Unique Advantages of Manufacturing in China


ING_52006_03120.jpgAccording to the United Nations Statistics Division, China accounted for 28.7% of global manufacturing output in 2019. In recent years, rising labour costs in the country have called its comparative advantage against low-cost competitors into question. The supply chain disruption worldwide from the COVID-19 pandemic has prompted an assessment by companies to bring production closer to home or increasing domestic production. China's energy crunch, which has led to abrupt power cuts at factories, have raised concerns over delayed deliveries.

As the world shakes off the pandemic, strategies to boost supply chain resilience have taken precedence, and what this means for China's attractiveness as a global manufacturing powerhouse is anyone's guess. But despite trade and geopolitical tensions, and the increasing desirability of India, Singapore, Vietnam, Mexico and Malaysia as manufacturing destinations, China is unlikely to be unseated from its top position any time soon. In this post, we discuss:

  • The unique advantages of manufacturing in China

  • Areas of sustained competitiveness

  • Impact of trade tensions and COVID-19 on trade and foreign investment

  • What Amazon sellers/foreign importers can do to effectively manage a disrupted supply chain

Why is it best to manufacture in China?

Large scale and low cost

A frequently cited advantage of manufacturing in China is the huge cost savings from cheap labour costs and low manufacturing costs (from using cheaper homegrown components over expensive imports). You'll save a ton in overheads, training cost, recruitment and wages than if you were to manufacture your product locally.

China has remained cost competitive across a wide range of industries due to higher productivity growth. The country has a higher productivity-adjusted manufacturing cost advantage compared to the U.S. This is true for the country as a whole as well as industrial belts in central and western provinces where new production capacity is being generated.

High production capability

China is pretty much unbeatable when it comes to scale, as well as the ability to upgrade production in a short time and respond to market trends. China's integrated supply chain accelerates the path from raw materials to manufacturing.

Increasingly sophisticated technology and R&D

The country has proactively sought to improve its production processes. While it may not be as advanced as the UK, Japan, Switzerland, US or Canada, government policy of rapidly expanding its high-tech sectors is expected to create a more advanced manufacturing industry.

Lower price of exports

A check on the appreciation of the yuan has made Chinese exports more attractive. It has helped the country maintain a healthy manufacturing economy, and had a cancelling effect on tariffs by the U.S. by controlling the costs of imports.

China is an excellent bet as far as manufacturing expertise and capacity are concerned. Whether you're an Amazon seller or an inventor, want to mass produce a commodity or produce custom products, you will find a Chinese factory that can satisfy your requirements at a low cost.  

Areas of sustained competitiveness

Here are more reasons why it is best to manufacture in China. According to a report from the Boston Consulting Group, China's domestic market is fast expanding and driving robust growth in manufacturing. The strong internal market growth is seen in the falling contribution of export goods to manufacturing GDP. Over 60% of China's manufacturing is in eastern coastal provinces of Guangdong, Zhejiang and Jiangsu. Government initiatives are moving industry out of major cities to central and western provinces.

In provinces such as Henan, Sichuan, Shaanxi, Jiangxi and Guizhou, manufacturing output is expanding. In provinces like Guangdong, low-manufacturing facilities are making way for higher-tech industries. At the same time, China is working on addressing challenges with regards to high logistics costs, skilled worker supply, physical infrastructure and capital investment in interior provinces.

As mentioned previously, Chinese supply chains are highly integrated. The manufacturing ecosystem of adjacent assembly plants, materials and component suppliers, and skilled labour, give the country a special advantage over low-cost competitors. Greater vertical integration of the supply chain means manufacturers can control costs and sell/make for low prices. It is one of the major advantages of manufacturing in China. With more major clusters coming up in central provinces, the breadth and efficiency of China's industrial ecosystem is only set to strengthen.

Chinese manufacturers have continuously invested in technology, infrastructure and skill development, which has boosted productivity growth and challenged major developed economies on efficiency. In 2001, when China became a member of the World Trade Organization (WTO), U.S. factories were 14 times more productive. Since then, the gap has narrowed by half. 

With increasing investments in automation, skill training and international management practices, China should be able to achieve parity with the west. That said, matching the west on productivity is not without its consequences. Automating factories would reduce the share of labor, making China's low labor cost advantage less relevant.

