How Manufacturing in China Saves Money
Cheap labor has been the bedrock of the Chinese manufacturing sector, wooing Western firms with the promise of rock-bottom production costs. This has been the main factor driving growth in Chinese manufacturing to where it is now – the world leader in manufacturing output with a global market share of 22%.
This sector has experienced two decades of unprecedented growth, leading some to say that rising labor costs have eroded China’s cost advantage in manufacturing and that it is no longer cost-effective to outsource production overseas.
However, the cost advantage offered by China goes far beyond just labor costs. Here are some of the most important ways that manufacturing in China helps foreign companies save money.
It’s true – Chinese labor costs are on the rise. The emergence of a vast middle class and a shrinking labor pool has started pushing up wages in many parts of China. However, there is still a long way to go before labor costs in China match those of places like the United States or Western Europe.
The ultimate cost benefit of cheaper labor depends on how labor-intensive the manufacturing process is. 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, while products like plastic toys (which are 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.
Economies of Scale
Of course, labor is only one of the inputs that go into manufacturing goods. Goods that require industrial processes like tooling and molding are more capital-intensive and manufacturing these in China can still offer significant cost savings.
This is because China’s massive manufacturing sector is highly competitive and offers huge economies of scale, which translates to world-beating prices for even specialized cutting-edge technology. This has helped China lead the world not just in labor-intensive products, but also capital-intensive ones – everything from frisbees to iPhones.
Established Supply Chains
Another input with a significant bearing on production costs is the raw material that goes into making the product – another area where China offers a cost advantage.
Decades of globalization have created deep-set supply chains across East Asia that provided access to every conceivable kind of raw material. Textile fabrics, leather, plastic pellets, steel, microchips – all are available at unmatched prices thanks to these established supply chains. Tapping into these markets can deliver significant savings based on the materials required.
Like many countries, China has a Value Added Tax (VAT) regime that assesses tax liability based on value added at every stage of manufacturing and distribution. 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!
Displaced Costs at Home
Outsourcing your manufacturing to China saves you money beyond just cheaper production costs. By taking manufacturing operations off your plate you also eliminate the need to hire the staff necessary to run those operations in your home country.
This can result in significant savings in salaries, benefits, real-estate and equipment costs, helping you keep your team lean and focused only on the tasks that you do best while relying on seasoned professionals for manufacturing.
Access to Emerging 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 combine to deliver significant savings on selling you goods in these countries.
MorphoMFG has over two decades of combined experience in delivering measurable value to our clients by taking advantage of cost-saving opportunities like these. Reach out to us today to explore how we can work together to bring your dream products to life better and cheaper than ever before.