In order to remain competitive in today's global economy, companies are always looking for ways to save money. One of the most popular and effective ways to do this is by manufacturing products in China. You must wonder, "How does manufacturing in China save money?". But hold on, let's first look at some important things to know about China's economy and its impact on the world.
"China is now the world's second-largest economy with a GDP of $17.07 trillion in 2021. It is also the world's largest exporter ($3.364 trillion) and importer ($2.687 trillion) of goods. The country has been growing at a rapid pace over the past few decades and is expected to continue doing so in the future."
By the end of this blog post, you'll understand why manufacturing in China is so cheap and how it can benefit your business. For your convenience, we will also discuss in which cases it might not be the best idea to go for the cheapest option.
So, without further ado, let's get started!
How Manufacturing in China Saves Money – Reality or Myth?
It is no secret that manufacturing costs are lower in China than in developed countries such as the United States, Germany, or Japan. But most of them, like the US, have now started offering lower manufacturing rates to attract foreign clients.
In fact, according to a study by the Boston Consulting Group, the manufacturing cost in China is only 5% lower than in the US.
So, is China still the cheapest option?
The answer is - Yes!
You must be thinking the 5% difference is not that big. But when we compare it with the overall cost, the difference is significant.
For example - The production cost of a widget in the US is $2.5 while the same widget costs only $2 in China.
Now, if a company manufactures 10,000 widgets in the US, the cost would be $25,000. But if the same company manufactures the same number of widgets in China, the cost would be only $20,000 - That's a saving of $5,000!
Depending on the product you want to manufacture, you will also find diversity in cost. For some products, the difference in cost may be as high as 20%, while for others, it may be only 5%.
You might see two similar products and wonder why one is cheaper than the other. The answer lies in the difference in production quality. Only China can produce such products according to the client's budget - that's the real secret!
Let's look at some reasons to understand why manufacturing in China is so cheap.
6 Reasons Why Is It Cheaper To Manufacture in China
Firstly, let us clarify something - cheaper does not mean inferior quality. When we use the term 'cheap,' we simply mean getting your product at an affordable price without compromising quality.
Now that we have that out of the way, let's look at some reasons for China's low cost of manufacturing.
1. Cheaper Labor:
Yes, it's true - labor is cheaper in China. But that doesn't mean the workers are paid poorly or treated badly. In fact, the minimum wage in China is higher than in many developing countries.
However, in recent years Chinese labor costs have been on the rise. The emergence of a vast middle class and a shrinking labor pool has pushed wages in many parts of China.
Okay - but how does labor cost vary between different professions?
Let us tell you in detail.
Products like clothes (which require much of the stitching to be done by hand) can be considered a high labor content product with up to 70% of the total cost. At the same time, products like plastic toys (made using industrial techniques like injection molding) are considered less labor-intensive, with labor costs in the range of 20-30% of the total cost.
Depending on where your product falls on this spectrum, you can save anywhere from 20% to 50% of the labor cost by manufacturing in China.
2. Established Supply Chains:
The manufacturing sector in China is highly developed and organized. This gives rise to well-established supply chains, which are necessary to bring down the cost of production.
For example, many small businesses specialize in manufacturing plastic toys. These businesses have well-developed supply chains for raw materials, molding, painting, etc.
This division of labor ensures that each business can focus on what it does best and produce a high-quality product at a lower cost.
3. Economies of Scale:
Being a business owner or manager, you must be well aware of the term economies of scale. It simply means that the larger the production, the lower the cost per unit.
This is because, with large productions, fixed costs like rent and salaries are spread out over larger units.
For example - If a company manufactures 10,000 widgets, the cost per widget would be lower than if the company manufactured only 1,000 widgets.
This has helped China lead the world not just in labor-intensive products but also capital-intensive ones – everything from Frisbees to iPhones.
4. Tax Exemption:
The Chinese government offers a host of tax exemptions and subsidies to businesses that set up manufacturing operations in China to export products - A dream come true for any business owner!
These subsidies can be in the form of reduced corporate income tax, value-added tax (VAT), or land-use taxes. However, goods made for export are exempt from taxation, and the Chinese government refunds the VAT for products exported from the country. Needless to say, all these tax savings go directly into your pocket!
Of course, there are tax fraud and other scams in China like there are in any country, and it’s important to be aware of these and to make sure you work with a China-based CPA who can ensure that you are in total compliance.
The Other Side:
Many fake service providers have taken advantage of tax exemption in recent years. These fly-by-night organizations claim to deliver top-quality products at ultra-low prices but often deliver sub-standard goods.
To understand how to bypass these fraudsters and get your products manufactured from the best factories in China, read our latest blog post on "Offshore Manufacturing."
5. Reduces Your In-house Production Cost:
You know well how in-house production eventually leads to an increase in labor costs. By manufacturing your products in China, you can avoid this overhead cost.
