Most companies that have their products made in China do so because it’s cheaper. Why is it cheaper? Because labor is so much cheaper in China than in the US and Europe, and labor is a significant portion of the production cost. But over the past several years, wages have been steadily rising in China, making Chinese factories progressively less competitive on labor costs. Meanwhile, numerous pundits have made predictions about manufacturing work fleeing China for countries with lower labor costs, especially for Southeast Asian countries like Vietnam, Thailand or Myanmar or to Latin American countries, especially Mexico. A corollary prediction calls for more re-shoring – bringing back manufacturing to the United States or the EU.
But this predicted mass exodus from China has not occurred. Thus far most of the manufacturing moving to Southeast Asia has been either redundant manufacturing (i.e., to have an alternate source of production in case something goes awry in China) or manufacturing for goods lower on the value chain. And the re-shoring movement is still finding its feet.
China has maintained its competitive advantage in a number of ways. For one thing, it has made enormous investments in infrastructure: raw materials, components, and finished goods travel rapidly and consistently to and from and within China via a vast web of ports, railways, and highways. None of its competitors come close. Additionally, China’s status as the factory of the world means its factories (and many of its cities) have developed tremendous expertise and specialization. They may have been the cheapest before, but now they’re the most experienced – and sometimes even the most efficient.
A couple weeks ago, Sheelah Kolhatkar wrote an article in The New Yorker about advances in robotics which logically will put a number of factory workers out of a job – no matter where the factories are located. The Chinese factory owners interviewed in the story were almost stereotypically dismissive of concerns about workers rights, and perhaps necessarily so. To them, and arguably as a matter of national economic policy, vast automation is the only way China will remain competitive as a manufacturing base for the rest of the world.
My colleague Grace Yang writes frequently about the challenges companies face when navigating China’s employoment laws. Regardless of Chinese factory owners’ attitudes, you’d think they would have a tough time replacing workers with robots. But one of the factory executives quoted in Kolhatkar’s article made a keen insight: up to 80% of Chinese factory workers simply do not return to work after going home for Chinese New Year. You couldn’t draw it up any better for making a massive and sudden reduction in force.
Of course, US companies that re-shore manufacturing with largely automated factories won’t have to contend with disgruntled factory workers, because those workers were laid off years ago. And the better robots get at doing assembly line work, the more it will make sense for goods consumed in the United States to be manufactured in the United States. As Kolhatkar notes, “China was never a particularly convenient place for Western companies to have their sneakers and T-shirts and widgets made.”
But for now, China remains the factory of the world. And the increased shift to automation means there will be an ever-widening divide in China between manufacturers with an eye to the future and manufacturers stuck in the past who can only compete on price but not quality – and won’t be able to compete on price for long. This means selecting the right manufacturer is more important than ever, and it’s going to be hard to do that without visiting the factory. It also means a well-written Manufacturing agreement with your Chinese factory is more important than ever.