Finding a reliable Chinese supplier

To increase your chances of finding an honest Chinese supplier that fits your business needs, ask the right questions and confirm the details that must be verified before you share your design drawings. Here are some things to consider when hiring a Chinese supplier for your business:

1. Location

239974824.jpgWhere is the factory based? Are they the manufacturer or a third-party? Do your due diligence to weed out intermediaries that buy from factories or sub-contract to another factory. Not only will they cost you more but they're also likely to be problematic when it comes to disputing quality issues.

2. Experience

Does the supplier make or specialize in your product? Get the details, visit the factory, and pay for samples to make an informed decision. Avoid conducting all business online as there is no way of knowing what's happening with your order thousands of miles away.

3. Documents

Is the factory legit? There are some bad apples out to make a quick buck from unsuspecting first time Amazon sellers. Do business with a Chinese supplier only after they have provided you a copy of these documents:

  • Business license, validating that the company is legally registered in Mainland China

  • Foreign trade registration certificate, showing that the company can legally carry out foreign trade and to confirm their English name.

  • Bank account certificate, to get details of the company’s bank account in Mainland China. The payments you make will go to this account and not to an offshore account.

  • ISO 900 certificate

  • Customs registration certificate

4. Testimonials

There are many advantages to manufacturing in China. But your success depends on the quality of the supplier you contract to make your product. Ask the supplier for testimonials. If you're going through Alibaba or another directory, filter on the basis of ratings to include only the top-rated suppliers in your assessment.

How have trade tensions and COVID-19 impacted trade and foreign investment in China?

Former U.S. President Donald Trump instigated a trade war with China, in which both countries imposed tariffs on one another's goods. Trump's rationale was that the tariffs would compel American manufacturers to move production out of China, weakening reliance on the Asian giant's manufacturing. China fought back in retaliation with its own tariffs. As a result of the controversial trade war, America's trade deficit grew and GDP shrank 0.08% between 2018 and 2019. China grew at or above 6% during the same time, with tariffs costing around 0.3% of deficit. US direct investment in China increased from $12.9 billion in 2016 to $13.3 billion in 2019.  

China has retained its number one position in the 2021 Global Manufacturing Risk Index, which assessed the most advantageous locations for global manufacturing among 47 countries in Europe, the Americas and Asia-Pacific.

China leap-frogged the US as the world's top destination for new foreign direct investment in 2020, driven by an eastward shift of the global economy by the COVID-19 pandemic.

In the U.S., investment inflow by overseas businesses declined 49% in 2020. Meanwhile, China witnessed a 4% increase in foreign indirect investment, and the country's gross domestic product grew last year. Broadly, East Asia accounted for a third of all foreign investment globally, recording its largest share since the 1980s. The European Union saw a 71% drop while the U.K. and Italy had no new takers.

In response to a plunge in FDI in the early months of the pandemic, Chinese officials moved to reassure foreign investors and sought to implement targeted policies to curb the slump in foreign trade and investment. As China took confident strides towards recovery and  things in the rest of the world started to look wobbly, FDI flows to China intensified.

Walmart Inc. has announced an investment of 3 billion yuan ($460 million) in Wuhan, the epicentre of the pandemic over the next five years. Walt Disney Co. is continuing construction of a new theme area for its Shanghai Disneyland Park. Starbucks Corp. is pouring $150 million to build a roasting plant and innovation park in Kunshan, in southeastern Jiangsu.

Investment initiatives in China by medical and pharmaceutical industries are continuing. This includes plans by AstraZeneca PLC to create a new Global R&D Centre and an artificial intelligence Innovation Centre in Shanghai, and Healthcare Industrial Fund with China International Capital Corporation Limited (CICC).

Last year, the British drugmaker announced a deal with Shenzhen Kangtai Biological Products to produce the AZD122 vaccine, with the top Chinese vaccine maker ensuring an annual production capacity of at least 100 million doses.

Despite the fallout from the pandemic and trade tensions with the United States, China remains an attractive and favoured destination for manufacturing and trade. The answer to 'is manufacturing is moving away from China' is a firm 'no'. Many American companies have no plans to relocate production abroad. Just 7.2% of Japanese companies operating out of China said they were considering moving out of the country.

