China’s manufacturing industry becoming less competitive

Have you read my article: How Manufacturers Can Compete With Low Wage Countries?

Last Friday New York Times, elaborated on one of the crucial aspects: workforce education.

My point of investing in education for more skilled workers (as a crucial competitive advantage as our high labor costs are directly linked with insufficient focus on manufacturing education) is being supported:

China is facing an increasingly acute labor shortage. The country is running out of fresh laborers for its factories. A government survey three years ago of 2,749 villages in 17 provinces found that in 74 percent of them, there was no one left behind who was fit to go work in city factories — the labor pool was dry.

Some manufacturers, already weeks behind schedule because they can’t find enough workers, are closing down production lines and considering raising prices.

Unskilled factory workers in China’s industrial heartland are being offered signing bonuses. Factory wages have risen as much as 20 percent in recent months, giving Chinese families more spending power (probably manufacturing industry wages could double in the next five years).

However, rising wages could lead to greater inflation in China, eroding some of China’s formidable advantage in export markets. The prospect of rising wages suggests that companies with high labor costs could experience margin pressure. Such increases would most likely drive up the prices for all sorts of Chinese-made goods, to import in the United States and the European Union.

This reality of Chinese talent shortage a.o. will re-shore manufacturing back to the western world, according to Mike Collins, Author, Saving American Manufacturing:

• Chinese manufacturers have trouble in guaranteeing their US and European customers accurate delivery dates because of unforeseen delays in the supply chain;

• Chinese manufacturers will have more difficulties to make quick changes in the manufacturing process – Without a strong workforce, it will be harder for them to quickly customize products.

• The risks involved with a supplier in China get bigger. Western manufacturers have begun to pull their supply chains back closer to their markets, closer to their customers – which are asking for custom-made solutions and just in time delivery.

• Harry Moser, chairman emeritus at Agie Charmilles points to the “costs of regulatory compliance, potential intellectual property loss, visits to overseas vendors, potential product quality problems, high foreign wage inflation and carrying extra inventory as cushion against late or damaged shipments.” (industryweek.com)

• Challenges in manufacturing offshore are legion, Brian Bethune – a chief U.S. financial economist – said. Infrastructure can be undependable, including frequent electrical brownouts in some regions of China. Manufacturing is often plagued by quality problems, rendering products unfit to sell in more sophisticated markets. Language and cultural barriers pose difficulties. Negotiating governmental expectations and hurdles, especially in China, is a huge issue. (Tennessean.com)

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China might be less competitive in the coming years; however, and that doesn’t surprise me at all: the Chinese government is rapidly reacting, with expanded postsecondary education. Universities and other institutions of higher learning enrolled 6.4 million new students last year, compared to 5.7 million in 2007 and just 2.2 million in 2000.

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This reality of Chinese talent shortage will re-shore manufacturing back to the western world:

· Chinese manufacturers have trouble in guaranteeing their US and European customers accurate delivery dates because of unforeseen delays in the supply chain;

· Chinese manufacturers will have more difficulties to make quick changes in the manufacturing process – It will be harder for them to quickly customize products, without a strong workforce.

· The risks involved with a supplier in China get bigger. Western manufacturers have begun to pull their supply chains back closer to their markets, closer to their customers – which are asking for custom designed solutions and just in time delivery.