Focusing on China, we look at whether manufacturing in the Far East is worth it financially and otherwise, outlining the pros and cons of doing so.
How many times have you read the words ‘Made in China’? Cutting costs by manufacturing in the Far East and particularly in China is a long-established tradition for western companies, and has contributed significantly to the rapid growth of China’s economy. However, under President Xi Jinping China has seen policies enacting economic reform to strengthen nationalism in the People’s Republic. Despite advocating for “win-win” foreign trade agreements, the Chinese Communist Party has continued to clamp down on foreign enterprise in the country, and its once-open economy is arguably suffering, to the result that both domestic and international manufacturers are leaving China. It’s high time to ask the question: is manufacturing in China still worth it?
China no longer has the lowest manufacturing costs
Of course, there are still financial advantages to manufacturing in China. Many big players, such as Apple, SanDisk and Luxottica still outsource much product manufacture and assembly to China, and enjoy lower costs for operation, labour and equipment. But China no longer has the lowest costs - its development as a nation has meant that labour costs have increased compared to countries like Indonesia and Thailand. In fact, Chinese manufacturing costs are increasing to rates comparable with those in western countries, and a surprising knock-on effect is that Chinese entrepreneurs are actually starting to move manufacture to the US in order to cut costs.
The trend comes after many prominent companies, including Panasonic, Seagate and Sony have moved to close factories, cease manufacture and sell shares in China in favour of other developing economies. Costs of shipping and duties, too, must be taken into financial evaluations, and it’s for this reason that many US-based companies are now outsourcing to Mexico for low-cost manufacture and zero tariff imports.
Chinese law and culture to be considered in decision-making
Aside from cost, culture and language differences should be accounted for, in addition to the legwork that setting up a manufacturing process remotely will incur. It is advisable that companies planning to outsource manufacture into the country research into guidelines for doing business in China, as there are certain protections that should be employed by all foreign enterprises. Anti-monopoly laws are imposed by the Chinese government on foreign enterprises, and in many industries such as the auto industry foreign companies are required to partner with domestic firms and thus reveal protected technologies which are often their greatest held asset.
It is presumably for this reason that Tesla has been so famously reluctant to move manufacture into the Far East. However, in December the Chinese government announced that electric vehicles would be exempt from this auto law, in order to tackle China’s pollution problem (as well as to discourage Chinese investments in Silicon Valley innovators). Since the announcement, reports have emerged that Tesla is planning to build a factory in Guangdong: whilst dismissed by the company as “rumours”, Elon Musk’s recent stealth visit to China suggests the story may have some grounds.
And for the big players like Tesla, it may still make a lot of sense to produce and assemble products in China. Long-established traditions of manufacture in the country have meant that production is consistently reliable; in China a stringent commitment to deadlines meets output efficiency even in the largest of orders, which factories are well-equipped to deal with. So well-equipped, however, that factories often stipulate high minimum order requirements, so an emerging business may struggle to find a suitable manufacturing means.
The future of chinese manufacturing
The Chinese government have set their gaze on encouraging manufacture within a certain high-value tech market, and so while some enterprises stand to profit off the back of this, other businesses, both domestic and international, have chosen to move their own production away from China. It is part of a movement towards the changing ideals of 2025 China, that involve efforts to improve fine production as well as investing in research and development to drive tech innovation. However, although China’s improving innovation is garnering widespread recognition, as EJ Insight points out, “in most cases, it won’t bring profits and extra market share, owing to the lack of protection for intellectual property and rampant plagiarism by other competitors”.
This brings us to the final disadvantage of manufacturing in China, which is a susceptibility to IP infringement as attitudes to IP tend to be different to those of the west. It is important to protect IP with patents where appropriate, to monitor production processes and above all, to go through any contracts with a painstaking attention to detail. (See: Our webinar on the best practices for IP protection in China).
With this information in mind it is apparent that manufacturing in China can be worth it, financially and otherwise, depending on the type of product being produced, the industry, and the strength of the foreign brand and company. If it’s simply a means to cut costs, you could consider instead outsourcing manufacture to another developing country such as Indonesia, Mexico or Thailand.
As a foreign business, it’s important to bear in mind differing legal and fiscal policies, and be aware that is inadvisable to enter into a joint venture agreement where your best interests are unlikely to be protected. Above all, remember that choosing to outsource manufacture to China is not a decision that should be made lightly, as it is likely to bring about more complications than anticipated.
To summarise, whilst manufacturing in China can be an effective company strategy in the right environment, it is absolutely imperative to protect yourself and your IP, which without the right precautions is under heavy threat.