It's a tough time to be in the manufacturing business. Consumers are spending less, the cost of manufacturing is increasing, and financing your way through these difficult times is practically impossible. At Panjiva, we call this state of affairs, "The Great Squeeze" -- because companies are finding themselves squeezed by several forces ostensibly beyond their control. Undoubtedly, some companies will not survive The Great Squeeze -- most likely those that employ the Deer in Headlights strategy: doing nothing in the face of danger. In contrast, survivors will take aggressive action to address the manageable aspects of The Great Squeeze. This article will explore one of these manageable aspects -- the increasing cost of manufacturing, particularly in China.

Cost Increases in China are Not Temporary

By now, most supply chain managers are quite familiar with the story that ends in higher manufacturing costs. Because everyone decided to manufacture in China, the demand for labor increased, leading to rising wages, which forced factories to raise their prices (i.e., your costs). The good news is that you're not alone in confronting rising costs in China. In fact, the rising cost of doing business in China is the most common complaint I hear from sourcing executives. And, there are actions you can take to keep costs under control. I'll come back to this in a moment, but, first, let me address a very dangerous line of thinking -- that price increases in China are temporary.

A common misconception is that the Chinese authorities will likely take action if the cost of doing business in China continues to rise. Many think (or hope) that the government will work to keep wages and prices under control in an effort to maintain the growth of their existing export industries.

However, evidence suggests the Chinese authorities are tolerating -- and, in some cases, encouraging -- these increases. Authorities have raised the minimum wage repeatedly, ostensibly so that people can cope with the rising cost of living associated with food and fuel. Moreover, Chinese authorities have been taking significant steps to encourage unionization. Why would Chinese authorities be comfortable with these steps which will ultimately result in higher costs of doing business? David Barboza, a New York Times reporter, offered a convincing explanation when he wrote that the authorities are "no longer content to be the home of low-skilled, low-cost, low-margin manufacturing" and are trying to move Chinese companies "up the value chain" ("China's Ambition Soars to High-Tech Industry," New York Times, August 1, 2008. Bottom line: don't bet against continued increases in the cost of doing business in China.

Strategies for Containing Costs

So if you are convinced, as I am, that cost increases in China are not temporary, there are several options available, each with its pros and cons, to address this aspect of the Great Squeeze. Determining which is right for your business requires a thorough understanding of the pros and cons of each -- as well as an honest assessment of your company's specific circumstances. First, let's review the options:

1. Identify the "New China" for Your Industry
   There is no shortage of countries seeking to be the "New China," by offering lower wage labor. Which countries should be on your short list? The answer is industry specific, because a low-cost labor pool is only valuable to you if it has the skills you require. For example, in the apparel industry, Vietnam and Cambodia are two frequently evaluated options.
2. China is the New China
   Increases in wages have been most significant in the Southern and coastal regions of China. In Northern and inland China, there remains a vast pool of low wage labor. Many companies are looking to suppliers in these regions as an option for keeping costs under control.
3. Leverage Your Suppliers' Networks
   Your suppliers in Southern China are just as concerned as you are about rising costs. In an effort to keep costs under control, they are likely working with -- or currently searching for -- subcontracting partners in other regions within China or outside of the country. Therefore, you may be able to work through your existing suppliers to keep costs down.

Choosing the Strategy that's Right for You

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