Recently there has been a lot of talk about manufacturing moving from China to countries with lower wages such as India, Bangladesh, and Vietnam. Although some manufacturers are now producing goods in these countries, China will most likelremain the world’s factory for the foreseeable future, here’s why;
1. Simple production like clothes and shoes are leaving China, other production isn’t
China has over 30 year’s experience in producing goods for Western markets; it has for sure been a steep curve to get to the point where it’s not only cheap goods being made there, but also medium and high quality. The reports of factories moving to lower wage countries is mostly for labour intensive low costs goods, i.e clothing & shoes. Medium to high end manufacturing is not leaving. It will take other emerging manufacturing countries a long time to catch up on the production ability that Chinese factories have in the higher value products.
2. Manufacturing ecosystems
It’s not as simple as saying ‘that place has cheap wages let’s make it there’.
Manufacturing ecosystems are the main determining factor on where a product can be made. A manufacturing ecosystem is the network of suppliers that provide parts to the final assembly factory and are essential for efficient and low cost production.
Take for example Foxcon, the company who handle the assembly of iPhone in Shenzhen. In order for Foxcon to be able to assemble iPhone’s it requires many manufacturers and suppliers of the phone’s components to be located nearby the assembly plant. These same suppliers also supply the other major smart phone producers, so the overall cost to produce comes down. These ecosystems become so important that it can effectively make it unfeasible to produce anywhere else. Basically all smart phones and tablets are produced in Shenzhen, with a few exceptions, i.e. HTC in Taiwan and some Samsung models in Korea, but the majority of the components they use come from China. There are so many established production ecosystems like this that it is very difficult to transfer production anywhere else.
3 Natural deep sea ports
A point that is not often mentioned is the logistics of getting the goods from factory to port. Again over the last 30 years China has built an enormous infrastructure to efficiently handle the mega quantity of goods produced. With its enormous coast line, river deltas and number of natural deep sea ports, China can handle quantity of production that would be almost impossible for any other country. In fact 7 of the world’s busiest deep sea ports are in China.
4. Where else has the population and capacity to produce the same quantity?
The frighteningly large population in China means there is an army of workers to fill the factories. Although it is getting more difficult for factories to find and keep workers, the sheer size of the pool of people will ensure the factories always have enough workers. Places like Vietnam have a small population in comparison, only about 6% of China’s. While some production is indeed going there, they are already finding it difficult to find enough workers, and so wages are hiking. There are even examples of the manufacturing returning to China from SE Asia. The only country with a comparable population is India. But there are so many logistical problems with producing there that it’s not realistic to assume India could take a major share of production anytime soon.
5. Working conditions are better than in other low wage countries.
Although not all factories have great working conditions, generally the standard has improved a lot over recent years. These days its pretty difficult to find a factory exporting to Western countries that would be considered a ‘sweat shop’. The standards in SE Asia, India and Bangladesh have a long way to go to reach standards required by Western retailers.
What are your thoughts?
(Photo taken at an LED lighting manufacturer we use in Shenzhen)