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The End Of Cheap China. What Does It Mean, Anyway?

Posted in China Business

Since we started this blog back in 2006, we wrote of how you should expect and prepare for China wages and other prices to rise. In our very first month, way back in January, 2006, in a post entitled, “China is Booming, Go There for Growth,” we warned of rising China prices:

This article discusses how “a majority of the world’s top chief executives plan to invest in China over the next three years to win customers” and to win market access, rather than just to reduce costs, which are expected to rise quickly over the next few years in any event.

SMEs should be thinking likewise.

For how much longer will China remain the world’s factory?

A month later, in, “Doing Everything Right in China — A Danfoss Primer,” we talked of the benefits of recognizing that “China has gone from being just a cheap place for OEM manufacturing to becoming a multi-tiered high growth market for goods.”  Then way back in April, 2006, in “China Is Expensive — NOT. Go Second Tier And Life Will Be Good,” we talked of how China’s rising prices were pushing foreign companies into China’s second tier cities.

And we have been writing of this ever since, most recently in a series of posts, we titled, “The End of Cheap China”:

The media has picked up on the whole “end of cheap China” meme and has been writing on it and its meanings frequently over the last few months. In “FDI in China: inland and at your service,” the Beyond Brics blog wrote of how China’s rising wages will push foreign direct investment (FDI) in manufacturing to China’s inland provinces, rather than outside the country.  Beyond Brics cites to an Economist Intelligence Unit (EIU) report predicting China’s inland provinces will be attracting “huge amounts of FDI in coming years.”

“The other big trend identified by the EIU is that services is attracting more investment than ever. FDI in both wholesale and retail has grown by nearly 40 per cent a year over the past five years.” Back in January, 2006, In part I of what became a twenty part series, called Service Sectors in China Will Reign, we predicted China’s service sector would boom.

We predicted all this (along with countless others) because it was all rather obvious. We knew that as foreign companies poured into China and hired Chinese employees, wages would have to increase and with that, spending. We knew that as foreign manufacturers poured into China or simply sourced their products to Chinese factories, the need for companies to service the manufacturers and those who profited from it would increase.

Earlier this year, in a post entitled, “The End of Cheap China, But Not China Manufacturing,” China Business Blog & Podcast wrote of how China’s rising prices would influence foreign investment into China. It too concluded that manufacturing would move inland.

In a recent article, “For Some U.S. Manufacturers, Time to Head Home: More companies are assessing the true cost of outsourcing,” Business Week too writes of rising costs in China and of how this is pushing low-end manufacturers to return home.

In Is the era of a ‘cheap China’ coming to an end, Week Magazine rightly views the end of cheap China as “an undeniable sign of economic growth and progress.”

In an oft-cited article from earlier this month, entitled, The End of Cheap China, the Economist Magazine seeks to answer the question of “What do soaring Chinese wages mean for global manufacturing?” Like China Business Blog & Podcast, it concludes that China manufacturing will shift inland and move up the value chain. The Economist concludes its article with the following statement that is actually THE big question:

The pace of change in China has been so startling that it is hard to keep up. The old stereotypes about low-wage sweatshops are as out-of-date as Mao suits. The next phase will be interesting: China must innovate or slow down.

Will China be able to innovate fast enough to make up for the fact that it is no longer cheap? What impact will China’s slowing economy have on all of this?

What do you think?