China’s Shifting Fortunes

 

As this issue goes to press, I am on my way to Beijing for the 2008 Summer Olympic Games. It’s an exciting time for China—these games are generally seen as China’s maturation as a culture, an economy and a global power in the modern world.

And the 29^th Olympiad also marks a crossroad for China. Nixon’s historic visit in 1972 set in motion events that would change—and are changing—our world. And not much has changed more in the past 30 years than manufacturing.

For me personally, the opportunity to witness an Olympics in such an exotic, exciting country is as good as it gets. To watch this mysterious country begin a quantum move toward openness is a real thrill.

But this type of change is never without its challenges, and China is finding itself at a stage of maturity where its trajectory toward manufacturing/economic dominance is slowing down a bit.

Consider these factors, and how they affect the total cost to manufacture in China:

• World Trade Organization (WTO) compliance: Since joining the WTO, China has been following a progression each year toward compliance that includes instituting an income tax and conforming to WTO directives and policies. While many would argue about its progress, this movement has resulted in added costs to Chinese manufacturers.

• Rising labor costs: The taxes mentioned above, inflation, increased standards of living and expectations of the emerging Chinese middle class are all contributing to the overall costs of maintaining manufacturing in China. Wages in China are rising 10 to 15 percent a year.

The taxes mentioned above, inflation, increased standards of living and expectations of the emerging Chinese middle class are all contributing to the overall costs of maintaining manufacturing in China. Wages in China are rising 10 to 15 percent a year.

• VAT rebate suspensions: Two rounds of VAT rebate suspensions (07/07 and 01/08) have added as much as 20 percent to the cost of many products and materials manufactured in or originating in China.

Two rounds of VAT rebate suspensions (07/07 and 01/08) have added as much as 20 percent to the cost of many products and materials manufactured in or originating in China.

• Falling U.S. dollar: The dollar has fallen more than 30 percent against world currencies since 2002 and is now falling against the yuan.

The dollar has fallen more than 30 percent against world currencies since 2002 and is now falling against the yuan.

• Energy prices: China isn’t immune to the pains we feel at the pump and in overall energy costs. But while we all are suffering through these rising costs, this accounts for a huge hit to the Chinese price. The problems for China and those with supply chains dependant on its suppliers are logistics, transportation and shipping. Proximity alone makes localized supply chains more attractive to buyers in North America and Europe.

China isn’t immune to the pains we feel at the pump and in overall energy costs. But while we all are suffering through these rising costs, this accounts for a huge hit to the Chinese price. The problems for China and those with supply chains dependant on its suppliers are logistics, transportation and shipping. Proximity alone makes localized supply chains more attractive to buyers in North America and Europe.

• Confidence: While energy prices represent a huge direct increase to the China cost, recent events and the Chinese response to them have exposed weaknesses in the Chinese manufacturing market and affected the confidence of many buyers globally. Despite the Chinese government’s rapid response to the tragic earthquakes this past spring, they exposed weaknesses in the supply chain and logistics in the regions affected. And the government’s solutions to reduce pollution and energy consumption before, during and after the Olympics will likely result in severe delays, disruptions or failures in deliveries of products from China for as long as 3 months. Many factories that don’t meet environmental standards will be closed. Transportation channels—trucking and shipping—will be affected as vehicle traffic is reduced and materials deemed risks to security are held from import/export (respectively). The overall psychological impact on many buyers is one of less certainty in the stability of Chinese supply chains.

While energy prices represent a huge direct increase to the China cost, recent events and the Chinese response to them have exposed weaknesses in the Chinese manufacturing market and affected the confidence of many buyers globally. Despite the Chinese government’s rapid response to the tragic earthquakes this past spring, they exposed weaknesses in the supply chain and logistics in the regions affected. And the government’s solutions to reduce pollution and energy consumption before, during and after the Olympics will likely result in severe delays, disruptions or failures in deliveries of products from China for as long as 3 months. Many factories that don’t meet environmental standards will be closed. Transportation channels—trucking and shipping—will be affected as vehicle traffic is reduced and materials deemed risks to security are held from import/export (respectively). The overall psychological impact on many buyers is one of less certainty in the stability of Chinese supply chains.

China isn’t going away, and changes won’t happen overnight. Many products and services that are pulled from China will move to other low-cost countries and will likely never return to the mature markets. But the advantages that China has enjoyed are indeed shifting, and U.S. manufacturers have an opportunity to capitalize by engaging former customers and prospects to express their advantages—proximity, stability and, now, cost.

I’ll write about my observations when I get back. In the meantime, "Go Team USA!"