People fall into two schools of thought these days. There are those that think China outsourcing has run its course. They subscribe to the notion that the appreciation of China’s currency (RMB), labor shortages and cost increases and increased fuel prices mean cost savings opportunities have substantially diminished. In contrast, the other side of the coin spells out what others have believed for years—startup costs and tooling are less in China, products with high labor content have to be outsourced and China will always be “Factory to the World.” For several reasons, they are both correct.
In a December 15, 2011 Wall Street Journal article it was reported that China's Ministry of Human Resources and Social Security, announced 21 provinces and municipalities had, on average, instituted annual minimum wage increases of 22% by October of last year. Officials in Shenzhen, in China's southern manufacturing heartland, said in November that they would raise the city's minimum wage by 15% in January, to attract more workers. While wage hikes are nothing new, they have reached a point where factories are no longer able to absorb the increases meaning higher costs are passed on to consumers. However, with last year’s economy taking a turn for the worse, demand dampened driving commodity costs down. The result was China’s digging in its heels on allowing currency to rise against the dollar.
Since the mid-90s companies sought out the labor machine that China represents with its nearly 800 million strong workforce to remain competitive in Western markets. China’s family planning practices in place since the 1970s translate into a tightening demographic of available workers. This has also meant that China has moved more inland to expand its available workforce. Even so, the average hourly wage earner still makes only around $70 per week on the low end and up to $80 at the high end. While this is nearly double what it was around 2001, compared to the 2011 U.S. Federal minimum wage of $7.25 per hour/$290 per week the 275% premium speaks for itself. Add to that mandatory unemployment taxes, healthcare benefits and other layers of overhead U.S. companies have to absorb and the costs begin to add up.
According to a February 1, 2012 Bloomberg report in which she sums up the U.S. manufacturing landscape, Caroline Baum states that “manufacturing employment peaked at 19.5 million in 1979, when it represented almost 22 percent of the workforce. Last year, the 11.7 million manufacturing workers accounted for less than 9 percent of total employment, according to preliminary data from the Bureau of Labor Statistics. During that time, the value of U.S. manufacturing output kept increasing, thanks to strong productivity growth.” So in other words, Advantage U.S.
And she goes on. “Manufacturing employment has increased 334,000 since the low in December 2009. Southern, non-union states offer an increasingly hospitable environment for factories. NCR Corp. opened a new plant in Georgia to produce automated teller machines. Caterpillar Inc. plans to build a new construction- equipment factory in the U.S. Ford Motor Co. is bringing 2,000 jobs back from China and Mexico after reaching an agreement with the United Auto Workers union. Even a family-owned North Carolina furniture manufacturer decided to reopen a factory that has been shuttered for more than a decade.”
What comparative advantages China may be giving away in labor and productivity however is being bolstered by innovation which takes China to an entirely new level on the global playing field. China has doubled the number of international patents created since 2005 and is launching products at a fraction of the time as its Western counterparts. Mckinsey Quarterly's February report cites their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence. And the report goes on to say that because of its large market, much of China’s innovation is staying there.
Because of the cross pollination of U.S. industry standards, quality processes and knowledge transfer, more and more firms are combining China’s vast low cost labor machine, ingenuity and speed to market to become multi-national in scope. Solar power companies, the auto industry and a new medical initiative sponsored by the Chinese and U.S. governments are creating opportunities for both our countries to leverage their strengths. Read the joint statement here.
China wins because they gain access to medical innovation and improved standards of healthcare. The U.S. gains access to an untapped market for highly profitable products and services. This bi-lateral agreement fosters long-term cooperation with China in the areas of research, training, regulation and the adoption of an environment that will increase accessibility to healthcare services in China. Participating U.S. companies initially include 3M, Abbott, Chindex, Cisco, General Electric, IBM, Intel, Johnson & Johnson, Medtronic, Microsoft, Motorola, and Pfizer. Supporting organizations include AdvaMed, the Alliance for Healthcare Competitiveness, the American Chamber of Commerce in China, and the American Chamber of Commerce in Shanghai, PhRMA and the U.S.-China Business Council.
As we continue to increase trust, enhance communication, and cooperate in developing life improving technologies and innovations, a new frontier of collaboration is emerging that will change the world as we know it.
David Alexander is the founder of Baysource Global and Executive Vice President of Direct Source China, a strategic sourcing and strategy firm with offices in Miami, Tampa and Shanghai.