Companies are being advised to change their approach towards the Chinese market, and no longer view it solely as a low-cost manufacturing-for-export market, according to a new study.
A joint study put together by management consulting firm Booz Allen Hamilton and the American chamber of commerce in Shanghai argues that firms should integrate China into their global supply chains to secure a competitive advantage.
It recommends that companies see China as a growth market and a market for lower-cost labour and sources, and integrate these operations. For example, those that use dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives.
China's strengthening currency and rising wages are said to be putting pressure on manufacturing margins, and forcing companies to change their attitude to the market.
"The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul,” comments Ronald Haddock, vice-president, at Booz Allen.
“China's changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy.
“At the same time, China is increasingly a major source of product and business model innovation. We 're seeing globalisation at work and China’s role has changed.”
Over half of the surveyed foreign-owned or foreign-invested companies manufacturing products in China believe the country is losing its competitive edge compared to other low-cost nations. As a result of this, almost one in five manufacturers is planning to relocate or expand their China operations to other countries, with India and Vietnam seen as the main alternatives. Around 88% said they originally chose China for its lower labour costs, but they are now finding cheaper labour and tax benefits in other locations. Around 63% said Vietnam was the most attractive alternative location.
However, despite China’s diminishing competitive edge, the majority of manufacturers said they would keep their operations in the country, with most citing China’s vast domestic market as the main reason to stay.
“China’s phenomenal economic growth and market reform story, together with a dynamic and challenging business environment, will continue to put pressure on manufacturing companies,” comments Brenda Foster, president, AmCham Shanghai.
“They will have to focus on continually improving their competitiveness and devoting more resources to innovation as they pursue their strategies and plans in China.”
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