China has long been a haven for multinationals looking to reduce their manufacturing costs. Thanks to a seemingly endless supply of cheap labor, firms have grown accustomed to outsourcing their most basic business activities there. However according to a joint study released last week by Booz Allen Hamilton and the American Chamber of Commerce (AmCham) Shanghai, if companies truly want to reap the rewards of sourcing from China, they need to get their hands dirty.
Entitled “China Manufacturing Competitiveness 2007-2008”, the study highlights how businesses approaching China as “both a growth market and a market for lower-cost labor and sources” post an average profitability rate two-thirds higher than those assuming a more myopic view. Yet despite the favorable returns, only one out of four companies combine a “strong in-country market growth effort with their manufacturing and sourcing operations.”
Certain unavoidable trends like a changing currency structure, rising labor costs, and an increasingly innovative market economy are sure to pressure foreigners into reassessing the way they invest in China. While some are countering inflation of directly sourced products by finding creative ways to improve internal productivity, others are taking a “simpler” route by expanding their operations to Vietnam and India where lower costs and tax breaks remain prevalent. Still, a sizeable 83 percent of the companies surveyed say they plan to stay in China because of its vast domestic market and solid infrastructure.
Whether MNCs begin embracing the dual approach delineated by this new study only time will tell, but for now these findings have raised an intriguing debate.
