Are Rising Costs in China Causing Companies to Look Elsewhere?
August 9, 2006 by Splatty
Filed under Misc Logistics, Supply Chain Management
Swizstick has posted repeatedly about taking a cautious approach in outsourcing your manufacturing operations to China. Supply Chain Digest online makes another case in an article titled “Global Supply Chain: Is Rise in Chinese Costs Causing Slide in Foreign Manufacturing Investment?”. The article states that direct foreign investment in China has slowed significantly lately and that the rising cost of manufacturing and labor costs in China is causing companies to take a second look before diving into the China manufacturing phenomenon.
As noted earlier in Supply Chain Digest, the growing cost of production in China has already led to the move of some low value, commodity goods to other low cost countries, such as Malaysia, and Vietnam. The Wall Street Journal reports that one Taiwanese food ingredients company lowered costs by 35% by moving from China to Vietnam.
Some also suggest it is also possible that many Western and Japanese companies have simply maxed out their needs for Chinese production capacity. For example, the Wall Street Journal reports that so much of the high tech and electronics manufacturing in developed Asian countries has already moved to China that there is almost no room for growth. However, research from McKinsey earlier this year showed companies currently buy only 30 percent of the goods they ultimately could buy in China, a that figure will rise to 50 percent three years from now.
Two areas they contend may be the future of low cost manufacturing are Vietnam and Malaysia. I have always felt that Vietnam would most likely be the next hotbed for low cost manufacturing, although ChinaLawBlog makes an excellent case that the next hotbed will actually be locations in inland China away from the coastal areas.
Another area of concern mentioned by the author is that the potential for security issues and logistical challenges in China may force companies to look elsewhere, although at the moment I believe that Vietnam would pose greater challenges than those presented by China.
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