Some companies have made concessions to avoid getting in their government's bad books. Tesla Inc. halted  plans to expand capacity at its Shanghai plan. But it is not about to turn away from China - Tesla's Giga Shanghai reached an annualized vehicle production rate of 45,000 Models Y and 3 vehicles, and the rate is expected to grow to 500,000.

Moving production out of China isn't a decision to be taken lightly. Companies invest many years to build relationships with suppliers. Relocating some capacity is done after an extensive cost-benefit analysis.

The Chinese government sprang into action to control the impact of COVID-19 outbreak and revive its economy. The forced lockdowns across Asia brought economic activity to a standstill. Factory activity fell sharply in Japan and South Korea. China was affected to a lesser extent. Though factory activity tanked in February last year, it recovered in March but the growth was marginal. After a period of lengthy shutdowns, factories began resuming operations as virus cases began to fall. In South Korea, drastic measures to control the virus led to manufacturing activity falling to its lowest pace in 11 years. As expected, manufacturing activity was also sluggish in low-cost production destinations such as India and Vietnam. These are also reasons why China is the world's factory.

What has changed for importers?

2260551.jpgSupply chain disruptions hurt small sellers the most. If you plan to order frequently from China, you must consider events that can potentially affect production - from pandemic to power outages. Specifically, how do you know if production has been affected and what next steps can you take?

Managing disruptions is easier and less stressful with a dedicated China sourcing agent serving as your foot on the ground. Remember that effective communication matters a great deal during crises. With an agent handling your order, you will be better able to receive and share the right information in a timely manner, and determine the best course of action so business doesn't take a hit.

The need to maintain ongoing relationships with Chinese supplies came to the forefront during the pandemic. Importers and Amazon buyers who were proactive in communicating with their suppliers made it through the pandemic more easily than those who struggled to communicate with factories or could not get through their message effectively at a time when manufacturers were under pressure and handling queries from their various clients.

In Chinese business culture, mutual trust and personal relationships ('guanxi') are among the keys to a successful business relationship. Transactional social ties are also beneficial for small importers and Amazon sellers. If you're interested in expanding your product line and want to contract with a single Chinese factory for all your production needs, then forming personal connections with the manufacturer will help you.

It is best to have a plan in place to react appropriately during a crisis. For example, you should make immediate inquiries on whether the delivery of your products will be delayed. If you placed a large order, you should be able to negotiate at least a partial delivery so that your business doesn't suffer a loss. Ensure consistent communication to customers based on the assurances of your Chinese supplier. If you're an Amazon seller, stay on top of Amazon's announcements. Last year, the ecommerce giant partially suspended its FBA program due to the global coronavirus outbreak to prioritize shipment of high-demand products.

Quality issues are a reality for any importer, regardless of where they source their products from. If you receive defective goods, you need to know how best to take up the issue with your Chinese supplier. Unlike western companies, Chinese companies do not expect to resolve disputes through legal action. You have to figure out a solution that you can live with, such as having the defective products remade on a priority basis. For this, you will need to dig into why you received bad products in the first place. Was something unclear in the product specifications? Was there a problem with the tools or a labor crunch at the factory that led to the poor quality? Or was the factory simply careless in monitoring quality?

Knowing your options during a quality dispute will come in handy to manage customer order fulfilment and supplier relations effectively. Things will naturally be easier if you're on good personal terms with the supplier.

However, due to the language and cultural barriers, you may struggle to establish strong relationships and communications with your Chinese suppliers as early and as effectively as possible. Engaging a sourcing agent frees you from the pressure of forming beneficial relationships with Chinese businesses all by yourself. Here are some things to consider when hiring a China sourcing agent:

Location: Where is the company based? Obviously, they need to have a presence in China to coordinate and monitor your order. Some agents also have an office in their clients' countries but this does not provide any special advantage.

Services: It is better to engage an agent whose services encompass product sourcing, order monitoring, manufacturing control and quality inspection. This way, you don't have to hire a quality inspection company separately or make arrangements with forwarders to pick up your products and track the shipping process.

Communication: Have a look around the agent's website. A well-designed website with a blog doesn't guarantee reliable service, but it should give you confidence about their  communication capabilities and motivation to provide you the information you seek.

Maple Sourcing ticks all the right boxes. We have helped many Amazon sellers in the U.K., U.S. and EU connect with honest and capable factories providing custom manufacturing. Make the most of the advantages of manufacturing in China with us. 

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