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March 5, 2008
Chinese competitiveness
Yesterday, the American Chamber of Commerce in Shanghai released a report on Chinese competitiveness. According to the press release Booz Allen/AMCHAM Shanghai Study Finds Companies Adopting China as Both a Growth Market and Manufacturing Hub Are Two-Thirds More Profitable Than Others:
More than half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe that the country is losing its competitive edge in manufacturing to other low-cost nations. As a result, nearly one in five manufacturers surveyed has concrete plans to relocate or expand China operations to other countries, with Vietnam and India seen as the top alternatives to China.
Among the study’s key findings:
* Operations management is a factor: The study found that three out of four companies lack fundamental best practices in their China operations, including integrating the dual functions of export platforms and domestic market penetration. Survey respondents cited a number of best practices that have yet to be fully applied in China. Just 11 percent reported fully applying integrated planning systems such as enterprise resource planning (ERP) software and material requirement planning (MRP). Even fewer companies – only 7 percent – had fully deployed analytical inventory calculation tools and processes, and 4 percent employed best practices for supply chain risk management.
* Declining competitiveness: More than half, or 54 percent, of companies surveyed believe that China is losing its competitiveness to other low-cost countries. Seven out of 10 respondents cited the rising renminbi as a major reason for China’s decline, while wage inflation was cited by 52 percent of those polled. Wages for white-collar managers and blue-collar workers have jumped 9.1 percent and 7.6 percent, respectively. Staff retention is also a major concern, with 33 percent of respondents citing it as a reason for lost competitiveness.
At the same time that costs are increasing, China is lagging behind global standards in many operational dimensions, most notably in logistics infrastructure, trade environment, access to technology, management capabilities, and protection of intellectual property.
The study, China's Shifting Competitive Equation: How Multinational Manufacturers Must Respond and a companion BoozAllen report Integrating China into Your Global Supply Chain are available on line.
We have been hearing these stories coming out of China about rising costs for a couple of years now. Obviously, if the key finding of the report—that “the days of China’s begin considered a cheap labor manufacturing platform are numbered”—is true, it will be interesting to see how multinationals react. Will they chase low cost labor by moving to other sites or will they attempt to upgrade in order to take advantage of the growing Chinese domestic market?
It will also be interesting to see how US companies and policymakers react. Clearly, trading one low wage competitor for another won’t have a big impact on US based manufacturing. Increasing China-based high-end competitors to US-based high-end producers for the Chinese market will have a big impact. As I have said many times on this blog, there is no reason to believe that the Chinese can’t and won’t go up the value chain—especially in their home market. US companies have to figure out a new business model, different from the old industrial age (extended) one they have been following.
That industrial age (extended) model sees the world as a huge assembly line factory, with the US as the engineering and management office in the front. It is unclear that the US can economically prosper in that role—and even if we can sustain that role as the rest of the world changes. Time to find a new model.
Posted by Ken Jarboe at March 5, 2008 10:59 AM
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