October 18, 2013

Low-cost Chinese manufacturing is dead. Long live nearshoring!

China doubled its GDP per capita in last decade.  That achievement took the industrializing United Kingdom 150 years. It raises some questions, and McKinsey & Co analyzed these questions.

Average monthly labour costs of Shenzen, China vs. Eastern European locations.
Source: Will Eastern Europe provide lower labour costs than China? - Manufacturing Hungary Blog

China economic model from the late '70 was built on low-cost manufacturing and export-driven growth. McKinsey and Company's recent article says: China needs a new story, a new growth model, because the challenges before manufacturing in China are huge. 

McKinsey's identifies 4 challenges before the future of Chinese manufacturing:

#1 Rising factor costs. in 2011, Shenzen wage inflation was 100%. It was 'only' 60% in Shanghai.

#2 Rising consumer sophistication. In 2020, the half of urban population is expected to become the part of upper middle class. This group demands innovative and high-end products, what local Chinese companies probably cannot manufacture. China will loose market shares not just abroad, but at home, too. The today strong Chinese supplier base also will weaken.

#3 Rising value-chain complexity. Product diversity, product customization and e-commerce aren't terms for Chinese manufacturing. Also the demanding Chinese middle class will need more customized products in shorter delivery time - and what about oversees consumers?

#4 Heightened volatility. The global economic crisis hit China, as well. The rising uncertainty makes business planning uncertain. "Volatility at such levels makes planning difficult for China’s manufacturers. This is problematic for companies that routinely make large, long-lived capital expenditures whose returns are crucial determinants of performance."


In its article, McKinsey provides some solutions for the challenges above, but we would like to add a new one: let's think about nearshore manufacturing in alternative, low and stable costs locations closed to your consumers.

China's next chapter: finally, a 3-minute video about how McKinsey sees the challenges in Chinese manufacturing.

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