Global Crisis/Innovation Blog

Now is The Time to Rethink Manufacturing in China: Bring Those Plants Home!

By Shlomo Maital

  This is a perfect time to rethink the losing strategy (losing, at least, for middle class factory workers in America and Europe) of producing everything in China.  According to Joe Manget and Pierre Mercier, writing in Bloomberg Business Week,  “The rising cost of manufacturing in China gives multinationals a rare chance to rethink global production plans”.

   The authors note that rising wages are eroding China’s massive competitive edge.   They point to Foxconn (huge Taiwan-owned contract manufacturer in China) and its doubling of wages, following strikes, suicides and worker unrest.

     “Much has been written about the more than doubling of wages at the Shenzhen factory of Foxconn,  the world’s largest electronics contract manufacturer, which produces Apple (AAPL) iPhones and iPads and employs 920,000 people in China alone. ‘One can talk about a world pre- and post-Foxconn,’ says Victor Fung, chairman of Li & Fung, the world’s biggest sourcing company and a supplier of Wal-Mart (WMT). ‘Foxconn is as important as that.’ ”

Wage inflation in China, coupled with soaring minimum wages (20 – 30 per cent increases in most regions) and stagnant productivity, suggest this is a great time to rethink the Made in China strategy.  If wages continue to rise 20 per cent a year, note the authors, added wage costs will total $623 / month in five years. (They cite a BCG Boston Consulting Group study).   Why not anticipate this trend, and bail out now, rather than wait for foreign multinationals’ Chinese plans to become uncompetitive? 

  I fear that again, CEOs of multinationals will again take the easy path and instead of working hard to build competitive plants in America and Europe, they will look for another source of cheap labor.  It’s easy to find – Vietnam.  According to Manget and Mercier,

   “Take one factory in Vietnam, where wages of 80¢ per hour are 31 percent lower than in China. On the face of it, this looks like a good deal—but factor in the differing productivity rates, and the Vietnamese factory’s cost edge drops to 14 percent. Furthermore, it won’t take long for young Vietnamese to demand the same treatment as their Chinese counterparts.”

  It is time for the U.S. to wake up and abolish all the major tax incentives granted under George Bush for companies that produce abroad, and transform those tax incentives by 180 degrees – give them to companies producing in America, rather than companies producing in Asia.   No country can ever maintain a strong prosperous middle class, healthy employment,  modern production technology, and rising productivity, when it produces services almost exclusively.  It is obvious.  Why, then, is it not obvious to political leaders in the West? 

     A golden opportunity presents itself to tackle the pernicious job crisis, with policies that are neither fiscal nor monetary.   Will our leaders again not miss an opportunity, to miss an opportunity?