Moving up the value chain – Shaun Rein

Starting in 2007, my colleagues and I found that rising labor and real estate costs were starting to create problems for many companies relying on “cheap China” to generate profits.

We conducted research to see whether cost increases were a short-term blip or if we were at the start of a dramatic change in the economy that would disrupt the business operations of firms.

It quickly became clear China would no longer be a cheap place to manufacture. The one child policy meant fewer overall people coming into working age, and they were no longer willing to toil in factories far away from home in sub-human conditions. I first presented our results at a speech at the Asia Society in New York. Another speaker literally hissed at me in the middle of my presentation and told me I was flat out wrong – she said China would always be cheap. Well, migrant workers’ salaries have been rising 20% annually since 2007, and it is only about 30% cheaper to produce in Shanghai than in Alabama in the United States when factoring in all transportation and other costs.

China won’t lose its manufacturing dominance. It has the infrastructure in place that no other country has. But in order to survive, companies are going to have to move up the value stream in manufacturing. China is going to become a big player in auto and aircraft, and consumer electronics. I expect that it will start to take more share from Germany in manufacturing. Companies will also have to work on operational and worker productivity as that is the easiest way to get great gains.