Asiatic Sourcing Blog

Chinese Manufacturing Remains On Top despite Labor Cost and Aging Concerns

Results released on Tuesday, 22 January 2013 of an international survey conducted by the United States Council on Competitiveness and Deloitte Touche Tohmatsu Ltd revealed that China was still the top dog when it comes to manufacturing destinations. This conclusion was derived from more than 550 interviews with senior leaders and CEOs of global companies involved in the manufacturing of goods. The manufacturing competitors coming in behind the leader were Germany and the United States.

The short term projection of the survey is that the country will continue to be the big player, at least over the next five years. However, there are concerns that both an aging population and rising labor costs could eventually affect China’s competitiveness. For now, the country is holding its own because labor costs remain relatively low and their corporate tax rates are attractive. Their advanced supply chains and hubs also make them desirable for doing business in China.

The Problems

An aging Chinese population is one of the main concerns for the country to remain competitive in the years to come. In 2012, the working age population shrunk by 3.5 million, which is quite significant and its only seen as getting progressively worse.

A direct result of the diminishing pool of labor is escalating labor costs. With fewer laborers available to fill positions, both national companies and those involved in China sourcing are finding they have to pay higher wages to those wanting to work. Many companies in the eastern provinces are already experiencing labor shortages as well as an increased rate of job turnover due to better wages elsewhere.

The survey also revealed that CEOs ranked Vietnam 10th and Indonesia 11th as Chinese competitors, but the advantages of manufacturing China products still far outweighed producing them in those countries.

Foreign Direct Investment

There is also a concern due to the falling Chinese foreign direct investment which saw its first decrease in 2012 since just after the financial crisis that engulfed global markets back in 2009. The manufacturing sector took a 6.2 percent hit last year as companies began looking to invest in outside markets as hedges to any future Chinese investments.

CEOs in Japan, for example, said they were taking an investment approach they deem as “China plus one”. This involves a strategy of utilizing China sourcing for one project while investing in another facility in some other Asian country.

Optimism Based On Advantage

Regardless of the several declining trends in the Chinese nation, companies remain optimistic to both produce in and buy from China. Medium and high-end manufacturing are seen as still quite competitive although the country is slipping in the low-end arena.

Also, China still maintains a workforce that is more highly skilled and possesses a better work ethic than its neighboring competitors. There is also the critical point of its dominant supply network that is essential for competitive manufacturing as well as the country’s huge base of natural resources available to manufacturers.

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