Tuesday, September 25, 2012

Outsourcing in China is Losing Its Allure



About two months ago, a small California company, Seesmart Inc has changed its manufacturing processes from China back to US for the economic situation of increasing costs of logistics, freight and high labor in China. [1]

As the second biggest outsourcing service country, China used to have huge advantages of low cost labor. However, the changes of economic conditions have undermined those advantages of outsourcing services in China. The soaring price of labor costs have risen 15 percent a year, and as the dollar value declined 23 percent since its peak in 2002, the cost of factory labor in dollar terms fell 11 percent in the U.S.[2]  In addition, the price of shipping finished goods has jumped since the average price of barrel of oil has gone from $22.81 in 2002 to $87.48 last year. [2] Although the labor costs of China is still much lower than in the U.S., the total cost of producing in U.S. may be lower when all factors are calculated. The researcherGartner recetly predicted that by 2014, the production of 20 percent of goods mow made in Asia and destined for U.S. consumers will shift to the Americas. [2] Another study by Accenture demonstrated that 61 percent of 287 manufacturers are thinking of moving operations closer to customers. [2]

Outsourcing in China is also a topic in the 2012 U.S. presidential election since most American people think the large amount of outsourcing services in China has stolen American’s jobs. Apparently outsourcing is also a topic for this verbal battle. And both Obama and Romney tried to use pressuring China strategy to win supports from electors. But if those policies will be implemented after the election is suspicious. There are so many benefit bonds between China and the U.S., the policy towards China is inevitable to be dual.  

From my point of view, although the trend of economic conditions (higher labor cost, appreciation in the Chinese yuan compare with the U.S. dollar, higher shipping costs) is not optimistic to outsourcing services in China, for those labor intensive manufactures, China still has relative advantages compare with US.  Otherwise, China is also craving shift from “made in China” to “created in China” status and to promote the living conditions for Chinese people. And china already has taken a lead in solar and wind power industries. In future, it is also possible that China will be a new outsourcing market for high tech manufacturing.

References: 

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