China Remains a Major Sourcing Destination

There have been countless articles about China’s reign as factory of the world coming to an end. While it is true that wage increases are making some of China’s lower-end industries, such as textiles, out to low-cost countries such as Viet Nam and Bangladesh, China remains one of the top procurement sources for mid- to high-tier products. Even as some of the lower-end industries move out, there is more to a country’s competitive supply chain than labor costs. China maintains a set of key factors that will continue to make it a competitive exporter even as the economic landscape shifts. 

 

1. High-quality Infrastructure (Especially Export-related Infrastructure):

China’s rail and road infrastructure, particularly along the coastal cities, are among the most developed globally. With a history of double-digit investment rate every year in infrastructure, China’s ports complement the rail/road infrastructure. Shanghai long surpassed Singapore as the world’s busiest port and it will be a while before key competing countries can match China’s current (and continuously developing) infrastructure.

 

2. Increasing Qualified Labor Force:

China produces hundreds of thousands of graduate engineers and scientists each year to be absorbed into the local industries. Moreover, China now has the world’s largest student population studying overseas with a sizeable number returning upon completion of their studies. Although there has been renewed attention to quality rather than quantity in the number of graduates, the increasing education level will boost China’s competitiveness vs some of the other low-cost sourcing destinations.

 

3. Growing Research and Development Expenditure Leading to Higher Innovation Capacity: 

Despite the reputation for copying, China’s innovation has continued to pick up pace. A report by McKinsey & Company highlights innovation in areas such as renewable energy, consumer electronics, instant messaging and mobile technology. As internal and external competition increases, China is also focusing on price reduction, adaptation of business models and supply chain development. This will lead to the elimination of less efficient firms, both domestically and those focused on the export market.

 

4. Lower Costs Comparing to Industrialized Countries: 

Despite double-digit growth in both wages and currency appreciation during the past decade, China’s minimum wage still stands far below that of industrialized countries. Rising wages are correlated with increasing productivity. Therefore, countries competing with China for lower costs will have to also compete with increased productivity and vice versa.

 

5. Specialization, Not Only at Sector Level, But Also at Product Level: 

China’s specialization in various products remains unparalleled globally. There are entire towns dedicated to producing a single product. For instance, Pearl River Delta is known for electronics industries, whereas Shenzhen has become the IT hub of China. Moreover, the product range available in these agglomerations is diverse, catering for low- to high-end products, resulting in differentiation as a key competitive factor.

 

6. Pro-export Policies:

It is true that the Chinese authorities have decided to alter the export-led growth model to one focused on domestic consumption. However, the country’s “going out” policy continues to have explicit support (via export rebates or subsidies) or tacit support, especially at local level. This support will continue to boost Chinese exports’ competitiveness -at least in the short term.