In today's politically charged climate, few U.S. manufacturers are likely to shed any tears (at least publicly) upon hearing that China's manufacturing industry has hit a rough patch. Nevertheless, with so many U.S. companies currently using Chinese factories to take advantage of low-cost labor, and so many others seriously looking to the East for competitive reasons, the state of Chinese manufacturing in the coming years will have a profound effect -- for better or worse -- on U.S. companies.

China's manufacturing industry is going through a period that can best be described as evolutionary, according to Bradley Feuling, CEO of Shanghai-based Kong and Allan, a supply chain consulting firm. Many Chinese manufacturing companies, he explains, were launched when the Chinese government began offering a value-added tax (VAT) credit reimbursement to encourage exports. A year ago, however, China reduced or eliminated the VAT export rebates for some industries. As a result, though you don't hear it reported much in the United States, some Chinese manufacturers are operating now at a loss, and many have been severely impacted.

"A number of manufacturers and industries in China are facing very difficult times," Feuling states. "Competition has grown to a point where each manufacturer has a very small piece of a huge pie. Gaining market share means consolidation and acquisition, yet few operations have the cash to invest in purchasing other companies." The majority of owner-operated companies are unwilling to sell to other local companies, though some will sell ownership to foreign buyers for the cash inflow, he says.

See Also How to 'China-fy' Your Manufacturing Operations

"With that being said," Feuling continues, "the manufacturing industry in China is still expanding, but in a vertical migratory path instead of horizontal. Higher value-added services are beginning to be understood -- customer service, for example, in working with foreign customers. Product or material design is another area. Supply chain operations and efficiency is a third. Companies can readily see that the future will require adjustment to remain competitive and in some cases stay alive."

End-to-end supply chain involvement is critical for U.S. manufacturers if their goal is to fully understand the cost of sourcing in China. "Sourcing accounts for more than direct cost," Feuling emphasizes. "When you buy a product, you buy the supply chain." He suggests that companies focus particularly on inventory and capacity management.

Absence Of Lean

When it comes to the current state of Chinese manufacturing efficiency, David Hemmings, president and CEO of consulting firm Pacific Rim Alliance, says, "Chinese companies, when compared to Western productivity numbers, are still very inefficient despite a great workforce ethic. It doesn't matter if wages are only $1.25 an hour if there are 2,000 extra people working to make up for their inefficiencies."

Jintian Group, an example of a modern Chinese manufacturing plant, makes equipment for the electrical and electric power industry in southern China.

From Hemmings' perspective, lean manufacturing is mostly a rumor in China. "Chinese-run companies don't have lean manufacturing, and workers won't stop production lines if they see something's wrong because the social and education system is based on Confucianism -- which emphasizes loyalty, harmony and obedience, not questioning."

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