CHANGING TRENDS OF MANUFACTURING IN CHINA

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The wages and costs are constantly increasing in China, and these are slowly eroding its low-end manufacturing base, which had been the major portion of the manufacturing landscape in China for decades. But, the Chinese government is working extensively to try, and replace this with a higher end manufacturing base. So, it is very important to understand, how this change is happening in China?

Let’s look at some facts:

  • “China doesn’t release data on factory closings or relocations. But according to an analysis by researcher Justina Yung of Hong Kong Polytechnic University for the Federation of Hong Kong Industries trade group, the number of factories owned by Hong Kong companies in the Pearl River Delta near Hong Kong fell by a third to 32,000 in 2013 from a 2006 peak. Many of those that left moved to lower-wage countries.”
  • “Labor costs in China have grown faster than consumer inflation for years, according to consultancy BMI Research, and are currently nearly four times those in Bangladesh, Laos, Cambodia and Myanmar.”
  • Many manufacturing companies in China have always been owned by companies out of Taiwan and Hong Kong.

However, it is important to note that even though the main strategy is to move towards high-end manufacturing, china has been able to hold on to low-end industry far longer than its Asian neighbors at a similar stage of development. This is due to the fact that manufacturing companies have access to several government incentives, subsidies, a large domestic market, and a good infrastructure that have always encouraged companies to remain onshore in China.

This shift towards the high-end sophisticated manufacturing in china, has changed lot of as aspects and trends related to manufacturing in China. We have tried to summarize some of these trends in china manufacturing:

  • Less and less new companies are coming to China to manufacture their apparel, shoes or other low-end products.
  • A lot of new companies (including a lot of startups) are coming to China to manufacture far more sophisticated products.
  • A much higher proportion of the sophisticated China manufacturers seem to be owned by Hong Kong and Taiwan companies, which were previously aligned with low-end products. This is particularly true of the (mostly Shenzhen) Chinese companies involved in manufacturing internet of things products.

The legal and IP issues have been made more and more complicated both on the high, and on the low end of china manufacturing. On the high end, companies have to deal with complicated quality issues, and issues revolving around who owns what when it comes to the IP. When manufacturing socks, IP is not that big a deal and certainly not terribly complicated. But when manufacturing a product with hundreds of components that has been jointly developed (or at least refined for manufacturing) by both the Chinese manufacturer and our client, the IP issues can seem nearly infinite.

But surprisingly enough, the low-end manufacturing is getting more complicated as well. Earlier our company (Global TQM) would draft a relatively simple manufacturing agreement between our client and the Chinese manufacturer and that agreement would make clear that the Chinese company and its factory were not to manufacture or sell the same product to anyone else and that the quality had to meet XYZ standards and if it didn’t, then __ would happen. But now, what we are seeing a lot more often is that even a low-end product manufacturing deal with a Chinese company will involve a Vietnamese (or other lower wage country) subsidiary that might make some of the products. Therefore, it becomes complicated as to who all to include in the agreement, and which laws will apply in case of any issues.

Conclusively, for better or for worse, the manufacturing landscape is changing across China, and it is very important for a company that is planning to enter, or already working on a China manufacturing strategy, to understand these changes. Choosing the right partners (or advisors) in china can fairly reduce the amount of risk, uncertainties, and adversaries that any company would face.