Knowledge Hub
03/01/2024
The Challenges of Manufacturing in China
For several years now, China has been the centre of global manufacturing. It is currently the largest producer of manufactured goods in the world. Many companies in the UK have relied upon China’s manufacturing output to create their products.
However, in the light of recent events across Europe and the rest of the world, this reliance has started to change, and China’s monopoly on global manufacturing has been weakened.
In this article, we will look at some of the events that have led up to these changes. We will also examine some of the key determining factors that have seen many UK companies return to manufacturing suppliers here at home as an alternative to those based in China.
China – The Age of Industrialisation
During the 1950s, China underwent a period of great economic change. Mao Zedong, also known as Chairman Mao (or Mao Tse-tung in the English-speaking world), was Chairman of the Communist Party of China for over three decades between March 1943 and September 1976. Under his leadership, China began a long and expansive period of industrialisation.
In 1952, 83% of the Chinese workforce was employed in agriculture. In 1953, with the help of the Soviet Union, Mao began an ambitious plan to bring industrialisation to China on a significant scale. The ‘Maoist Great Leap Forward’ plan was implemented between 1958 and 1961. Its goal was to transform the People’s Republic of China from an agrarian economy based on farming to a modern communist society with a strong economic base at its centre.
The Soviet Union gave the Chinese some of the most advanced technology in the world. They also sent many thousands of Soviet technical advisors to China to oversee some 156 industrial projects.
The overall result was a sea change in the Chinese economic model. China began to rely more heavily on industrial output. Over the next quarter of a century, the value of agriculture to the country’s GDP had declined from 70% in 1952 to 30% in 1977.
In 2022, the percentage of the workforce employed in agriculture had fallen to 24%, compared to 83% in the 1950s.
In 2021, China’s manufacturing output had risen to $4,865.83 billion, which represented a 26.04% increase from 2020.
Why Has China Become a Popular Choice for Manufacturing?
China’s position as the foremost manufacturing power in the 21st century is due to a few important factors:
Low labour costs: employees are put to work for long hours with few rewards. Industrialists benefit from gaps in employment legislation. Low-cost labour is also possible because of China’s high population. As there are so many people competing for jobs, the rate of unemployment is high, which in turn has driven down wages.
Lack of regulatory compliance: in order to maximise manufacturing opportunity, much of this sector has been almost completely deregulated to encourage investment and to promote exports of manufactured goods.
Quick lead times: Chinese manufacturers have gained a reputation for supplying goods extremely quickly.
Infrastructure/Business Ecosystem: China has invested heavily in an extensive infrastructure which enables it to hold great sway over its supply chain partners.
Low taxes and duties: goods can be exported to different geographical territories at low cost to the customer.
Poor environmental regulation: with little or no regulations for sustainable practice, the manufacturing industry is allowed to thrive at the expense of environmental wellbeing. Industrialists are also able to avoid waste management costs.
Absence of law to protect workers’ rights: Chinese factories do not adhere to the same laws which some of their overseas competitors are subject to, including laws relating to child labour, involuntary labour, working hours, and health and safety.
Government influence: government investment in domestic infrastructure combined with a favourable pro-business tax system has helped to keep manufacturing costs at a very low level.
Strong domestic economy: a strong economy has led to increased spending. This has increased the value of the Chinese Yuan (CNY) and has provided Chinese manufacturers with the opportunity to expand their businesses.
World Events which have Served to Weaken China’s Manufacturing Dominance
In recent years, we’ve witnessed many significant and quite unpredictable changes in the macro environment which have served to shake China’s stranglehold on the global manufacturing sector.
Let’s look at some of the key world events in more detail:
Ukraine war – the political turmoil in Eastern Europe has led to supply chain disruptions, export challenges, rising costs, and uncertainty in global financial markets.
Energy crisis – inflated energy prices have meant that Chinese manufacturers have had to increase their prices, the burden of which has been borne by the customer. This has made China a less attractive option than before.
COVID-19 – delays and shortages related to the pandemic have prompted many customers to re-evaluate their reliance on China, and to look elsewhere for an alternative solution.
US economic policy – the US Government’s hardline trade policies with China have resulted in a succession of costly tariffs which have driven prices up.
Continued lockdowns in China – as China struggles to break free from COVID-19, lockdowns are still part of day-to-day life, and have had negative implications for manufacturing activity.
Protests – over the past year, several demonstrations have taken place across China in protest against these sustained periods of post-pandemic lockdown. This unrest has had poor economic implications for China, as well as for overseas financial markets.
Reduced investment – these socio-political events have led to a reduction in investment in China. For a country whose success has been built on capital investment, this has negatively impacted its economic progress.
In addition to these factors, China has also been confronted with many other challenges, including increased labour expenses, accelerated manufacturing competition from other developing economies, and a series of ongoing trade disagreements.
All this activity has seen some companies in the UK and overseas disengage with China and move to quickly diversify their supply chains. In many cases, this has seen corporate buyers look to their own domestic marketplaces for new manufacturing partners.
What Does All This Mean for Chinese Manufacturing?
The pace of companies moving production out of China is accelerating all the time, with China losing more manufacturing and export market share in several of its key sectors.
Chinese manufacturing companies had always been attractive because of price. But in the light of recent global events, Chinese manufacturers are no longer able to offer pricing which is as favourable as it once was. This has undermined arguably the key selling point for these manufacturers when trying to secure new business from overseas customers.
Some UK-based customers have seen their costs of doing business with Chinese manufacturers go up by over 25%.
Coupled with this, the supply chain has now become more complex and challenging in the aftermath of COVID-19, the war in Ukraine, and the United Kingdom’s exit from the European Union. Goods can no longer be depended on to arrive on time every time from the other side of the world.
Geopolitics is also a concern for some customers. The Chinese Government’s support for Russia, its diplomatic issues with the United States, and its aggression towards Taiwan has seen some UK based customers begin to question their support for Chinese manufacturing.
Here are some other key reasons why China has lost some of its pulling power:
- Uncertainty over IP Protection: Intellectual Property (IP) laws are less robust than in many other countries, with low penalties for IP infringement. This makes it difficult for UK designers to protect valuable IP in a country where counterfeit is possible.
- Competition with neighbouring economies: local nations such as India, Vietnam and Indonesia have provided increased competition to Chinese manufacturers by benefiting from even lower labour costs and reduced levels of regulation.
- Economic downturn: China is currently experiencing adverse changes in their economic cycle, with manufacturing companies being squeezed by slow economic growth and rising costs.
- Reduced foreign investment: there has been an increase in the number of investors leaving China in recent times. Overseas investors are concerned about security, government policy, and a lack of action on reform promises, according to the European Chamber of Commerce in China.
Other Sources:
If you’ve enjoyed reading this article, please check out our article on Reshoring, which can also be found in the Knowledge Hub section of our website.
