Why is China still the top manufacturing destination to source from in 2024?
After opening up to the world in 1978 and joining the WTO in 2001, China has gradually grown its manufacturing sector to become the world’s biggest producer of manufactured goods. This article explains the advantages of sourcing from China and working with Chinese suppliers for your business. Many suppliers will get you the quality that you need at a reasonable price. Good Chinese factories can customise your product, quickly scale the production, and deliver your orders on time.
I will describe the potential advantages of manufacturing and sourcing in China.
Advantages of manufacturing in China
Why sourcing from China? Because China is still one of the world’s leading suppliers of manufactured goods. So, what are the competitive advantages of the Chinese manufacturing sector? And what are these advantages of China sourcing for your company?
Some of China’s main competitive advantages:
- An abundance of relatively low-cost labour supply
- A skilled and experienced workforce
- Highly developed infrastructure
- A robust manufacturing base
- Cost advantages due to economies of scale
- Relatively stable and effective governance
- So why sourcing from China?
Low labour costs and an abundant labour supply
“The reason that China has been able to serve so many buyers with such advantages prices in the past is mainly thanks to their cheap and abundant labour resource.”
The main reason manufacturing moved to China on a large scale in the first place was the country’s abundance of cheap labour. China’s large population makes it a top global destination for low-cost labour. The country has, therefore, long been a strategic location for several manufacturers and labour-intensive industries to set up operations. Labour costs are significantly lower than in countries like Japan, the US or in Europe. The relatively low labour costs make China a more cost-effective choice than many developed countries.
Increasing labour costs
Since the trend of opening up started, especially after joining the WTO, and with the growing prosperity in China, labour costs in China have been increasing for many years. Even with the increase in labour costs in China, the country remains competitive and the wage rate remains relatively low compared to developed countries. However, China has lost its labour cost advantage compared to many developing countries. Workers in a factory in China’s leading manufacturing hubs in East China often earn US$700-800 per month. In Bangladesh or Myanmar, workers can be hired for US$150-200 per month. In countries like India, Vietnam and Mexico, the labour costs for factory staff is also significantly lower than in China nowadays 1.
Another problem the Chinese manufacturing sector faces is that younger people no longer prefer to work in factories. In combination with the ageing population and the shrinking workforce, the competitive advantage of cheap and abundant labour resources is becoming less and less the competitive advantage for China.
So, while labour costs are still much lower than in developed countries, the costs of labour in sec are not a significant competitive advantage anymore. This will be even more true in the future. China is changing increasingly from low costs and quantity to focusing on quality, and the same is true for its labour.
So what are the advantages of sourcing in China if labour costs are not that low?
A skilled and experienced workforce
“China has the people that can turn your dreams, designs and ideas into an actual product.”
Experience in manufacturing
One advantage of sourcing from China comes forth from China’s vast experience in manufacturing. Since the Great Reforms in 1978 in China, China’s manufacturing sector has been evolving. Since the 1980s, a large number of family production businesses have been established and are being passed down to succeeding generations. Thanks to this long period of evolution and trial and error within China’s many family businesses, lots of experience has been gained over the last 40+ years.
This abundance of experience that China has in manufacturing is unique. China has, with its expertise, a vast advantage over many developing countries, where the industry has only recently developed. Therefore, most of the factories in those newly developing industrial countries are also set up by Chinese people. For example, when you work with a factory in Bangladesh or Vietnam, the factory is most likely Chinese-owned and many materials and components probably come from China. China also has this comparative advantage over the industrial sector in the West. The West has outsourced much of its manufacturing to China and other developing countries. This has led to a lack of experienced staff in the field of manufacturing in many developed countries in the West now. It will be challenging for Western nations to move production back home.
