The Chinese economy thrives as a manufacturing powerhouse and the nation's products seem to be everywhere. The majority of tags, labels, and stickers on a variety of goods proclaim they are 'Made in China.' Because of this, it's understandable Western consumers might wonder, 'Why is everything made in China?'
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Some may think the ubiquity of Chinese products is due to the abundance of cheap Chinese labor that brings down the production costs, but there is much more to it than that. In addition to its low labor costs, China has become known as "the world's factory" because of its strong business ecosystem, relatively lax commercial regulations, low taxes and duties, and competitive currency practices. Here we review each of these key factors.
Lower Wages
China is home to approximately 1.41 billion people, making it the most populous country in the world. The law of supply and demand tells us that since the supply of workers is greater than the demand for low-wage workers, wages stay low. Moreover, the majority of Chinese were rural and lower-middle-class or poor until the late 20th century when internal migration turned the country's rural-urban distribution upside-down. These immigrants to industrial cities are often willing to work many shifts for low wages.
China has relatively lax laws on child labor and lower minimum wages than more industrialized countries. However, this situation seems to be changing and more provinces have raised their minimum wages in response to increases in the cost of living.
There are two minimum wages: the hourly minimum wage and the monthly minimum wage, which does not include any additional payments for overtime, night shifts and weekend work. Both are set by provincial governments, which update the minimum wage every few years. As of , Shanghai has the highest hourly minimum wage among 31 province-level governments (RMB 2,690/US$370 per month), while Beijing has the highest hourly minimum wage (26.4/$3.70 U.S.).
The huge labor pool in China helps to produce in bulk, accommodate any seasonal industry requirement, and even cater to sudden rises in the demand schedule.
Business Ecosystem
Industrial production does not take place in isolation, but rather relies on networks of suppliers, component manufacturers, distributors, government agencies, and customers who are all involved in the process of production through competition and cooperation. The business ecosystem in China has evolved quite a lot since the s.
For example, Shenzhen, a city bordering Hong Kong in the southeast, has evolved as a hub for the electronics industry. It has cultivated an ecosystem to support the manufacturing supply chain, including component manufacturers, low-cost workers, a technical workforce, assembly suppliers, and customers.
American companies like Apple Inc. (AAPL) take advantage of China's supply chain efficiencies to keep costs low and margins high. Foxconn Technology Group (a Taiwan-based manufacturer of electronics) has multiple suppliers and manufacturers of components that are at nearby locations. For many companies, it's economically unfeasible to take the components to the U.S. to assemble the final product.
Lower Regulatory Requirements
Manufacturers in most industrial economies have to navigate a labyrinth of regulations covering consumer protection, workplace safety, labor laws, and protection of the environment. As a relative newcomer to the world industrial economy, China's regulations are not as strict as those in other countries.
Historically, Chinese factories have employed child labor, have had long shift hours, and have not provided the workers with compensation insurance. As the economy developed, the Chinese government instituted reforms that protect workers' rights and provide for fairer compensation. However, compliance in many industries is low and change has been slow. Additionally, environmental protection laws are routinely ignored, enabling Chinese factories to cut down on waste management costs.
According to a World Bank report, 18 of the world's top 20 most polluted cities are in China. However, air pollution in China's largest cities decreased during the early shut-down periods of COVID-19.
Taxes and Duties
The export tax rebate policy was initiated in by China as a way to boost the competitiveness of its exports by abolishing double taxation on exported goods. Exported goods were subject to zero percent value-added tax (VAT), meaning they enjoyed a VAT exemption or rebate policy. Additionally, consumer products from China were exempted from any import taxes. These lower tax rates helped to keep the cost of production low, enabling the country to attract investors and companies looking to produce low-cost goods.
China and U.S. Tariffs
In July , the U.S. announced China-specific tariffs, targeting 818 imported Chinese products valued at $34 billion. This was the first of many rounds of tariffs imposed by both countries, resulting in $550 billion of U.S. tariffs applied to Chinese goods and $185 billion of Chinese tariffs applied to U.S. goods as of February .
Upon President Joe Biden taking office, China's Foreign Minister Wang Yi called for the end of multiple tariffs. Throughout the Biden presidency, there have been ongoing discussion of easing tariffs. As the United States continued to battle rising inflation throughout , both President Biden and U.S. Secretary of the Treasury Janet Yellen stated easing tariffs with China could have positive implications on domestic inflation concerns.
Currency
China has been accused of artificially depressing the value of the yuan to provide an edge for its exports against similar goods produced by U.S. competitors. China keeps a check on the appreciation of the yuan by buying dollars and selling yuan. The low price of the yuan encourages foreign manufacturers to buy Chinese goods, thereby making the country more competitive in the world market. The yuan was estimated to be undervalued by 30% against the dollar in late .
