Why do companies choose to manufacture in China?

Overview of manufacturing

China is the world’s largest manufacturer, sometimes referred to as ‘the world’s factory’. It has been an attractive destination for manufacturing in recent decades thanks to its low labour costs, technically skilled workforce and good infrastructure. But China’s competitiveness and manufacturing profile are changing, with more developed regions moving up the value-chain and labour-intensive manufacturing moving inland. Businesses are increasingly choosing to manufacture in China to service the growing Chinese market, rather than use it as low-cost option to manufacture export items.

Manufacturing’s percentage share of Chinese GDP has been slipping in recent years, but it remains a major sector, accounting for 42.6 per cent of GDP in 2014. The sector employs about 30 per cent of workers in China, and has ensured China remains the world leader in gross value of industrial output. On the more developed Chinese eastern coast, the focus has increasingly moved to advanced manufacturing, while lower cost and more labour intensive manufacturing is increasingly located further inland.

However, as China’s focus on the services sector likewise grows, increasing numbers of Chinese will be employed in the financial services sector, rather than manufacturing or agriculture.

Advantages and challenges of manufacturing in China

Advantages of manufacturing in China include access to increasingly sophisticated Chinese research and development (R&D) and science and technology, as well as incentives offered by local, provincial and central government agencies. Another positive of manufacturing in China are the efficiency gains thanks to larger economies of scale in China. However, rising labour costs, skills shortages and intellectual property protection are significant issues to be considered when looking at manufacturing in China.

Other concerns and challenges when manufacturing in China are the current development stage and inconsistency with application of commercial law in China and variable quality of logistics and infrastructure systems. Using contracted manufactures or subcontractors may also cause serious difficulties that have to be strictly managed. These include the need for rigorous quality control, possibility of leak of products to the domestic and international market, production overruns and ethical and corporate socially responsible manufacturing.

What to consider

There are a number of ways for foreign businesses to go about manufacturing in China. Contract manufacturing is a popular option for both large and small businesses across various industries. Australian businesses can also choose to invest directly in a factory in China, either independently as a wholly foreign-owned enterprise or as part of a joint venture with a Chinese company.

Location is another key consideration for manufacturing in China, with the Chinese Government encouraging investment in different types of manufacturing in different regions. On the more developed eastern seaboard, where wages are higher and the infrastructure is better, the Government encourages investment.

in high-end, low-polluting manufacturing. Further inland in China’s central and western provinces, where labour is cheaper and infrastructure less developed, the Government encourages investment in more labour- intensive manufacturing. Some cities and provinces specialise in certain industries and producing specific goods.

Quality control is an important consideration when choosing to manufacture in China. There have been high- profile cases in which poor quality control by Chinese manufacturers – usually sub-contractors – has caused significant problems for international brands, ranging from clothing to toys and food products. Make sure you have robust quality control mechanisms in place and perform due diligence. 

Case study: Michell Wool

Australia’s own manufacturing sector has been given a boost by the entry into force in December 2015 of the China-Australia Free Trade Agreement (ChAFTA). Under the ChAFTA, wholly Australian-owned companies will now be allowed to establish in China. In addition to this, almost all of Australia’s manufacturing exports will enter China duty free within four years. Australia has great opportunity to invest in advanced manufacturing in China, which has been earmarked as important future driver for China’s economy.

In 2006, 145-year-old Australian family business Michell Wool opened their 14,000-square metre Suzhou factory for carbonising wool – a required process to clean the wool.

Read more on their successful engagement with China’s manufacturing industry.

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In recent years, China has emerged as one of the top manufacturing destinations for a majority of brands. From telecom majors to auto giants, China attracts several key players from all over the world. A combination of factors has made China the most popular destination for overseas manufacturing. Here are top five reasons why China scores big.

Low-Cost Labor

One of the main attractions to manufacturing products in China is the availability of low cost labor. In fact, according to statistics, manufacturing in China can help reduce costs by 30% to 80%, depending on labor intensity of production.

Strategic Location

China also benefits from its proximity to a number of growing markets such as India and South Korea. Moreover, moving production to China gives manufacturers access to China’s rapidly growing domestic market.

Low Raw Material Costs

At a time when manufacturers in all industries are trying to cut expenses, China provides a cost-effective option. Access to affordable raw materials helps bring down manufacturing costs to a considerable extent. As a result, having suppliers who are local to the manufacturer has gained importance as a way to cut costs.

Access to Cutting-edge Technology

Realizing the potential of its market in the era of globalization, China has spent the last few years developing its technology. Heavy investments in research and development have helped the country gain an edge over other emerging countries.

Evolved Supply Chain Management

To make the most of the growing interest in their country as a manufacturing hub, many Chinese suppliers have stepped up in recent years. By identifying a reliable local supplier, international companies have a simpler, more efficient option for increased production. This has encouraged even more Chinese suppliers to update to the latest technologies and raise their standards in order to attract more customers.

With a growing market, access to low cost labor and technological advantages, China is becoming the favored destination for overseas manufacturing. Call us today to get a quote and see how much you could save by taking your manufacturing to China.