China remains attractive in spite of reduced cost advantages

June 25, 2012 | Global news

Increasing wages in China strengthen domestic demand but increase
pressure on the industry. Reduction of growth rates, increasing wages and energy prices mean more and more negative headlines regarding China’s economic situation.
According to the European Chamber of Commerce, a fifth of all companies are already reconsidering their investments in China. Yet in the same survey, three quarters of the companies also stated that China was gaining more im-portance for their own corporate strategy. “Whoever went to China just for cost advantages is currently encountering problems,” says Markus Franz, Managing Director at Staufen AG in China, to clarify this development. “The cost advantages have considerably decreased, especially in the metropolitan and coastal regions. However, it never makes sense to invest in a country solely because of low-cost manufacturing conditions. The aim should always be to develop the domestic market, too. In China, a considerable potential is lying dormant in the domestic market, which still makes it worthwhile for most of the industries to find a way into the Far East.” Franz adds that increasing wages promote domestic consumption as well as stabilising governmental fiscal policies. “The Chinese are just starting to consume – the possibilities are enormous.” In order to remain efficient, Franz recommends making other adjustments: systematic supplier development, strategic sourcing and stream-lined processes offer significant opportunities to save and improve, even in China.
According to Franz, increasing production costs in China and in all other emerging markets were at some point foreseeable. “Relocating production just because of costs is never a long-term idea. In addition, the supply chain is enormously stretched and is then liable to having masses of material and products transported across the world – this can have severe consequences.” On the other hand, China offers interesting possibilities if companies develop strategically in the target country by doing their homework in terms of quality, costs, processes and delivery performance. “Increasing income as well as China’s expansive fiscal and monetary policy show a positive impact on developing domestic demand – which is also a defined objective in the 2011 government’s current five-year plan,” says Franz. “Increasing purchasing power and the desire for Western goods are clashing, es-pecially in China. The new middle classes like to show off what they can afford. At the same time, the majority of the population does not share the new prosperity and thus does not yet have the necessary purchasing power to be able to fulfil these desires. With these changes, the market in China will become even more exciting and lucrative,” says Franz, estimating the situation. “So you shouldn’t fear a collapsing economic growth down to ‘just’ 7.5 percent – it shows that the bubbling cauldron that is China is turning into a stable marketing environment.” He adds that the way to the Far East is thus worthwhile, even under the altered framework conditions and is essential for companies who call themselves global players. However, Franz warns that “cost pressure will continue to increase in the future – people need to be aware of this.” Key factors for efficient production In order to remain efficient, even with increasing costs, Franz and Staufen AG advise taking a close look at the processes in your company and optimising them in terms of the lean management concept. “There is normally much room for improvement in the procedures and production steps, or even in administration,” says Franz based on his own practical experience. Strategic sourcing and supplier development are further important triggers for minimizing cost, realising potential, increasing efficiency and ensuring delivery performance. “There is still a great amount to be done here, above all in China – the possibilities have not yet been used to their full potential. In particular, finding and actively managing suppliers is a great challenge which needs to have an active role and handling. However, if companies do their homework, increasing wages and energy prices can be balanced out and even overcompensated for.”

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