Industryweek 1743 Kevinlehrer2

Why it's 'Not Your Big Brother's China' Anymore

Jan. 3, 2012
Kevin Lehrer is seeing 'exponential' shifts in China's manufacturing landscape -- literally and figuratively.

Kevin Lehrer is seeing "exponential" shifts in China's manufacturing landscape -- literally and figuratively.

"We like to say it's not even your big brother's China these days," says Lehrer, co-founder and managing partner of Five Horizons Group LLC. The firm provides services such as site selection, sourcing and quality assurance to Western consumer-product manufacturers doing business in Asia.

"I've been going [to China] since the early 2000s, and the rate of change, the rate of growth, the rate of infrastructure development over there is just astonishing."

Perhaps the most significant shift is in where manufacturing is-- or was -- taking place in China.

Lehrer: The rate of change in China "is just astonishing."
In recent years, Lehrer has seen more and more manufacturers migrating north and inland, away from traditional manufacturing hotbeds such as the Guangdong province on the southern coast.

Not surprisingly, those companies are "seeking out lower-cost manufacturing regions," Lehrer says, and they're finding them in the north-for a variety of reasons.

Cheaper labor is a big part of it.

"When the southern regions of China were the industrial hotbeds, you had a large migrant-worker base from the north that would travel all the way to the south to go to these factories," Lehrer explains.

"As manufacturing has moved further north, you now have an employee base that is already residing in the north and that would much prefer to work up there as opposed to traveling all the way to the south.

"So you have a more optimal cost structure with the labor base in the north and the west, and it's by and large cheaper than in Shenzhen and Guangdong."

Government subsidies are spurring growth in northern regions of China, Lehrer adds.

"The Chinese government heavily subsidized those southern factories early on to stimulate manufacturing in those areas. Now the government is looking to strategically inject capital and subsidies into those northern areas to generate a similar type of growth."

Heightened Emphasis on Quality

In the wake of a well-publicized spate of product-safety issues involving Chinese-made goods, authorities in China have made quality control a major focus in recent years, Lehrer says.

"Government entities have really cracked down and are forcing the hand of Western companies to ensure that they have quality-control measures both upstream during the development phase and then downstream during the inspection phase to ensure that product leaving China is of the highest quality and safety standards," he says.

The crackdown on quality control, Lehrer adds, "has put an additional price pressure" on products manufactured in China.

The fallout from the 2008 global recession has created another type of pressure for some manufacturers: lack of supply.

"The economic crisis wiped out a pretty large segment of low-cost manufacturers," Lehrer says.

"And as the economy has slowly rebounded, one of the other trends that we've seen is factories are smaller in some ways and don't have the capacity to handle production like they once did, because they are far more conservative in their infrastructure."

Consequently, as retail demand has picked up, some consumer-product manufacturers have had "difficulty in getting factories to be able to produce enough or to have enough inventory to fulfill the demand."

Is Vietnam the Next China?

As far as trends in the Asia-Pacific region, Lehrer sees Vietnam emerging as a manufacturing hub for Western companies, particularly in product categories such as furniture and textiles.

"We are seeing several companies and industries really hedging by setting up a certain portion of their manufacturing base in Vietnam as a supplement to China," he says.

However, Lehrer emphasizes that Vietnam is "emerging" -- especially in terms of its infrastructure, which lags behind that of China.

"In a lot of ways, Vietnam is like China was 20, 25 years ago," he adds.

Still, China is not the only low-cost manufacturing game in town, with nations such as Vietnam, Malaysia, Indonesia and the Philippines growing in popularity.

"China still has a solid future in front of it as it relates to being a manufacturing partner," Lehrer says. "But I think any good Asia manufacturing strategy involves not putting all your eggs in China these days."

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