Is It Really Cheaper To Manufacture In China?
Updated: Apr 25
In today's business environment, it is common for companies to outsource their manufacturing operations to China. After all, labor and production costs are much lower there than in developed countries. However, is it really cheaper to manufacture in China? There are some factors to consider when making this decision. First, the cost of labor is not the only factor that affects the bottom line. Second, quality control can be an issue when manufacturing abroad. Finally, transportation and other logistics costs must also be considered. Let's take a closer look at these questions to get a better understanding of outsourcing manufacturing to China.
Related Article: Does the US still want to manufacture in China?
Some History Behind Manufacturing in China
The People's Republic of China has been a member state with the WTO since 2001. This country is now an economic powerhouse, ranking as both the second largest manufacturer and consumer in terms output while gaining a reputation for producing everything from cars to electronics at quantities unmatched by many other nations.
China is an attractive market for foreign businesses because of its large population, cheap resources, and commitment to globalization. Cheap labour, access granted by membership in the WTO (a multinational trade agreement), as well low tariff rates with Western markets make it a gold mine for international investors who rushed into this country during the 2000s when China's economy was opening up at breakneck speed.
In the past few decades, China has been making a name for themselves with their manufacturing capabilities and own innovations. They rank high up there on patents and new technology development in many fields such as consumer electronics, robotics and artificial intelligence.
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The Real Cost of Manufacturing in China
Rates of pay in mainland China's wages vary greatly between areas and between urban and rural employees (estimates range from $0.33 to $4 per hour). The majority of China's labor rules are disregarded, including minimum wage, overtime, and overtime compensation.
In high-tech manufacturing, China has been held back by weak infrastructure outside of its developed but packed cities. Examples are power and water supplies are not dependable; for instance, many industries in southern China that consume large amounts of electricity are required to take one day off a week to conserve power and help avoid shortages.
Shipping and Warehousing
Shipping to and from Asia is another significant cost of outsourcing to China. According to estimates made, shipping and logistics add up to 17% of the cost of a product. In-transit inventory payments and land transportation costs eg. from the factory to port, port to a distributor's warehouse are significant factors that also cannot be ignored.
While light non-bulky items may be carried cheaply by air, the majority of products are shipped by sea in 40-foot cargo containers before arriving at a US port between two to six weeks later. Schedules are less flexible and organizations are less able to adapt to changes in market demand as a result of the extended shipment durations. Offshore manufacturing often makes lean manufacturing unworkable.
Ancillary Labor Costs
There are ancillary labor costs that are seldom considered in addition to direct labor and freight costs. The costs of sending boots-on-ground to find, evaluate, and maintain relationships with suitable manufacturers and suppliers. And after that, still the sending of technical and managerial staff to oversee the manufacturing and assembly.
There's also the expense of the quality defects of shipped products and any warranty terms. If thorough inspections, and realistic commitments to required quality standards eg. ISO9000, Six Sigma are not made, then more often than not, outsourced product quality is lower than domestic product quality. Full payment is frequently dependent on the number of units running off the assembly line, regardless if that unit is still fit for purpose.
Those hidden costs such as cost of freight, customs, logistics, inventory carrying costs, and reduction in cash flow added together could result, without proper controls, in an extra 15 to 24% to the cost of a product manufactured in China.
Related Article: What causes manufacturing price fluctuations?
Why Big Brands are Still Outsourcing Their Manufacturing To China
Manufacturing Expenses are Lower
Manufacturing items in Chinese facilities can help US companies save money on production (which tend to offer significantly lower production costs than their US counterparts). As a result, company owners and manufacturers are willing to put up with the difficulty of producing items on the other side of the planet (and the subsequent need to ship the goods long distances.)
High Manufacturing Capacity
China's manufacturers have grown their assembly lines and chain supplies to meet insatiable global demands for cheap goods. They are experienced in mass production for almost any requirements and sector for decades, and from small to large quantities.
Possibilities for Product Range Widening
Outsourcing to Chinese manufacturers helps you to quickly diversify your product line, provide new product ranges and updates, rebrand and update existing items, as well as try out new goods. This can be done relatively quickly, with inexpensive tooling and packaging, and in small quantity batches.
Lead Times Can Be Shortened
You can ensure a steady supply of incoming items by increasing the frequency with which you place orders ie. in smaller quantities but more often. You won't experience the stress of low inventory and the urgent need to make a huge production run if you place orders more frequently. Many factories have minimum order quantities, although they're usually acceptable or adjustable if more regular orders are made.
Improve and automate inventory management controls with the manufacturer. You may allow your supplier to track the same data and automatically place a buy order on your behalf if you provide them with inventory projections.
Taking a Risk Won’t Bring the House Down
Manufacturing in the United States can be prohibitively expensive, especially for a new venture or line. To make it all worthwhile, local manufacturing enterprises must have significant margins due to personnel and training expenses, production process problems, and equipment expenditures. If anything fails along the line, it could be irreversibly expensive and final. Because production costs are low in China, issues such as defects, failures, bad runs etc. will not necessarily kill off projects. Changes and adaptions can be swiftly made at a limited cost to keep operations running.
There Are Professionals to Help
There's a propensity to become concerned when you're not working face to face, when there are language hurdles, and when the factory is located across an ocean. Diversitech Global, a leading design, assembly and packaging business, works closely with its clients to establish an initial trusting connection for outsourced production.
Alternatives to Manufacturing in China
Manufacturing items in China, based solely on the factory worker’s wage packet, is no longer the great advantage it was, say, 20 years ago. China's wages have increased since 2005, with the typical manufacturing worker earning around $27.50 per day. However, in turn, productivity in China improved by 11% between 2007 and 2012, and it is likely to continue to rise as a result of further automation investment.
Indonesia, Vietnam, India, Bangladesh, Thailand, the Philippines, and Myanmar are all boosting their manufacturing production at cheaper costs than China, making them an alternative for many international enterprises.
While it used to be true that shifting wholesale manufacturing operations to China resulted in immediate and large cost savings for Western consumers, this is no longer a simple and clear cut case with tariffs and countries with even cheaper labor.
Considerations such as flexibility in manufacturing demands from clients, experience in production and assembly technologies, a disciplined, educated and skilled workforce, a stable business environment, developed transportation and infrastructure etc, should all be kept in mind.
For each manufacturer, the pros and disadvantages of producing in China must be considered. The parameters to consider vary greatly based on what you want to produce and the other criteria mentioned above.
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