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Manufacturing in China: Is It Hollowing Out?

Posted By Jeff Moad, March 15, 2013 at 3:09 PM, in Category: Global Value Networks

Much has been written in recent months about reshoring which is being driven, in part, by rising labor costs in China and increasing transportation costs. In fact, at least one writer has recently gone so far as to predict that China will become the next Rust Belt.

"Not so fast," says Booz & Co. Partner John Jullens in a recently-published article. Jullens argues that China's manufacturing sector, while transitioning along with the rest of China to a developed economy, is not about to implode. And he lists five reasons for this:

  • Domestic demand. China's growing economy is generating millions of new consumers. Manufacturers producing close to those customers will be in a position to grow along with the economy;
  • The Urban-Rural Divide. While China's coastal regions are seeing rapidly-rising wages, inland areas continue to offer lower-cost labor. Manufacturing of certain types of products is likely to relocate there;
  • Operational Excellence. There's still a lot of room for Chinese manufacturers to become more productive through automation, leaner supply chains, and improved labor productivity;
  • Frugal Manufacturing. Chinese manufacturers are still very good at innovatign to reduce costs through the use of "good enough" materials and simpler off-the-shelf components. Expect that to continue;
  • Government Incentives. China's government has the financial means to incent manufacturers to locate or expand in China. Expect them to use them.

Jullens predicts China's manufacturing will continue to grow, but only if it is supported by the government through investments in roads and other infrastructure that will connect the country's interior with export hubs in Shangai, Shenzhen, and Tianjin.

I tend to agree with Jullens. Writing off China's manufacturing sector as the next Rust Belt is way premature. But I would add another factor to his reasons for the ongoing strength of manufacturing in China: the incredibly large and capable supply networks that have developed there over the past few years. Manufacturers in many verticals tell us some materials and parts are now available at the right price only in China. That becomes another rationale for locating production there.

Do you see China's manufacturing sector as resilient or rusty?

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit


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