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Reports of China’s death as a sourcing destination are highly exaggerated.

Executive Summary:

Think of China as two entities: urban coast vs. undeveloped interior.  China’s heartland is like having their own “Mexico” built in without the need to cross an international boarder, learn a different language/culture or fight off drug cartels. China’s Mexico gives it plenty of labor and room to grow.

 

Full Article:

Recent headlines often state something along the lines of “labor rates are on the rise and China may lose its competitive edge.” I believe such a statement is not totally accurate. To be specific, they should say “the heavily urban areas along the coast like Guangdong are becoming relatively more expensive, but with a majority of the population still rural, low cost China sourcing is far from near its end.”  I’ve been living in Shenzhen (Guangdong) running factories and front offices for 12 years and can confirm that it is getting much hard these days to find and retain staff for the production lines and also desk work. But, it is all relative. I say “much harder than before” because 5 years ago job hunters would form a line my door, now we need to go out and find them at the job markets and recruiting websites. But we still find them, just harder.

 

Let me mention a few words about the supply base in China. We source raw materials and components pan-China and have found that by getting quotes from the whole country, there are still plenty of suppliers to meet our targets. So it is not like China is drying up as a source. Plus, thanks to the slightly higher wages on the coast, suppliers are finally getting rid of the “throw more bodies at it” mentality of production and starting to think about efficient work place set up and efficient use of labor. For what it is worth, our companies in Shenzhen have had good luck finding and retaining staff because we run our facilities in full compliance with local labor laws and have a KPI/Bonus system that attracts good people. I have done my research first hand visiting other areas of China to check out rents/wages/tax policy and realize I could save 15-20% by moving operations to a place like Hunan, but I am not moving any time soon as I would lose 20% thanks to increased logistics and have a much harder time finding trained middle and upper management for my operation. Top level managers don’t want to leave nice places like Shanghai and Shenzhen and move to the gritty interior.

 

China Mike’s Crystal Ball (labor rates)

We are witnessing a massive and much needed nationwide correction orchestrated by the central government to bring balance to the current disparity between the coast and the interior in terms of resources, infrastructure and wealth.

 

Next 5 years

I believe you will see the suppliers who are involved in labor intensive production who compete only “price price price” move inland leaving the coast. But the companies who are well-rounded and compete on quality, service as well as price, will remain on the coast until the infrastructure and skill sets in the interior improve.

 

Next 5 to 10 years

When access to infrastructure and skilled labor improves in the interior of China, higher end factories will also consider leaving the coast.  This will help stabilize wages (and factory rents) on the coast by achieving a balance of supply and demand.  Because labor rates and factory rents are so much lower in the heartland, it will take a long time for rents and labor rates in the interior to catch up to the coastal rates. As a result, the country as a whole will remain competitive as a low cost, but increasingly quality conscious supply base for many years to come.

 

I could be wrong, but I’m putting my money where my mouth is by planning to raise my 2nd child here in China and have made no plans to leave the PRC for the next 5-10 years. Unless I can afford early retirement of course!

 




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