Moreover, the need for extra space and machinery also gets eliminated. As a result, the cost of maintaining an in-house production unit is also saved - isn't it a feasible option?
It also helps you keep your team lean and focused only on the tasks you do best while relying on seasoned professionals for manufacturing.
Now, you must have an important question in your mind -
How much cheaper is it to manufacture in China?
But don't worry, we will also answer this question in our article - stay tuned!
6. Access to Emerging International Markets:
Producing your goods in China can be of great value if you intend to sell these products in the fast-growing emerging Asian markets. Geographic proximity and well-established logistics and shipping systems deliver significant savings on selling your goods in these countries.
Not only this, but China is also aggressively pursuing free trade agreements with countries worldwide. This gives businesses even more opportunities to sell their products in new markets without worrying about tariffs and other trade barriers.
The wait is over...
Now that you know the reasons for cheap manufacturing in China, it's time to answer your prime question - Cost vs. Quality!
Won't These Savings Affect the Product Quality?
This is the most frequently asked question when it comes to offshore manufacturing in China.
And, the truth is - it depends!
You see, in China, you can find a single product with different quality levels. It all depends on your budget and requirements.
Company X needs 1000 phone cases at $5 each, and Company Y needs the same number of phone cases but at the price of $10 each.
Now, the beauty is that both companies will get what they need!
The quality of the products depends ultimately on the client's budget.
So, we can say you will get the highest quality product possible in your budget range.
Are you interested in learning about the pro and cons of manufacturing in China? Check out our latest blog post.
But Low-Cost Manufacturing Isn't the Whole Story - Here's Why
Before getting into this discussion, we want to share some of our client's experiences with you!
Almost 60% of clients who came to us had a negative experience with their previous supplier in China. The main reason was - they only focused on the cost of production and ignored other important factors.
As a result, they faced many quality issues and delivery delays.
And in the end, they had to spend more money to fix those issues.
But how do they get into their trap?
They told us that their previous supplier promised to deliver the highest quality product at a very low cost. But, they only realized their mistake when they received their products.
We heard them saying - "we wish to consider the cost as a secondary factor and focus more on quality."
Another reason is to remain competitive. Most of the suppliers in China quote the lowest price for the product. And once they get the order, they start cutting corners to make profits.
How to avoid it?
You might be thinking, what is the solution to this problem?
But the reality is, being a business owner, you know exactly how much your product will cost. So, stop falling into the trap of scammers offering you low prices that seem too good to be true.
In short, manufacturing is cheap in China but only for those who know all the above factors and how to get their product mass-produced in China.
Get Your Products Made Cost-Effectively - The Right Way
While offshore, getting your product manufactured at a cheaper price from a reliable supplier is like finding a needle in a haystack.
But don't worry!
We have the most viable solution for you.
Partner with a contract manufacturing company like Morpho MFG.
They will handle the entire process, from onboarding the most suitable supplier according to your cost and product category to logistics.
Haven't you heard about a contract manufacturing company yet?
Let us give you a brief introduction. A contract manufacturing company is an organization that offers to manage the entire manufacturing process of your product on your behalf.
But will they be able to produce a high-quality product at a low price - Let's find out!
MorphoMFG: Premium Products, Sensible Prices
Morpho MFG is a contract manufacturing company with an extensive network of reliable suppliers in China.
But getting back to the main point - how do we manage to produce high-quality products at cheap prices?
We have been working with Chinese suppliers for several years. So, we have direct relations with them and excellent negotiation skills - is that all?
No, we have a lot more to offer.
We get the best prices for our clients without compromising on quality. Our dedicated quality control team inspects every product before it gets shipped to our clients.
They make sure that the products meet all the international quality standards.
You must be thinking, do they provide all these things at a low cost?
The answer is YES!
Contact our customer support team and experience it yourself. Check out our homepage as well to know more about our services. Thanks for reading!
Frequently Asked Question
How much cheaper is it to manufacture in China?
Manufacturing costs in China have increased significantly over the past few years. Nevertheless, it is still cheaper to manufacture in China than in other countries.
But how cheaper can it be?
Currently, we can't give you an estimate as it depends on several factors, such as the type of product, order quantity, quality requirements, etc.
But wait - we have something for you!
Check Morpho MFG's blog post on the cost of custom ODM products in China for a detailed cost analysis. We hope it will solve all of your cost-related queries.
Why Do Leading Manufacturing Companies Choose China?
We know that almost every leading manufacturing company has its own manufacturing setup or outsources its manufacturing to China.
But what is the reason behind it?
The answer is simple - to stay competitive and save on production costs.
Morpho MFG is a partner contract manufacturer for a lot of international clients. We have several offices in Guangzhou, China, and can help you get your products manufactured at a fraction of the cost.