Who would have thought that sending manufacturing processes to China would one day become “too expensive?” The world’s second largest economy is on the brink of an economic crisis after years of booming success. So, is outsourcing to China really a thing of the past, or will China bounce back after adjusting to the changing economic environment?
China’s economic boom and resurgence as a world economic power can be traced back to the major reforms that took place beginning in 1978. During this year, the decision to allow foreign direct investment in certain zones of the country was reached. Due to the lack of proper legal groundwork and high uncertainty, firms were hesitant to enter the Chinese market. However in the early 80’s the Chinese government made the foreign direct investment process easier and began developing the necessary infrastructure in order to become an attractive host. This effort, along with favorable tax treatment, began to draw the attention of businesses around the globe. The economic boom that transpired was significant as businesses began outsourcing manufacturing processes to China in an effort to reduce costs. The rest is history.
Recent headlines, however have been warning about a potential economic downturn in China:
- “China heading for economic downturn, many warn”
- “China orders firms to cut capacity as economy slows”
- “Oversold China catches the eye of investors”
- “ADB chief warns of `big downturn´ following China’s economic slowdown, U.S. monetary policy change”
- “Sourcing shifts: Brands look for alternatives to China”
The one headline that really caught my attention reads “U.S. Manufacturing no more expensive than outsourcing to China by 2015: study.” This article, based on research conducted by AlixPartners, suggests that manufacturing costs in China will be equal to the costs of manufacturing in the U.S. by the time 2015 rolls around. This however does not necessarily suggest a return of manufacturing to U.S. soil as many other cheaper alternatives have presented themselves as viable alternatives, such as Cambodia and Vietnam. It is also suggested that pulling out of China is not an option due to the growing domestic demand for products.
In your opinion, are all of the headlines an overreaction to an economic bump in the road for China? In the end, we are talking about an economic downturn for a country that is nevertheless forecasted for 7.7 percent economic growth in 2013. Or, should businesses take caution and listen to the media buzz of an economic downturn in China? Will we see a significant shift of strategy from global businesses over the next few years?
I guess only time will tell.
4 comments
Several things come to mind: outsourcing locations tend to occuro in cycles for a variety of reasons including the vagaries of the global economy, the cost of labor and production and manufacturing expertise. This is why it’s important to consider what’s known as the Total Cost of Ownership for a given enterprise both at the start of an outsource relationship and, with proper governance structures in place, during the course of the agreement. For more on this concept, check our white paper, “Unpacking Best Value-Understanding and Embracing Value Based Approaches for Procurement,” and other resources n the Vested library (http://www.vestedway.com/vested-library/).
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