Wednesday, September 25, 2013

Chinese Manufacture - Boon or Bane?

How often have you seem items that read – Made in China? All through my childhood, I came across toys, stationery, clothing and the like with a common tag, which mentioned its make in China. The article Supply Chain for iPhone Highlights Costs in China, left me pondering about how China, which was always spoken about in the manufacture industry, is no more in the limelight. China was the targeted, pre-eminent destination for all the manufacturing activities in the 1980s. This can be tied to the fact that it had the highest population back then.  People were plenty, but jobs few, which is why the labor costs were lower. The government’s enforcement of family planning policy in 1979 is now taking effect. The supply-demand curve turned around, with high labor demand but low supply. The high demand can be attributed to the fact that all the western countries chose China to set up their manufacturing units to engage low-cost labor.

These changes are now resulting in a shifting supply chain in China resulting in the companies turning away from Chinese manufacturers. To mitigate this, the Chinese manufacturing companies are now taking leads and competing for innovation. Goodbaby, for example, started by a school-teacher now holds 70% of the juvenile-product market. Another contract manufacturer, Daphne, built its own retail network over the years and now makes $1.2 billion in revenue. It first formed a great manufacturing capability and then improved its design capabilities to move up the value chain(ChinaDaily USA, August 08, 2013). Thus, although the western countries are moving away from the manufacturing units in China, the Chinese market is emerging through innovation.

On the other side, companies that heavily depend on these Chinese manufacturing firms are heavily hit due to labor agitations. Any disturbance in the manufacturing process causes a domino effect in the supply chain of the product. It is a tough call for the MNCs to decide if the mitigation to this is to move out from China to other developing countries like India, Korea or to stick to a country as emerging as this.  Outsourcing to India, Vietnam too is a risk as the labor wages there are as high as that of China but start at a lesser amount. GE has already moved its production from China to the states. Foxxcon(major supplier for iPad parts) has moved from higher wage coastal province to cheaper interiors of China, India and Indonesia. Therefore, with China investing in leading innovations, is it a good idea to drift away from this growing economy?

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