Work ethic and pragmatism
Chinese employees’ work ethic and pragmatism also benefit the industry and can be a reason why to source from China. China’s cultural emphasis on diligent work is deeply engrained in the nation’s values. Chinese people are culturally willing to serve the collective of the company or the family and are often willing to work hard in striving for success. They believe that success will enable them to earn more, provide for their families, and make their lives easier. The Chinese believe that success comes through dedication and focus, as seen on the Chinese work floor.
Pragmatism is another cultural value that is ingrained in China’s society. Pragmatism entails enacting practical solutions to practical problems. In general, the Chinese are open to exploring different ideas and are willing to revise and adapt one’s ideas in the face of a changed reality. You can expect your supplier to be flexible and pragmatic in solving problems, such as temporarily being able to work with smaller order amounts or to help you improve your product. This is especially true when you have a good relationship with them. If you have a design that uses components and materials that the factory does not have in stock or has never worked with, they will often be willing to make it and work it out for you based on your specifications.
Advantages for your business
The Chinese work ethic may bring many advantages for your business when you use the opportunities in China well and can be an advantage of sourcing from China for your business. Chinese staff and workers will be ok if they need to work extra hard or work overtime to improve samples or finish orders on time. You can expect them to be willing to learn and to customise and improve your product based on your requirements. It is critical to remember here that you can only expect people to be this pragmatic and hard-working on your behalf if it also serves the Chinese party’s (long-term) interests. It will always be essential to analyse what incentives you can provide to your suppliers and how they can play out for the benefit of their business and, ultimately, your own business.
Talent pools of skilled workers
China’s work ethic also entails dedication, resilience, discipline and a focus on excellence. They are committed to devoting time and effort to working to their maximum ability to improve the quality of one’s work. Striving for mastership in a specific field or specialism is part of China’s nature. It results from this dedication, focus and resilience. One must become an absolute expert in a particular area to attain mastery. Becoming a specialist again brings responsibilities, including teaching, mentoring, and guiding others towards excellence in their fields as well. This cultural trait makes the Chinese to be able to excel in many areas.
The willingness to focus and work hard for success causes many students are choosing to study for degrees in technical subjects. (Or, in many cases, their parents decide this for them). Today, 30% of people with STEM degrees (Science, Technology, Engineering and Maths) are in China. The result is a great talent pool of highly skilled people located in highly specialised industrial regions. Thanks to the availability of these talent pools, almost everything is possible regarding unique designs, customisations, new product functions, OEM/ODM, etc.
China’s competitive advantage nowadays lies much more in the experience and skills of the working staff rather than labour costs. Therefore, the country is transforming from a “Made in China” industry to a “designed or created in China but made elsewhere” industry.
Highly developed infrastructure
“China has a unique and advanced infrastructure serving its production and export sectors, making it possible to supply your order with high speed and efficiency and with cost-price advantages.”
Special Economic Zones and Industrial Zones
In the 1980s, several Special Economic Zones were established in East China that would become the leading manufacturing centres in China. The Chinese government has invested heavily in the infrastructure of these Economic Zones. From then on, most manufacturing in China became highly centralised. Within the Special Economic Zones, dedicated industrial zones have been created. Dedicated industrial zones often specialise in producing a particular type of product or a specific range of products and the infrastructure is optimally developed for this.
The Special Economic Zones have a highly developed infrastructure supporting industrial activity and trade. The major harbours and cargo airports are all located in these areas. Inland transportation by rail or road is also highly developed in these areas. As a result, transporting to other countries has become efficient and cheap.
Industrial zones
Industrial zones are areas dedicated to industrial production. It is common for industrial zones to be highly specialised, with all suppliers producing (one part of) one type of good. The suppliers can all support each other and make the area a top producer of a specific good or type of goods. They are highly efficient with plenty of resources. Many workers searching for work go to these areas where they can find lots of opportunities to work. Talent pools of staff with the needed certifications and skills for the particular industry will also come to these areas to find a job. The required materials and components are all made in these areas, and the infrastructure needed to let all run is present here.