In , the yuan appreciated 8% against the dollar, a move that experts say came about after former President Trump threatened to label China a currency manipulator. However, this trend reversed and the yuan weakened against the dollar beginning in June when the U.S. imposed tariffs on Chinese goods.
On Aug. 8, , China's central bank lowered the yuan to 7. per dollar, the weakest level since April . During and after the COVID-19 pandemic, the yuan continued to lose value to the U.S. Dollar. The average exchange rate throughout was 6. CNY to USD with the exchange rate hitting 7.17 at the start of .
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As of May , the Chinese foreign exchange reserves totaled approximately $3.2 trillion.
China has many favorable conditions that strengthen its economy. It often invests heavily in domestic infrastructure and real estate. It has lower wage requirements and favorable tax treatment help make manufacturing costs low. It also boasts relative supply chain efficiencies that entices international corporations
As of March , Chinese investors held over $767 billion of U.S. Treasury debt. Note that this includes all accounts based in mainland China, not just the Chinese government.
No, China has the second-largest economy in the world. The United States has the largest economy in the world; as of , the International Monetary Fund estimates the U.S.'s GDP was $28.8 trillion. By comparison, the IMF estimated China's GDP at $18.8 trillion.
The Bottom Line
Pundits have wondered if China will lose its spot as "the world's factory' as other emerging economies offering cheap labor dull China's competitive edge. However, the availability of cheap labor is just one of many factors that have kept the "Made in China" label on so many products purchased by consumers around the world. It will take more than low labor costs for emerging economies to set up a business ecosystem that can compete with China's. For some time to come, China will be "the world factory' with its low production costs, huge labor pool, vast talent base, and business ecosystem.
In the past few decades, China has grown to become a significant economic power. Much has changed for the country since the government decided to allow international trade and embrace the global market. China's economic wheel began to turn very fast. These days, China is a giant, not only in terms of manufacturing but also in purchasing power. The country's GDP is expected to reach $17.2 trillion in . China's large population plays a crucial role in both aspects. The large workforce means relatively inexpensive wages and a huge market to sell products.
It is not surprising, then, that even the most significant most reputable brands in the world have been shifting manufacturing to Chinese factories for a long time. They get the benefits of low production costs and, in many cases direct market access to Asian consumers.
China's outsourcing market is $23.3 billion with growth as fast as 30% in . Many companies from other countries have moved their own headquarters to China to establish a business. Compared to many of its neighboring countries, China retains its place in the low-end industry segment better. The government has hugely supported this, introducing subsidies, incentives, and good infrastructure to keep local companies in a highly competitive global market.
However, this does not mean that China excels only in manufacturing low-end products. There has been an ongoing effort to make higher-value products. HSBC reported that China's transport equipment and machinery industries grew 46% in (a significant increase from 21% in ) even when its lower-value exports declined.
The main reason to consider manufacturing in China is the lower manufacturing cost. Low production cost, especially for mass-market products, means you have enough supply to maintain competitiveness in the market. Some companies also choose to outsource to manufacturing facilities in China to ease the distribution process to other countries. When the manufacturing process is properly handled elsewhere, your company can focus its resources on research and development for future products.
Here's a more detailed explanation of some of the biggest advantages of manufacturing in China.
Working with a manufacturing facility in China means reducing the production cost without reducing volume output. This is by far the primary reason why U.S. firms and entrepreneurs put up with the disadvantages of manufacturing on the other side of the world.
Some domestic factories in the U.S. are limited in capacity and time, but this is never the case with their Chinese counterparts. Once again, cheap labor costs play a crucial role in this aspect. You can hire more people to complete volume-demanding production while requiring less money than domestic facilities. There are certainly ethical considerations regarding the low labor cost in China, but not all facilities are exploitative. Do your due diligence.
When you have products made in China, you can also market the goods to the local market. Companies that outsource production do more than oversee the manufacturing process. They follow up by establishing a supply chain and local marketing efforts. They hire local employees and acquire equipment to support their ventures.
There is no need to ship the goods overseas because the factories are already in China. With over 1.3 billion potential consumers, you get the promise of good returns. This is a big advantage if you plan to sell your product abroad.
The biggest caveat is that manufacturing overseas typically only makes sense if you deal with large production runs. Manufacturing in China also comes with many drawbacks, which can only be offset when you take advantage of bulk ordering. Depending on the type of products you plan to make, overseas outsourcing may not be a viable option at all. Weigh the benefits of cheaper labor against the following significant disadvantages:
The first challenge is the difficulty finding the right factory that's willing to manufacture your products. It takes extra effort to develop relationships with facilities on the other side of the planet.
It's critical that you do your due diligence here, not only so you know you'll receive good service but also to make sure that the facility you're considering is reliable and above board. You should make at least one trip over to visit them for yourself if you can.
You can look for companies online or visit tradeshows. This involves added costs, stress, and time. It can also be challenging to find factories in China interested in dealing with you unless you're looking to manufacture hundreds of thousands of units.
