Has China lost its relevance as a production location?

China’s position as a production location is currently a hot topic amongst global thought leaders in supply chain. The general price level of products made in China is rising rapidly, and it has been claimed that some of the products actually originate in North Korea. So has the time come to look beyond China for low-cost production facilities? This is one of the most common questions that I’m asked when holding keynote speeches, workshops or supply-chain training courses.

By Heidi Larsen, Supply Chain Princess

It seems that many supply chain managers believe China is getting left behind as a production location and is on the verge of losing its role as ‘factory of the world’. However, I have to strongly disagree with them. I still consider China to be a very relevant production location, and I have summed up a few reasons why below.

# 1 “China is becoming too expensive material-wise”

It’s true that material prices have been skyrocketing recently. However, if you look at the prices over a longer time frame, they have gone down as well as up. The overall increase (without considering each material commodity individually) has by no means gone ‘through the roof’. Furthermore, looking at the geographical spread of the price rises, they seem to be limited to the east coast of China, which is where most factories are concentrated. But don’t forget mainland China!

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# 2 “Chinese labour costs are rising significantly”

True. However, again, this is mostly in the eastern coastal region – plus l have to say that the general quality of work has increased proportionally. When I started doing business in China back in 2004, a general factory worker used to earn around RMB2,600 a month. Today, that amount has increased to RMB3,600. This is still very favourable in comparison with wages within the EU, and wages have increased more significantly in other nearby countries, such as Vietnam and Bangladesh to name but a few.

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3 “Minimum order quantities (MOQs) are increasing”

This is both true and false. It’s true that, on your first request, you will be given higher MOQs than, say, in 2007. However if you negotiate on these and break down the reasons and arguments, you can still get 500 pieces of a porcelain cup produced, for example – in your own design, of course. In fact, I did that just yesterday – at a 60% lower unit cost than originally quoted.

# 4 “Transportation time is too long and no longer competitive”

China hasn’t moved. In other words, the location itself – and hence the transportation time – is the same as it was. If you choose China as a production location, it shouldn’t be for the transportation time; I don’t believe it ever has been. Everything is relative – and you chose your supplier for a reason!

# 5 “It’s too far away and it takes too long to get there”

This is related to the previous point: you chose to start producing in China for a reason – perhaps because of better know-how, certainly for a better price, and maybe for other reasons too. Again, China hasn’t moved! Having said that, I see way too few companies encouraging their suppliers to visit their own headquarters. Maybe it could be time to turn the tables, and to invite your supplier in for a talk on future innovation opportunities? Trust me, you will be (pleasantly) surprised at the outcome!

So no, China has NOT lost its production relevance – far from it! What has changed is not China as a production location but rather, in my opinion, the overall complexity of the global supply chain. So many more individual factors now need to be taken into consideration. So I hope that this will make you stop and think carefully about where to base your production, and why – just as I did when first encountering China in 2004.