Due to the developed infrastructure and the levels of specialisation in these highly specialised Economic Zones and dedicated Industrial Zones, remarkable efficiency and production volumes can be realised. All product stages can occur there, and the skills to design and develop new products are abundant. Everything can be done with great speed and at low costs, making it another possible advantage of sourcing from China for your business.
Transportation
The transportation system in China is highly developed and efficient. The Chinese government has invested heavily in constructing and maintaining roads, railways, airports and waterways, especially since the worldwide financial crisis in 2008.
China has an efficient inland transportation system. The country has a well-developed and extensive network of roads, railways, and waterways. It helps suppliers transport materials and components quickly and cheaply within the supply chain. This makes the production process efficient, even when not all operations are executed in the same area in China. In China, it is normal for a factory to order components from a supplier thousands of kilometres away and receive the goods in no time. The country’s major transit hubs are well-connected to the rest of the world. This makes exporting goods fast, efficient, and cost-effective.
Apart from inland transportation, public transportation around the country is also efficient and affordable for ordinary people. With its extensive high-speed rail network, air traffic and bus transportation, ordinary people can easily travel around the country’s larger cities without owning a car. A range of policies and initiatives have been implemented to reduce transport costs and increase efficiency, allowing passengers to move between cities for affordable prices. This increases labour mobility even for the lower class factory workers.
In recent years, since the “Going West” approach of the government has been launched, not only the infrastructure in the more developed areas has been developed, but the infrastructure in the less developed areas has been developed as well. With such efficient and affordable transportation throughout the country, there is high mobility for both low- and high-skilled workers. As a result, companies can better utilise the labour resources available in the country.
Energy and data infrastructure
Another advantage of China, why sourcing from China may be a good choice, is the established infrastructure for energy and data. The availability of relatively cheap energy and a robust infrastructure for data sharing and other new technologies bring new opportunities for these sectors.
In China, the government determines energy prices more than the market. They are generally much lower than in many Western countries. China is a large producer of coal energy, and the production of nuclear and renewable energy resources, such as wind and solar, is also increasing. The country’s large population and lengthy supply chains allow them to access resources at a much lower cost than many other countries. It will enable efficient production and distribution of energy.
Other areas where China has recently developed its infrastructure are telecommunication, high-speed internet and data sharing. China has a well-developed infrastructure for data sharing. There are many data-sharing platforms in China, and investments in the country’s data infrastructure are enormous. There is an emphasis on improving the speed and accuracy of data transmission. This is helping to make China an increasingly attractive destination for those looking to leverage data-driven solutions.
The development of AI, blockchain, 5G and even 6G in China are also progressing rapidly. The country is one of the leading players in the world in artificial intelligence, 5G and blockchain research and development. Chinese manufacturers increasingly embrace new technologies and processes, such as AI and automation, to become more competitive. Blockchain technology is also being adopted rapidly by all kinds of industries.
The cheaper energy provides the country’s manufacturers cost advantages in producing energy-demanding (raw) materials and components. The advanced infrastructure for data and data-driven technologies may make the Chinese manufacturing sector more competitive in the future.
Robust manufacturing base
China has the most extensive manufacturing base in the world. There is a large availability of all sorts of suppliers for all kinds of goods. Therefore there will always be a suitable supplier for every type of business.
Factories in the industrial zones
In industrial zones, one will mostly find large and medium-sized factories. They benefit most from production scale and the accessibility of resources. Years of manufacturing experience can be found in many of these factories, and many are well-managed. The bigger factories make, on average more use of machinery and robots and more often have a relatively advanced system for quality control. These factories can be competitive in large-scale production and offer cost-price advantages. The bigger the factory usually is, the more selective they typically are about whom they accept as its customers, depending on the volume of orders they are expected to receive and how profitable you as a customer can be for them.
