Rising Costs, Low Quality Ending ‘Cheap China’ Era

The era of China as the low-cost factory floor for the world has ended, according to a new study.

A stronger Chinese currency and rising wages has pressured margins, but poor operational procedures among manufacturers are pushing up costs too, according to a study by consultant Booz Allen Hamilton and the American Chamber of Commerce Shanghai.

"The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,” Booz Allen Vice President Ronald Haddock says.

"China’s changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy.

Story Continues Below

"At the same time, China is increasingly a major source of product and business model innovation,” Haddock says. "We’re seeing globalization at work and China’s role has changed.”

Companies that target China as a growth market and as a source of lower-cost labor and materials reap profits two-thirds higher on average than companies that focus solely on manufacturing or on the Chinese consumer market.

Unfortunately, only one out of four companies surveyed currently combines strong in-country marketing with its manufacturing and sourcing operations.

Only 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP).

A mere 7 percent use analytical inventory calculation tools and processes and just 4 percent used supply chain risk management best practices.

More than half of the foreign-owned or foreign-invested manufacturers surveyed believe that China is losing its competitive edge to other low-cost nations.

Nearly one in five plan to relocate or expand Asian operations, with 63 percent of those listing Vietnam as their first choice while 37 percent prefer India.

Despite rising costs and competitiveness problems, 83 percent of companies said they will continue manufacturing in China.

Most respondents cited the rising Chinese currency, the yuan, and higher wages as the major reasons for China’s competitive decline, with worker retention also a major concern.

Wages for white-collar managers and blue-collar workers are up 9.1 percent and 7.6 percent, respectively.

The study also noted that China lags behind global standards for logistics infrastructure, trade environment, access to technology, management capabilities, and protection of intellectual property.

"China’s phenomenal economic growth and market reform story, together with a dynamic and challenging business environment, will continue to put pressure on manufacturing companies,” AmCham Shanghai President Brenda Foster says.

"They will have to focus on continually improving their competitiveness and devoting more resources to innovation as they pursue their strategies and plans in China.”

The study focused on 66 of the largest foreign-owned or foreign-invested manufacturers in China — more than 10 percent of the total number — and included consumer, industrial, healthcare and materials industries.

Eighty-one percent of the companies surveyed were wholly owned by foreigners and 10 percent were joint ventures between multinationals and Chinese partners.

Approximately 30 percent of respondents have an additional major presence in China beyond their manufacturing footprints, including representative offices, regional or global headquarters, regional or global procurement centers, and regional or global R&D centers.

Editor's note:
Turn $10,000 into $161,000 in less than six weeks!
Fortunes Will be Made From 2008 Dollar Collapse. Take Action Now.
Bernanke Punishing the Dollar. More Profits Ahead.
Dollar Slammed Again. What To Do Now.
Why the Fed Interest Rate Cuts Won`t Work
Newsmax`s Intelligent Options Performance Red Hot in 2008.
What the Mainstream Media is NOT Telling You About The Economy
Recession Warning: Irrefutable Evidence of the "R" Word Just Released