Manufacturing in China – The True Cost
For decades, manufacturing companies have relied on Chinese factories to produce their products. This evolution in manufacturing practices has become commonplace across several sectors. However, the true cost of manufacturing in China is often unexplored.
What is the true cost of doing business in China? Are the goods coming out of China high-quality? What should a foreign company know before they move their business to China? In this blog, we will examine the true costs of manufacturing in China.
Why Do Companies Choose China?
Late in the 20th century, manufacturers began to embrace the concept of outsourcing. The benefits included the low cost of living in China and gaining access to cheap materials. This business model allowed businesses to stay competitive in their industry. As global demand increased, more countries sought China’s low-cost manufacturing industry.
However, as the years passed, U.S. companies have noticed a shift in China’s profitability. How has China become less cost-effective than in the past? What should a U.S.-based company watch out for before moving their business to a Chinese factory? Before U.S. manufacturers pay the “China price,” they need to understand what is driving it.
In this article, we will be covering in detail the following main factors that U.S.-based companies should watch out for before outsourcing to China, as well as alternative outsourcing options:
- The High Cost of Living
- Poor Production Quality
- Loss of Intellectual Property
- Lack of Legal Protection
- Unaligned Cultural Paradigms
- Frustrating Language Barriers
- Disruptions in the Supply Chain
- Conflicting Time Zones
- The Trouble with Distance
- Paying the “China Price”
- Fewer Pros, More Headaches
- Growing Your Business
- Outsourcing in Mexico
- Choosing the Best Option
The High Cost of Living
For decades, China represented the most cost-effective way to manufacture goods. The low labor costs meant that a company could reap a 30-80% cost reduction in operating costs. Over the last decade, China’s wages and overseas shipping costs have increased. This increase has made loaded labor rates in China comparable to the loaded labor rates in the United States.
As China builds a strong middle-class, it becomes a less viable partner for companies who wish to move their manufacturing operations overseas. U.S. manufacturers will need to decide if the price of doing business in China is still as appetizing as it was a decade or two ago.
Poor Production Quality
China’s access to cheap materials makes it the leader in producing widgets. However, China often experiences quality issues with its products. For this reason, organizations like Aerospace often choose partners like Mexico over China.
The expense of poor-quality products extends beyond the materials themselves. The logistics associated with returning an item are often prohibitive and can result in write-offs. Some of the costly problems associated with China’s poor-quality control practices include:
- Shipping costs
- Manufacturing delays
- Time consumption, and
- Limited access to English-speaking advocates.
As the global supply chain continues to adapt to an ongoing pandemic, manufacturers need to assess whether they can afford to experience higher shipping costs and slower replacement times on the return of low-quality, defective products.
Loss of Intellectual Property
U.S. companies depend on laws and cybersecurity methods that protect their intellectual property (IP). However, when a company chooses to cut costs by moving their manufacturing operations to a Chinese factory, they forfeit those protections. The Chinese government does not recognize individual privacy, and manufacturers are increasingly at risk for cyberattacks. Anyone who moves their operations overseas must expect to have their IP copied, stolen, or misused in a way that is not in line with the brand.
What happens when your intellectual property is stolen in China? The result is more than time-consuming and irritating. These cyberattacks are designed to undermine manufacturing organizations. IP theft represents a substantial monetary loss for any business. It also has the potential to damage their reputation in the industry and kill off revenue streams.
Before a company decides to move their operations to a place with few protections against IP theft, they need to ask themselves if they are really receiving the competitive edge they crave.
Lack of Legal Protection
The complexities of moving a manufacturing business overseas can be cumbersome and expensive. Manufacturers are vulnerable to Chinese laws and taxation practices. Without a shelter company, manufactures have few allies in the Chinese government if something goes wrong. In addition to the absence of legal protection.
If you attempt to resolve an issue through the Chinese legal system, the cost and time involved can be astronomical. In the end, you may seriously injure your ability to operate your business in China without ever resolving the issue.
Before a company moves its operations to China, they need to remember that they are signing a contract with the Chinese government and not a private business. The contracts are usually written in Chinese. U.S. factories need to be prepared to hire their own translators and international lawyers to help with the transition.
Unaligned Cultural Paradigms
China utilizes its own management standards that are vastly different from the quality standards U.S.-based companies are accustomed to using.
If you are considering moving your manufacturing operations to China, it is crucial that you understand that China’s worldview is fundamentally different from Western cultures. In China, the customer (you) isn’t always right. The lack of cohesiveness between the two mindsets can result in a breakdown of you getting your needs met.
Companies who move their operations to China often experience frustration and disappointment when the worldview that shapes their U.S. business model is not understood or respected in China.
How will a brand adapt when its primary manufacturing partner does not have the same priorities? What are the consequences of sure an unaligned collaboration? Is the “China Price” too high to pay?
Frustrating Language Barriers
Another setback is that Chinese manufacturing facilities do not hire multiple English-speaking employees. There is usually one translator available to work with your company. When you need to know what is happening at your factory or there is a production issue, you are limited to receiving information through a single source. To speak to the translator, you must be willing to work during Chinese business hours, and it can be challenging to convey your customers’ needs in a relevant way to your Chinese partners.
