Why China Remains a Major Sourcing Destination

Introduction:

There have been countless articles and books about China’s reign as the factory of the world coming to an end. While it is true that wage increases are making some of China’s lower-end industries, such as textiles, less competitive vis-à-vis other low-cost countries such as Vietnam, Cambodia, and Bangladesh, China remains one of the top procurement sources for mid to high-tier products.

  • For instance, heavy equipment exports from China experienced a growth rate of about 30 percent in the last decade alone.
  • Even as some lower-end industries move out, there is more to a country’s competitive supply chain than labor costs.
  • China maintains a set of key factors that will continue to make it a competitive exporter even as the economic landscape shifts. These include:

1.  High-quality infrastructure: (especially export-related infrastructure)

china high speed trains

China’s advanced rail infrastructure and its high-speed trains

China rail infrastructure:

  • High-quality rail infrastructure that includes conventional and high-speed rail systems.
  • Trains can operate up to 217 mph, reducing crucial travel time between different ports.
  • It modernized rail infrastructure including electrification of lines and improved rolling stocks.

truck on china highway

Truck carrying cargo on China’s new highway

China road infrastructure:

  • China holds one of the largest highway systems in the world, the National Expressway Network, covering over 160,000 kilometers.
  • They have improved quality and construction standards for safer travel.
  • Allows for speeds up to 75 mph, efficient for moving to different sites.

2008 vs 2020 china rail infrastructure

The increase in the amount of railroad infrastructure in 2008 vs 2020

General Infrastructure:

  • China’s rail and road infrastructure is among the most developed globally, particularly along the coastal cities.
  • With a history of double-digit investment in infrastructure, China’s ports complement the rail/road infrastructure.
  • Shanghai has long surpassed Singapore as the world’s busiest port and it will be a while before key competing countries can match China’s current (and continuously developing) infrastructure.

ningbo and shanghai ports

Shanghai and Ningbo ports with hundreds of cargo

2.  Increasing qualified labor force:

China’s qualified individuals:

  • China produces hundreds of thousands of graduate engineers and scientists each year to be absorbed into the local industries.
  • Moreover, China now has the world’s largest student population studying overseas with a sizeable number returning upon completion of their studies.
  • Although there has been renewed attention to quality rather than quantity in the number of graduates, the increasing education level will boost China’s competitiveness vis-à-vis some of the other low-cost sourcing destinations.

china worker in factory

Workers operating within a factory using highly advanced equipment

3.  Growing research and development expenditure leading to a higher innovation capacity:

  • Despite the reputation for copying, China’s innovation has continued to pick up pace.
  • As internal and external competition increases, China also focuses on price reduction, adaptation of business models, and supply chain development.
  • This will lead to the elimination of less efficient firms, both domestically and those focused on the export market.

Expanding research and development fields:

  • A report by McKinsey & Company (Greater China) highlights innovation in areas such as renewable energy, consumer electronics, instant messaging, and mobile technology.
  • China also puts a big emphasis on biotechnology and healthcare, fighting against prominent diseases. Innovations in medical devices and vaccines help combat these issues.
  • China’s evergrowing infrastructure requires a lot of research and development, and with good care, the results show, based on the improvement of rails and road systems.

Worker inspecting piece of equipment

A worker carefully inspecting a piece of equipment

4.  Lower costs relative to industrialized countries:

China’s wage system:

  • Despite double-digit growth in both wages and currency appreciation during the past decade, China’s minimum wage still stands far below that of industrialized countries.
  • Rising wages are correlated with increasing productivity.
  • Therefore countries competing with China for lower costs will have to also compete with increased productivity and vice versa.

china construction worker

China’s construction workers relaxing

5.  Specialization, not only at the sector level but also at the product level:

  • China’s specialization in various products remains unparalleled globally.
  • There are entire towns dedicated to producing a single product.

Different areas of specialization:

  • For instance, Shenyang, a city in northeast Liaoning Province, has developed a reputation for its heavy industry, particularly in the manufacture of automobiles and light machinery.
  • The Pearl River Delta is known for the textiles/electronics industries, whereas Shenzhen has become the IT hub of China.
  • Moreover, the product range available in these agglomerations is diverse, catering to low- to high-end products, resulting in differentiation as a key competitive factor.

pearl river delta technology

Pearl River Delta becomes a technology hub

6.  Pro-export policies:

  • The Chinese authorities have indeed decided to alter the export-led growth model to one focused on domestic consumption.
  • However, the country’s “going out” policy combined with an increasingly saturated domestic market, especially in sectors related to fixed assets investment such as steel, cement, and heavy equipment, continues to have explicit support (via export rebates or subsidies) or tacit support (high barriers to entry, licensing requirements), especially at the local level.
  • This support will continue to boost Chinese exports’ competitiveness – at least in the short term.

korea and china free trade agreement

China and South Korea signing a free trade agreement

Conclusion:

Overall, China remains one of the prime sourcing agents due to many reasons listed above. Whether that be advanced technology and material quality to lower costs, China has its benefits and advantages over other sourcing partners. Continually, we will conclude the shift inland aspect of China.

  • A shift inland: As the coastal areas become expensive, investment in areas such as Chengdu and Chongqing, which are a distance from the coast, continues to see increasing direct investment from both local and foreign firms.
  • This is not to say that the inland does not pose its problems, but over time it may prove easier to shift inland than abroad.

Countries and companies that seek exports from China

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