China's Cost Advantage

Manufacturing Engineering, Aug 2005

The migration of manufacturing and research and development to China will not abate any time soon, according to analysts working for the Boston Consulting Group (BCG). Labor, land, buildings, machinery, and scientists and engineers all cost less, and it will stay that way for at least a decade.

Labor rates remain up to one-thirtieth of those in Germany, and that low-cost advantage will be sustained for a long, long time. An almost infinite pool of rural workers-more than 900 million people-want to join the industrial workforce.

Multinational companies are increasing their purchase of high-tech parts and components from Chinese vendors. Exports of technology products from China surged by 72% last year to $45.4 billion, while total exports increased by 35% to $593 billion. The next wave beyond high-tech will be industrial goods.

Low cost and high productivity mean that sourcing from China isn't a choice any more for many multinationals: it's a necessity. According to BCG, China enjoys advantages that many other countries can't match. While US workers may be more productive and technologically sophisticated, they are also more expensive. On the other hand, people in places such as the Dominican Republic and Romania are willing to work just as cheaply as workers in China, but are not as productive.