliminating preferential tax treatment for exporters.

Within China, as living standards have risen, wages for factory workers have increased. This has been especially true in booming coastal provinces where factories often cannot find enough workers and must bid up wages. Workers have become more aggressive too and strikes have increased.

Also, trying to emulate China’s success, other nations have also created economic zones offering favorable treatment to outside investors and exporters. Furthermore, free trade deals the US made with Mexico and other nations has given those nations cost advantages as China’s expense.

In response, China has taken steps to encourage investment in less developed regions in the interior where labor is cheaper and in greater supply. It has also begun to move higher up the supply chain where labor is a smaller portion of production costs.

While some production has begun to shift away from China to cheaper regions or back to countries where the products will be marketed, China still has advantages that will keep it the world’s factory for many products. China has invested heavily in infrastructure and has developed an impressive network of suppliers. This, combined with decades of experience in Western markets, means China will continue to be very attractive as a place to manufacture, albeit production is likely to keep shifting to new areas and more to higher-end manufacturing.

Also, average wages, particularly in the less-developed regions, will remain low by Western standards for the foreseeable future.  No other nation can offer the kind of labor resources and infrastructure that China currently does. For these reasons, China will remain a manufacturing force to be reckoned with. However, exactly what kind of a force it will change into remains to be seen.

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