The process of trying to run your business remotely without clear lines of communication is sure to cause frustration and financial loss. If you are thinking about moving your factory to China, ask yourself if ongoing language barriers are worth the risk.
Disruptions in the Supply Chain
International trade came to a grinding haul when the COVID-19 pandemic shut down factories, closed borders, and incapacitated workforces. The two-week disruption quickly turned into long-term turmoil. At the same time, consumers and U.S.-based businesses wondered how long everyone would have to wait for everyday products like hand sanitizer and hygiene products.
In addition, the COVID-19 pandemic exposed manufacturing companies’ heavy reliance on foreign labor and the gaps in their contingency plans. In China, factories are still struggling to find ways to fill demand while they are short-staffed.
The Suez canal crisis further complicated supply chain issues. An estimated $60 billion (a day) worth of goods was trapped behind a stalled ship during that time. The products included everything from livestock to toilet bowls. These disruptions meant that manufacturing companies experienced several costly consequences, including missed deadlines and spoiled goods.
Before a company decides to use the standard path of outsourcing, they need to take a hard look at the reality of Chinese manufacturing. What will further disruptions to the overseas supply chain cost your organization?
Conflicting Time Zones
Have you ever needed to make an important phone call? Do you feel frustrated when you missed your contact by minutes? When you move your factory to China, you are required to conduct business during Chinese business hours.
These conflicting time zones add additional hours to your workday, If you have a time-sensitive situation, you risk missing deadlines or necessary details because you are never in sync with your Chinese partners.
The Trouble with Distance
Similar to the problems manufacturers face with the conflicting time zones, the distance between China and a U.S.-based business represents a substantial price tag to U.S. businesses.
This hefty price tag includes growing airfare prices, skyrocketing hotel bills, and potential quarantines as China restricts the movement of international travelers.
China’s distance can also make it almost impossible to resolve issues. The time and expense involved can cut into the cost-savings you were hoping to achieve. Steep differences between time zones and access to English-speaking partners in China can produce expensive manufacturing delays, resulting in a loss of consumer confidence in your company. When a problem needs to be solved, you deserve the assurance that you are working with a manufacturing partner who understands your values and customers. When a factory is overseas, the brand’s reputation is put at risk by the inability to monitor operations at your overseas factories regularly.
Paying the “China Price”
China is one of the top 10 worst countries for workers’ rights. News reports out of China continue to decry China’s slave-labor mentality. Even if their employees receive a 40-hour workweek, conditions can be brutal. Reports of abuse and sub-par benefits are not uncommon.
In the end, manufacturers need to examine the risk to their reputation in the global community. Labor conditions are often at the top of many watchdog organizations’ hit lists. Sacrificing human rights for labor costs could be detrimental in the long run.
China’s deplorable track record of exploiting its population to beat out the global market is no longer acceptable. Consumers have begun to sour on the idea that “cheap” at any cost is a cost worth paying for. Before you move your organization to China, you need to ask if the workers on the other end of the supply chain will pay the “China price.” Will your consumers be able to stomach your decision, or will they take their business to an organization that understands the value of thinking globally?
Fewer Pros, More Headaches
The true cost of manufacturing in China continues to grow. The once-lucrative partnership is now burdensome to many brands. At a time when precision, communication, and expediency are at a premium, paying the “China price” should be more than any business is willing to absorb.
The cost of manufacturing in China represents more than just lower labor rates. The contentious relationship between the U.S. and China adds additional headaches to manufacturers seeking price breaks overseas. Manufacturers are often used in a tug-of-war between the two countries. This battle manifests itself in the form of tariffs and other expenses that reduce a company’s profitability.
Growing Your Business
Now that China is no longer a sound business option for most manufacturers, how should companies view outsourcing?
Headlines that decry outsourcing as a business strategy are only telling half the story. The truth is that moving aspects of a manufacturing company’s operations out of the country often leads to expansion in their home territory. Revenue that once went toward paying loaded labor rates is now available to use for growth and development.
Another benefit to outsourcing is that companies that outsource to other firms quickly discover that they can start building their core staff in their home country. In other words, the increase in revenue means that companies have room to add their own qualified, skilled employees to the workforce, which opens the door to innovation and growth.
Outsourcing in Mexico
Deciding to outsource your business is not an easy one. It can be an excellent way to add value to your organization. Before your company decides to outsource, remember to ask these questions:
- Does the firm have access to a skilled workforce?
- Can they quickly meet your needs when it comes to hiring and retention?
- Will the time zone and language barrier negatively impact productivity?
- How will this decision help your business grow?
Choosing the Best Option
Whether your business is large or small, you will experience the cost-savings and uncompromising quality that sets Mexico manufacturing facilities apart from other global options.
As the economy continues to shift, you do not have to worry about how your organization will measure up against other businesses in your industry. Whatever drives your need to outsource, you do not have to pay the “China price.” Mexico has a solution that will meet your needs.
If you want to lower your loaded labor rates, while increasing production in CNC machining, the aerospace industry, or any other major industry, BF&S Manufacturing has a solution for you and is AS-9100D certified. Call or e-mail us today to discover the BF&S Manufacturing difference for yourself.