THE cost of manufacturing in China may be equal to the US by 2015, claims a new study by consulting firm AlixPartners.
According to the AlixPartners Manufacturing-Sourcing Outlook, the cost advantage of manufacturing in China has eroded in the last few years. In 2005, it cost 25 to 30 percent less to manufacture in China than in the US, but that gap has closed rapidly.
Factors affecting manufacturing costs in China include higher labour wages, the rising value of the Chinese RMB, and shipping costs.
In the past decade, wages in China have risen an average of 12 percent annually due to increased minimum wages and competition between manufacturers for workers. This, AlixPartners says, has bee “on a steady and steepening incline since 2005”.
The RMB has also appreciated against the US dollar, so it now costs more to ship goods made in China to other parts of the world. This currency strength is expected to continue to grow by 5 percent a year, and ocean freight rates is also increasing 5 percent annually.
With these rising costs, some companies are moving their factories to more rural areas in China in search of lower costs. Others are relocating to regional alternatives like Vietnam, Mexico and India, which remain cost competitive.
But don’t expect a mass pull-out from China. Besides the inherent costs of relocating facilities, China retains a unique capacity for large-scale manufacturing and labour and plant/equipment capability.
It also has an aggressive industrial policy, with emphasis on training and incentives for investment. The swing towards China has also reduced the number of skilled domestic manufacturing workers in both the US and Australia over the past decade, making a move to re-shore manufacturing a risky one.
Additionally, the burgeoning Chinese domestic market means a presence in China is still an advantage – even if exports are not profitable, the plants can simply turn around and start catering to the locals.