Small suppliers outside the industrial zones
Smaller factories are often located outside industrial zones, in villages or towns. The costs for renting or leasing a venue are lower here. The cost of labour is also often lower. There are usually more labour-intensive processes in these factories. These factories may be less experienced and less specialised. This kind of smaller factory outside the industrial zone may often contain not much more than a workshop. Quality control is usually less organised, so more production errors can be expected when buying from smaller factories. However, these factories cannot be as selective as the bigger ones. The buying power of small buyers will be much higher in these factories. Suppliers will be more likely to be willing to work with smaller order amounts and be more flexible to meet the demands of smaller customers.
Besides these factories, many companies that supply foreign importers are trading companies that don’t produce a good but can deliver additional services. They can help smaller or inexperienced buyers get products in smaller volumes and fit the needs of these buyers. They often offer better communication and services, but the price that has to be paid for the goods is usually higher. These companies also have little influence on the production and quality management of the goods they sell.
All in all, for every kind of buyer, suppliers are available in China. Finding a supplier that can work according to your expectations will be critical as a buyer. It can be challenging to tell what kind of supplier you are working with from a distance. It will be worth it to research this before starting any cooperation so that you can stay in control over the purchasing process in China.
Strong manufacturing ecosystems
Industrial production does not occur in isolation but relies on networks of suppliers, component manufacturers and distributors. These networks are all involved in production through competition and cooperation. China offers a wide range of sophisticated industries and supply chains. For many products, the entire supply chain, from raw materials to final products, can be organised within the country or even within the region. The base of available materials, components and packaging manufacturers has been developed over the last 40 years and has become huge. Effective cooperation systems exist between suppliers, which increases production efficiency throughout the supply chain.
Suppliers often work closely together with each other. Cooperation between suppliers is an integral part of the production process. Cooperation often happens within close networks of family relationships or connections between people who know each other personally. These personal relationships (guanxi / 关系) help businesses build trust with each other and cooperate with high efficiency. Many supply chains have therefore become well-oiled machines.
China’s developed infrastructure is an advantage for your business
The highly developed infrastructure is one of China’s leading comparative advantages over other industrial nations and one of the reasons why to source from China. It helps and provides for your business in the following ways:
- Efficiency and cost advantages: The transport, internet, data and energy infrastructure and the business ecosystems make production highly efficient. This brings along cost-price benefits for your business.
- Speed and punctuality: The efficient infrastructure allows Chinese manufacturers to design and produce goods at a large scale at high speed. Few delays can be expected to be caused by problems in infrastructure networks.
- Flexibility: Chinese factories are resourceful by having lots of production talent and many suppliers of materials and components nearby. This allows them to make changes to your product to match your expectations for specifications and quality.
Cost advantages due to economies of scale
“In China, everything happens on a large scale. This provides major cost price advantages and provides you advantages prices.”
A primary cost advantage that China has and why sourcing from China may be worth it is its Economies of Scale. Economies of scale refer to the cost advantages a business can achieve by producing more of a product at a lower cost due to increased efficiency. Manufacturing costs can be saved due to large-scale production and the abundance of many resources.
Output scale
From the output side, the economies of scale are some self-fulfilling prophecy for China. For many goods, China is the biggest manufacturer in the world. Large-scale production makes the use of automation more profitable, which helps companies to become more efficient and reduce costs. This makes them more competitive in the global market, causing the demand for these goods to increase again.
Input scale
From the input side, many resources are abundant. China has a massive resource of relatively low-cost and highly skilled labour. Other resources that are needed within the supply chains are (raw) materials and components. All are produced at a large scale, bringing cost advantages within the entire supply chain. Energy is another resource that the industrial sector needs, which is also produced on a large scale. The same goes for the scale of the infrastructure supporting the supply chains. The large production scales and the scale of development of new technologies, such as robots, AI, blockchain and 5G, also reduce the relative costs for adopting these technologies. This allows Chinese manufacturers to be frontrunners in adopting these technologies.
Economies of scale has become a concept that has brought significant competitive advantages to the Chinese manufacturing sector. It has caused increased efficiency in production. It caused a faster spread of technology and ultimately lower prices and better quality output.
