Era of China as a Low-Cost, Manufacturing-for-Export Market at an End: Study

For some manufacturers, it’s getting too expensive to simply offshore production to China

A new study conducted by Booz Allen Hamilton and the American Chamber of Commerce, indicates that companies that pursue China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives. Companies that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 percent compared with 17.8 percent). Despite the returns that this approach can generate, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations.

The first annual study, “China Manufacturing Competitiveness 2007-2008,” found that while a stronger Chinese currency and rising wages were putting pressures on manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labor and products are also limiting profits.

“The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,” said Ronald Haddock, Vice President, Booz Allen. “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. At the same time, China is increasingly a major source of product and business model innovation. We’re seeing globalization at work and China’s role has changed.”

More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China. To find out more, download China’s Shifting Competitive Equation – How Multinational Manufacturers Must Respond or Integrating China into Your Global Supply Chain – Lessons Learned from Global Supply Chain Integrators (both are in PDF format).