Disadvantages of Manufacturing in China

I use the China Law Blog as a source of wisdom on China.  Dan Harris’s recent post about some disadvantages of manufacturing in China struck me as basic and obvious–until I read his last comment:

"I know this stuff sounds rather basic, but I have had a number of clients who end up surprised . . ."

Okay, he’s probably right.  Some things may not be obvious to someone who has immersed himself in all that one needs to learn about doing business in China.  There’s so much to learn, that it’s easy to not get around to some basics.

Here’s the key stuff about when it does not make sense to manufacture in China:  when a product is made in a fairly capital-intensive way, so that there is not a lot of labor cost in it.  Example:  Frozen potatoes are made in a highly automated way, so we keep the manufacturing here.  Frozen vegetables are increasingly being made overseas, because they are fairly labor intensive.

The one complication about this way of looking at potential cost savings is that one has to imagine how things might be made elsewhere.  Read Fortune Magazine’s article, A Tale of Two Factories.  They look at two auto parts plants owned by Tenneco, one in Shanghai and one in Michigan.  They produce the same products but in very different ways.  The one in the U.S. is set up use capital to replace labor.  The factory in China uses labor whenever possible.  So a business manager thinking of operating in China would not want to imagine the identical factory copied from the U.S.  Imagine what your factory might look like in a world where labor is cheap.

Now let’s finish that quote from the China Law Blog:

I know this stuff sounds rather basic, but I have had a number of clients who end up surprised at the low or minimal cost savings to be realized by manufacturing in China, particularly after adding in the transportation costs, the increased legal and administrative fees that come from doing business internationally, and then accounting for the increased risks of quality and other problems.