Last week, we did a post, “The End of Cheap China, With A Giant Caveat.” The point of that post was to pick up on the widespread discussion regarding the end of cheap China and to highlight how this “end” has, and will continue to, impact foreign companies very differently. Our initial “end of cheap China” post was based mostly on a “Made in America, Again: Why Manufacturing Will Return to the United States, a Boston Consulting Group study that jump-started the end of cheap China discussion.

Yesterday, I was alerted to two very recent and very good articles addressing the end of cheap China issue. The first is a post by Michael Zakkour over at the China Business Blog and Podcast, entitled, “The End of Cheap China. But Not China Manufacturing.

Michael starts by positing that “the cheap China era is over, but China manufacturing isn’t.” He goes on to note the following, all of which he contends portend just fine for Chinese manufacturing:

  • China is not going to be able to build a service and consumer driven economy within the next five years.
  • China’s interior provinces are still a viable alternative for manufacturing, as compared to the more expensive and saturated coastal cities. China’s 12th Five Year Plan “makes clear that more equal development and sharing of wealth is a priority.” This equalizing of wealth will mean a continued and increased push to move manufacturing inland.
  • “America will not win back the “low value-add, commodity based manufacturing jobs it once had.” These jobs are going to SE Asia and South America.
  • “China is working toward moving commodity based manufacturing inland, but is also developing higher value-add and higher technology manufacturing in the coastal areas. It is NOT abandoning manufacturing and it has the money to support and subsidize it where needed. In other words China will move from selling toothpicks to the machines that make them (formerly bought from Germany).”
  • China’s has “stellar” manufacturing infrastructure, which makes it very difficult for other countries to compete.
  • Western companies are shifting manufacturing to China to create and manufacture products for China.
  • Chinese manufacturers are improving in terms of efficiency and quality and this will provide a new advantage for China.

I think Michael is right and his explanation above provides support for the fact that we have not really seen much of a slowdown in terms of our clients’ manufacturing in China, other than on the very low end.

The other article is an Economist article, entitled, “The End of Cheap Goods?” This article focuses on what Bruce Rockowitz, CEO of Li & Fung, calls the phases of Asian manufacturing:

He [Rockowitz] argues that Asian manufacturing has gone through a number of phases, each lasting about 30 years. When China was isolated under Mao Zedong, companies in Hong Kong, Taiwan and South Korea grew expert at making things. When China reopened in the late 1970s, after Mao’s death, these experienced Asian operators converged on southern China. With almost free access to land and labour, plus an efficient port and logistics hub in nearby Hong Kong, they started to make things ever more cheaply and sell them to the whole world.

For the next 30 years manufacturers in China helped to keep global inflation in check. But that era is now over, says Mr Rockowitz. Chinese wages are rising fast. A wave of new demand, especially from China itself, is feeding a surge in commodity prices. Manufacturers can find some relief by moving production to new areas, such as western China, Vietnam, Bangladesh, Malaysia, India and Indonesia. But none of these new places will curb inflation the way southern China once did, he predicts. All rely on the same increasingly expensive pool of commodities. Many have rising wages or poor logistics. None can provide the scale and efficiency that was created when manufacturers converged on southern China.

Rockowitz, like Zakkour, does not see manufacturing leaving China. He just sees it getting more expensive:

Nothing can replace the Chinese miracle. “There is no next,” says Mr Rockowitz. Prices will now start to rise by 5% or more each year, with no end in sight. And that may be optimistic. So far this year, Mr Rockowitz says, Li & Fung’s sourcing operation has seen price increases of 15% on average. Other sourcers of Asian toys, clothes and basic household products tell similarly ominous tales.

At the same time, according to the Economist, China is “shifting to more sophisticated products, such as electronics:”

Some of the more striking offerings at the [Computex] fair were ultra-cheap versions of global hits. A company named BananaU advertised tablet computers with Google’s Android operating system for $100. Another pushed Windows-based thin computers looking much like MacBooks for under $250. E-Readers were everywhere and available for a song.

Whether these products can be produced or sold in developed markets is unclear. The quality may be “B” for Banana rather than “A” for Apple. The intellectual property embedded in some devices may not, ahem, have been paid for. But still, the booths were packed.

Amazingly enough, prices for these electronics goods are “falling sharply” and this is attributed to Chinese manufacturers “learning how to get more from fewer hands.” The article concludes by saying that “Li & Fung may be sounding the closing bell on one era of production, but the Taipei [Computex] computer fair suggests that another is emerging.”

What are you seeing out there? What exactly does “the end of cheap China” really mean for manufacturing and overall?

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.