From Observer, page 48, issue no. 360, Mar 24th, 2008
Translated by Zuo Maohong
Original article: [Chinese]

Though the era of cheap labor is over, foreign manufacturers in China still have an opportunity to profit by marketing to a local population that is consuming more and more, said a report published in early March. Of the 66 foreign companies it surveyed, over half thought China was losing its advantage of "low-costs" to other countries like Vietnam and India.

The World's Factory Becomes Less Competitive
The report, entitled Research on the Competitiveness of Chinese Manufacturers 2007-2008, was jointly written by Booz Allen Hamilton and the American Chamber of Commerce in Shanghai. It was an attempt to find out how American manufacturers in China could remain competitive amidst rising costs and increasing competition in the Chinese market.

According to the research, 54% of the surveyed companies thought China was losing its edges over other low-cost manufacturers. Seventy percent believed it was mainly due to the appreciation of the yuan, and 52% blamed it on the rise in salaries—salaries for management and general staff had respectively grown by 9.1% and 7.6%. Thirty-three percent of the companies considered talent drain another factor.

Xie noted that the new Labor Law taking effect this January would further push up personnel costs—already a consensus within industry. Therefore, it was reasonable to believe that pressure from rising labor costs would't ease in 2008, he said.

As a result, about 20% of the companies surveyed claimed they had nailed down plans for transferring parts of their business to other countries. Among them, 63% intended to move to Vietnam, and 37% preferred India. Eighty-eight percent said they had chosen China thanks to its low compensation costs, and now that there were even cheaper markets and more preferential tax policies in other countries today, China was less attractive.

Optimize, Optimize, Optimize
Besides rising costs, the report noted that China still lagged behind international standards, especially in terms of infrastructure for logistics, trading environment, acquisition of technologies, management ability, and protection of intellectual property rights. Another factor impeding profit growth of multi-national companies was the fact that they failed to optimize their operations and fully integrate purchasing, manufacturing, and marketing in China.

According to the research, 3/4 of the companies surveyed lacked best practice of operations in China. Merely 11% had used planning and integration systems, such as Enterprise Resource Planning (ERP), and Material Requirement Planning (MRP). Only 7% had completely applied storage analysis tools and procedures, and 4% had adopted best practice methods in supply chain risk management.

As the whole industry became less competitive, local manufacturers were inevitably impacted, especially labor-intensive industries such as shoemaking and clothing. Some medium and small-sized companies had already been on the verge of bankruptcy. In response, Xie suggested small companies improve production efficiency, and that those which were able to adopt best practice would boost their advantage in the long term. For example, he said, the latter could improve their operation efficiency, better allocate supplies, introduce advanced manufacturing and logistic management, and enhance management abilities etc.

In his book, The Direction—What Chinese Companies Should Learn, published last year, Xie expressed similar views. "Apparently, even if the competition in China becomes even stronger, there would be more opportunities and better returns for those who can keep applying best practice to various operations and are well-versed in China's development progress, " he said.

A New Attraction: Consumption Power
Despite rising costs, 83% of manufacturers surveyed chose to continue operating in China. As for the reasons, 78% said they wished to stay because of the big market here, while 39% said they would so to avoid re-organizational costs. Brenda Lei Foster, president of the American Chamber of Commerce in Shanghai, cautioned that China's rapid economic growth, market transformation, and vigorous business environment will continue to impose more requirements on manufacturers. Companies should focus on boosting their competitiveness and spend more on innovation, she suggested.

One key finding of the report was that of all the multi-national companies surveyed, those taking advantage of both the consumption market and the cheap labor market in China made more profits than those depending on only one of them. Companies which both purchase and sell in China made 29.6% and 17.8% more on average than mere purchaser and mere buyers, respectively. This meant that companies which added China into the global supply chain had advantages over those which only took China as a low-cost production base.

Xie said the report showed the overturning of some traditional ideas. "We found that China was no more an exporter merely relying on its low costs.  The local consumption market is playing a more significant role," he emphasized.

However, the research also found that despite considerable returns, only 1/4 of companies treated the Chinese market as both their production base and a target market. "To take full advantage of both China's consumption and resources, manufacturers should make sure to adopt their best operating modes here, such as streamlining production and introducing Six Sigma," said Xie.

According to Ron Haddock, president of Booz Allen Hamilton, foreign companies in China might have to change the management philosophies developed during the past decades. Rising costs and a changing currency value had forced them to rethink their strategies in China and how they should blend them into their global planning, he said.