Risks of Chinese Sourcing
Increasing Risks Make Chinese Manufacturing Less Desirable
© D. Chen
Apr 17, 2008
With so many US corporations outsourcing labor inside China, the question arises whether it benefits or slows domestic economic growth, and more importantly, how it affects typical business entities and consumers today. Globalization has changed the playing field for many business ventures, yet core company models and strategies remain similar.
Brief History
Opened to the developed, industrial world since the 1980s, Chinese leader Deng had determined to bring the nation up to speed economically. Despite lacking infrastructure, war torn from the still settling communist revolution, China determined to catch up. Where it lacked in technology, logistics and management sophistication, it made up with lower costs.
It presented international-arbitrage opportunities for many importers. The labor cost discrepancies meant increased profit, competitiveness, and businesses throughout the globe took notice. Those of little competitive edge domestically suddenly found boosted sales with a pure low price vantage.
Over the years, increasing numbers of firms have outsourced production at Chinese facilities. Many businesses have adapted must-outsource and cut costs attitudes, though this sentiment remains ambiguous. However, as American participants escalate into this scheme, subsequent risks and domestic issues arise.
Copycat Exposure
Known for still-developing intellectual property legislations, American products made in China carry high risks of breaches concerning trade secrets. For some US businesses, technological and design innovation remain the primary competitive edge, and for many the risk of potential copycat conduct outweighs savings via Chinese labor. Consequently, Chinese labor tends to attract more mainstream, derivative goods.
Local Government Corruption
Numerous facilities produce common wares, and foreign buyers frequently need to deal with more than just the factory management. Local government bodies manage manufacturing facilities in the forms of regulation enforcements and taxes, and corruption still imposes various issues for foreign business operations in China.
Faced with competing purchasers, the factories or municipal regulators may require unconventional influences to release best price offers. Some facilities decline sales due to already burdened orders. Under the table transactions, enticements in the forms of automobiles, gift vouchers, gratuitously expensive meals, etc., have become common business expenses. Still, even if production becomes secured, quality remains an issue.
Little Incentive for Quality Workmanship
Chinese factory employees have little incentive to labor distinctly or precisely along the production lines. With an average wage roughly a tenth of American counterparts, and sometimes questionable work conditions, production finesse exists as an after-thought for the typical Chinese laborer.
The above issues then logically raise points of whether outsourcing in China remains attractive for foreign enterprises, particularly America. With all risks considered, the labor cost savings may not contribute enough toward increased business efficiency.
About Labor Costs Today
The global markets function efficiently, and the saturation of foreign labor demand has lifted average Chinese wages. According to Ethical Corporation, the now less competitive costs have made Chinese facilities a less desirable source of manufacturing. While Beijing directs producers to take on higher-end products, Chinese companies estimate a 30% wage increase this year alone.
Increased labor, lending costs, tighter pollution controls and elimination of preferential tax treatment for foreign businesses have dramatically diminished the attractiveness of Chinese sourcing. Scores of foreign investments have shifted to Vietnam, India, or other lower cost sources. Nevertheless, Americans still consume Chinese-made products at a rapid pace; perhaps it is time to re-think strategy.
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