Relatively stable and effective governance
China’s governance is different from any Western governance style. The governance style may be disliked for many reasons, and risks are also involved. But certain aspects of governance can also help your company succeed when doing business in China.
Stability
Two of China’s central traditional values are harmony and stability. The government also aspires these values. China has a relatively stable government policy and a strong central government. The central and local governments function well, have a relatively high level of trust among the population and can implement effective measures to enforce regulations. Compared to many other developing manufacturing countries, the risks of violence or unrest motivated by political interests are very low. The corruption level is also much lower than in most comparable countries.
Long-term vision
Another characteristic of Chinese values is found in its long-term focus. The governance of the country focuses on long term goals. While there are constant possibilities and risks that short-term policies change, the long-term goals are improbable to change. China has clear policy goals of becoming a global leader in technology and trade. The country has developed a long-term focus on developing the economy and infrastructure. They implement strategies to promote innovation and technology and broaden their international presence, for example, with the global infrastructure project “Belt and Road Initiative”. In the long term, one can be confident that China will stick to these strategies and goals.
Government incentives for innovative sectors
China has introduced long-term strategies for innovation and to increase the implementation of advanced technologies. Key sectors that China wants to promote include agriculture, biotechnology, advanced manufacturing such as robotics and electric vehicles, AI, blockchain, big data and green energy. Policies exist to push these sectors forward and the investments could only increase in the near future as well. Current policies include tax incentives, subsidies, educational grants, and research and development. There is a general preference for providing these incentives for domestic companies. However, there are several incentives for foreign companies as well. These incentives exist for establishing research and development centres or participating in key technology collaborations and talent acquisition. These stimuli can be another reason why sourcing from China can be a good choice.
What we can expect from China’s governance
All in all, China’s governance offers many advantages. Although governance in China can cause short-term uncertainty and risks, the country’s government is likely to stay stable, and corruption levels are relatively low. The government’s power is strong and can implement policies towards the long-term goals of improving the trade position and implementing advanced technologies. Having a policy that encourages innovation and technology will make it more likely that the country will remain competitive in these fields in the future.
But are the supply chains moving out from China?
While China remains a dominant force in global manufacturing, some evolving trends have led parts of supply chains to move elsewhere in recent years. Geopolitical tensions like the US-China trade war have incentivized companies to diversify production across multiple nations as a risk mitigation strategy. lower labour costs in other developing Asian countries are also attracting more labour-intensive sectors away from China.
However, relocating massive supply networks takes considerable time and comes with challenges. China has spent decades in building specialised industrial clusters backed by its extensive infrastructure and supplier ecosystems. Duplicating this depth of expertise and scale elsewhere is not simply done. China’s manufacturing capabilities remain very difficult to replace for many product segments like electronics, machinery and many other consumer products.
What is the problem with China’s supply chain?
Potential issues with relying heavily on Chinese supply chains tend to centre around politics. Businesses perceive the uncertainties from geopolitical tensions in areas like trade policy and foreign relations. Supply disruptions also occurred during events like the COVID-19 pandemic lockdowns and more recently the attacks on ships near Yemen.
Unexpected events can threaten the delivery of Chinese products. Overreliance on China makes businesses more vulnerable to supply shocks stemming from domestic political actions or economic directives. Therefore, some companies see threats in working with Chinese suppliers as well.
So why sourcing from China?
The fact that China has become the world’s factory is not a coincidence. China has the experience and the available talent and workforce that you can find nowhere else. Advanced infrastructure, stable governance and the possibility to benefit from economies of scale are also unique features of the country. Therefore it is likely that China will remain a significant producer of many industrial goods in the future.
China is also a complex country and very different from Western countries. Distance, language differences, cultural differences and closed-border policies may make it challenging to do business in China. You will need to find strategic solutions for these challenges, to be able to build success in China.
