Why is china suited for offshoring

Top tier electronics firms remain dependent on US silicon. The rise in Chinese wages in recent years has brought the average hourly wage rate to levels seen in emerging Europe. Comparability of average wage data across countries is not without problems, but even when taking into account a significant margin for error, the rise in Chinese wage costs remains impressive Figure 7. While nominal wages in China have been rising, productivity has grown even faster.

This is largely due to investments in machinery and robots automation resulting in more output per worker. This has resulted in an overall fall in unit labour costs Figure 8. However, this downward trend in unit labour costs does not hold for all industries. Some labour intensive production is difficult to automate and still relies disproportionately on manual labour. Examples include clothing production, household appliances and toy manufacturing. These types of industries haven't experienced steep increases in productivity but are nonetheless facing higher wages.

For example, Jintai Garment, a clothing manufacturer based in the coastal province of Zhejiang, has built 17 factories in the inland region of Henan, employing about workers. The relocation of factories to inland China has coincided with a vast increase in inland freight traffic Figure 9 , indicating increasing economic activity in the non-coastal regions of China.

In recent years, this relocation towards inland China has slowed as wages in inland regions are also on the rise. This means that, in addition to China, firms have a second production location in a low wage economy within Asia. Firms both Chinese and foreign are increasingly active in outsourcing lower value added activities to neighbouring Asian countries. Figure 10 shows that Chinese value added in the gross exports of Vietnam, Thailand, and Mexico has increased significantly in recent years, indicating a shift of assembly activities from China towards these countries.

Western companies, meanwhile, are engaging in near-shoring activities to bring production closer to western consumers. Mexico fulfils this role for companies that service the US market while emerging Europe services demand for Europeans. The trade war between China and the US is also a trigger to move parts of production from China to other countries, so that American import tariffs can be avoided.

The Financial Times reports that Pegatron moved part of its production from China to a rented factory in Indonesia to circumvent US tariffs. Large furniture companies such as Ikea have also reportedly switched to a Vietnamese supplier , in part because of the trade conflict.

Despite the upgrading of activities and higher wage costs, we should stress that China will remain a manufacturing powerhouse for mass production in the foreseeable future. The size of the country and its population, as well as the willingness of the Chinese population to move, allow for economies of scale not achievable anywhere else.

While the reported maximum factory size is about 20, workers in most Asian countries, Chinese plants are vastly bigger.

The Foxconn factories are even larger, hosting from , to , workers. The sheer size of the economy will remain a counterweight to the benefits of lower wages in other countries for some time to come.

This is particularly true given the rising trend of automation, raising worker productivity. China is rapidly automating production. Since , the Chinese working population age 15 to 64 has been decreasing. This decline will continue for the foreseeable future, while the total Chinese population keeps on growing.

In order to maintain strong economic growth and support the elderly in China, productivity growth is needed to compensate for the declining working population. To attain the current target of 6 to 6. Automation is an important driver of productivity growth. According to statistics by the International Federation of Robotics, the average number of robots per 10, employees increased from 25 to 68 from to Over the last decade, the share of Chinese robots in total robots worldwide more than doubled see Figure Automation first took off in the automotive industry but has spread rapidly to other Chinese sectors such as electronics manufacturing and metals.

Industries that can be automated to a larger extent are more likely to stay in China, particularly because of its large and growing domestic market for consumption. At the same time, automation makes it viable for some foreign companies to move production for the European or American markets back to the home market. As mentioned, some firms are relocating labour intensive production, such as garment manufacturing or toys, to other Asian countries.

Figure 12 shows the 10 Asian countries in which Chinese greater China , Japanese and South Korean firms invest the most. These investment flows show the jobs added in countries and sectors by foreign investment. A lot of manufacturing activities that are being relocated also take the shape of cross border outsourcing, which is not captured by international investment flows. Hence outsourcing is not shown in Figure Still, Green Field FDI flows are part of the story of relocating industries and indicate which countries and sectors are most attractive to firms seeking the most efficient production location.

Vietnam is the most favoured destination for offshoring or outsourcing production. Similarly, they can manage excess production by manufacturing less for the next order. Manufacturing contractors may agree to immediate scale-downs more readily, giving you the flexibility to reduce your production quickly. Moreover, China has a large potential workforce which enables Chinese contractors to scale up productions cheaply.

China is geographically situated between the Asian and European markets and is an active participant in world trade. As a result, outsourcing processes to this Asian country can give you easy access to profitable markets.

Additionally, since China itself is a huge market , offshoring to the country can create huge opportunities for companies. The low labor wage, resource-intensive manufacturing, and exports make offshoring to China a profitable option.

According to the Global Innovation Index GII , an annual ranking of countries based on their innovations, China ranks 14th among countries. It comes before countries like Japan, the Philippines, and India. This is because China houses tons of innovative companies, including high-tech startups like Weltmeister, an electric car brand. The list also includes Alibaba 14th , Lenovo 25th , Tencent 26th , and Xiaomi 31st. Outsourcing to a country with huge research potential, like China, can give you quick and easy access to technology.

This will provide you with a competitive advantage over your competitors from other countries. The Chinese government tends to welcome any foreign company that shows an interest in outsourcing. Additionally, China continually amends its outsourcing laws and works towards improving its infrastructure to ensure smooth outsourcing. In fact, the country spent around 10 times more on infrastructure than the US in The country has also successfully developed digital infrastructure, particularly broadband and digital payment systems.

Startups offer business agility, access to new technology, insight into target markets, and customer-centric innovations. As a result, outsourcing to the Chinese economy with tons of startups will get you access to resources that can help you overtake your competitors. In addition, your business can get services or products from startups at lower costs when compared to established companies. Chinese cities like Hong Kong , Shanghai, and Chengdu help high-tech startups flourish.

They do this through initiatives that improve infrastructure and by giving access to top talent. Additionally, these cities are politically stable with an open culture due to globalization.

Such an adaptable and friendly environment makes outsourcing convenient and pleasant. China saw 7. On top of that, China established a Thousand Talent Program, which aims to attract scientific talent to the country. What was the best religion in ancient China? Which was not a change in American business practices during the late twentieth and early twenty-first centuries?

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