Here's a worst-case scenario that's more common than you'd believe. A factory will agree to take you on as a client, but because they are typically dealing with multi-million-unit orders, you barely register on their radar at all, and your product order is delayed and neglected.
China has opened itself up to international trade, but that doesn't mean everyone is proficient in English, and you probably don't know much Mandarin or Cantonese. Hiring a translator can make the business run smoother, starting from the initial negotiation to the production process. There are a lot of things you'll want to discuss with your Chinese partners, making a translator necessary. But, again, this is a cost that you need to weigh against the savings in labor costs.
Shipping can be a real pain. Shipping from China means having your products packed up and put on cargo ships that sail around the globe. This leads to long lead times and significant shipping costs. Depending on your distribution network, these costs can vary. How you deal with the items once they arrive state-side is also an important consideration.
It is usually much easier in this regard to deal with local manufacturers. Inventory management becomes very important when you're dealing with international lead times. If your items are out of stock, your customers will go elsewhere. The added time spent in transit means you always need to think two or three steps ahead when dealing with overseas manufacturers.
There is a certain stigma attached to the 'Made in China' label and a certain prestige attached to products 'Made in the U.S.' Whatever you might think about the validity of these notions, the reality is that many consumers value domestically manufactured products and are often willing to pay a premium for them.
This is something to consider if the margins you would make by manufacturing in China are marginal. Once all the shipping, travel, and translation costs are taken into account, consider that you might be able to sell your product at a higher price point with that coveted 'Made in the U.S.' label.
We've all seen those knock-off purses and sneakers that are made in China out of shoddy materials and are quick to fall apart. However, manufacturing in China isn't necessarily a death sentence for your product. In fact, Chinese manufacturers produce good products more than they do bad ones.
There is one caveat to that, which is that you shouldn't manufacture complex, sophisticated items in China like electronics or clothing with intricate designs. If your product is a simple textile or gadget with just a few parts, you shouldn't come across any problems as long as you vet your manufacturer. Make sure to routinely check the factory for quality. If you do go with the Chinese manufacturer, connect with an agent who can ensure the factory is always following best practices and that the goods are being produced accurately and on time.
Because Chinese workers typically work for less (meaning lower profit margins), the factories require very high minimum orders. If you're looking for small-batch manufacturing or one-offs, you'll have trouble getting your needs met in China.
One of the concerns associated with manufacturing in China is the risk posed to intellectual property (IP). The enforcement of IP protection is an issue consistently raised by the US-China Business Council (USCBC), and fortunately, the Chinese government has recognized this concern and IP protection is improving. For example, the Chinese government has begun to increase the number of IP courts to help manage IP issues.
However, there are still challenges. With long-standing issues in terms of uneven enforcement, trade secrets, and procedural barriers, it's important for companies to be aware of the level of IP protection that they'll need and to then develop corporate protection strategies to combat these risks.
Ways to Counteract Intellectual Property Risks: Patenting is a simple way to reduce the risk to your IP. Before manufacturing, you should register your IP with a trademark, brand name, copyright, or domain. This prevents copycat manufacturers from stealing IP without consequence and preventing someone else from patenting your IP. You don't want to be in a position where you have to buy the rights for your own IP to continue manufacturing.
Changing the value chain of a product's development can also help protect IP. One way to do this is by splitting research and development tasks between departments in the US and China. Compartmentalization can help keep critical components of the manufacturing process out of China, reducing the risk of copycat manufacturers employing reverse engineering tactics. Without the full picture, there is less risk to IP.
Alternatively, a company can establish a Chinese research and development department to strengthen its relationship with Chinese partners. Creating a level of trust with your manufacturing partners creates a greater incentive to avoid leakage. In addition, developing a good relationship between your company and the Chinese workforce is essential. If employees feel secure and wish to build a long-lasting career with your company, they will be more loyal, reducing risks to IP.
Whether you compartmentalize your company or expand research and development, the most straightforward tactic to protect your IP is to be proactive. Browse Cad Crowd's patent services for more information on how to begin the patenting process so you can start protecting your IP.
The advantages and disadvantages of manufacturing in China need to be balanced out. You can't have only one without having the other. The key to a stable manufacturing process is to consider your options carefully and take precautions.
Regarding rapid manufacturing and prototyping, you want to work with U.S. companies. U.S. manufacturing has seen a bit of an upswing in recent years as manufacturing becomes increasingly automated and labor costs gradually become less important. Starting with Trump's presidency, the US government's promise to penalize American companies manufacturing overseas is also something to consider. However, many of these promises have yet to come to fruition.
If you're looking for U.S.-based manufacturers, Cad Crowd can help. Take advantage of our contract manufacturing services to connect with 3D printing, molding, or CNC providers in the United States. In you need help with design and engineering, you can launch a design contest or get a free quote today.
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