The flip side to China's large population is its vast labor supply. China's emergence as the manufacturing hub of the world over the past three decades has created significant downward pressure on pricing of many of the world's goods. Outsourcing manufacturing to China has become a standard practice for many labor-intensive products, such as machine tools, leather products, toys, furniture and textiles, among others.
While many have characterized China's labor pool as unlimited, that has proven not to be the case. In a number of areas on both the low and high end of the production value chain, Chinese manufacturers have had to deal with shortages of suitable labor, particularly in certain geographical regions. Coupled with an increasing focus on environmental protection and labor rights reform, China's low-cost advantage has decreased a bit over the years. Nevertheless, much like other developing countries, China has changed the global pricing landscape, often with deleterious effects on manufacturing companies elsewhere around the world. As a result, many companies have been faced with the harsh reality that they must compete on quality and design or else determine a low-cost production strategy to compete and survive. Often, this low-cost strategy entails outsourcing some part of the supply chain to China.
Importantly, China's competitive advantage in manufacturing is no longer driven solely by low cost labor. Many Chinese factories have become very eficient and are able to deliver a high-quality product compared to counterparts in other lowcost geographies. Furthermore, China is in the process of moving up the production value chain and is making a major push to develop its service sector. Foreign companies should view this trend as both a threat and an opportunity, but it should be managed appropriately either way.
