China's Great Transition

China's Great Transition

A manufacturing giant built on exports is promoting domestic consumption.

China's 12th five-year plan signals a shift toward slower growth, more domestic consumption and more concern with raising living standards broadly across the world's most populous nation. For U.S. manufacturers, these shifts mean China will remain an attractive manufacturing site, but the nature of the attraction will be evolving.

"China is the world's factory today. It will remain the world's factory tomorrow. Nobody is going to flip a switch," notes Ron Keith, CEO of Riverwood Solutions, a managed supply chain services and operations consulting firm. But China's factory is becoming more expensive to do business in. Keith notes that direct and indirect labor costs have increased 128% since 2005. Along with rising labor costs, the Chinese government is becoming more particular about the industries it wants to attract and promote, seeking higher value, cleaner operations. Keith points out that printed circuit board fabrication shops, for example, use a lot of chemicals and fresh water. He says the government is making it "increasingly difficult to get permits to do those types of things."

A young, more affluent middle class in China are tech-savvy buyers. Photo: Masterfile
As labor costs rise along China's east coast, companies are moving some operations inland. For example, Foxconn, which produces most of Apple's iPads and iPhones at its huge factories in Shenzhen, is reported to be moving 200,000 production jobs inland. Moving inland may reduce labor costs, but it also raises shipping costs for exporters who move hundreds of miles from eastern ports.

But Foxconn is also launching an intrapreneurship program, according to Stephanie Yan, principal of Z.H. Studio, a media and marketing consultancy in Beijing that generates China business reports and studies. Foxconn is offering employees with 5 years or more tenure up to $25,000 if they start up a Foxconn-branded retail shop in their hometown. By developing an entrepreneurial network this way, Yan says, Foxconn is able to create product and service outlets around the country and build a strong logistics system for domestic consumption.

Ron Keith: "China is the world' s factory today. It will remain the world' s factory tomorrow. Nobody is going to flip a switch."
Manufacturers aren' t looking only at moving to inland China. Keith says companies are exploring a number of other Asian countries eager to build their own manufacturing sectors. Those countries include Malaysia, Vietnam, Philippines, Indonesia, Thailand and Singapore.

But if China represents a more expensive outsourcing destination, it also offers an enormous and increasingly attractive market. Some analyses, for example, show that China' s middle class in a few years will exceed the total population of the United States.

Western companies that established operations in China years ago to source their products, says Jonathan Wright, a senior executive at Accenture Consulting, will find themselves in a strong position to address domestic demand there. But he warns that companies will find discerning consumers among China's younger, more affluent population.

"The wealthiest population in China is younger than in the mature markets," Wright says. "With that youth comes tech savvy and very different buying behavior than in mature markets. They want to buy quality products and will use blogs, tweets and other research to make the best decisions they can."

See Also:
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