In Managing The Dragon's (MTD) last post, Don’t Leave China, Just Move, we took issue with a recent Economist article that suggested that companies should reconsider China as a manufacturing location due to rising wages and other costs.
MTD’s point was simple. China is a vast country where manufacturing costs vary widely depending upon city and region. Rather than leave China for countries that seem more attractive on the surface, MTD’s advice is that companies should consider moving to second and third-tier cities within China where costs are lowest. That is what large, sophisticated, manufacturing intensive companies like Foxconn are already doing.
There is another point to be made, though. Implicit in the article’s main argument is the notion that China is, above all, a manufacturing center. If costs are rising in China, the article suggests that companies consider other countries when establishing new manufacturing facilities. Apart from the fact that any other country in the world, except for India and the United States, is vastly smaller, looking at China primarily as a manufacturing center is yesterday’s game. That’s the game of the 1990s. The game in the 21st century is all about the China market.
I have always felt that the only real reason to be in China is for the market opportunity. When I established ASIMCO Technologies in 1994, the strategy from the outset was to capitalize on the future development of China’s auto industry. While we did implement an export program in the late 1990’s, the idea was to use exports to leading global players to upgrade our manufacturing capabilities.
Before companies like Bosch, Tenneco or Cummins will give a supplier its first order, the supplier’s factory is audited, no matter where it is located, and the supplier development teams roll in to correct the deficiencies and get the factory up to snuff. And it worked. The quality at each of the ASIMCO factories that exported was upgraded, and they became that much stronger in the China market as a result.
As ASIMCO was building its export business, it became clear that there were two groups of people in the world. There was one group that was in denial about China and did not believe that Chinese factories could ever produce quality products. (We never managed to get any export business from companies in this camp.) Then there was a second group that believed just the opposite. They believed that the manufacture of nearly everything would move to China.
Of course, neither group was right — the world seldom works that way. In reality, what we are seeing today is a healthy recognition that cost is only one variable in a complex equation when it comes to a company’s sourcing decision. Proximity to the customer, quality, responsiveness, delivery times and other factors matter as well.
So, when you’re thinking about where to locate your next factory, don’t merely look at wages and other costs. Also take into account China’s vast and rapidly growing market, and recognize that the only way your company will be able to penetrate the China market is by manufacturing in-country. Any cost savings to be derived for products sold into other markets is merely icing on the cake, but not the primary reason to be here.