The Three Scariest Words in U.S Industry:
"The China Price" -- Will Your Company Survive?

Our commentary on a recent BusinessWeek article

Recently, BusinessWeek ran a front-page article that should be a wakeup call for all U.S. companies. Headlined "The China Price," the article explained how U.S. manufacturers are being forced to cut their prices 30-50 percent in order to compete with the Chinese. In some cases, Chinese manufacturers are so cost effective American manufacturers could only compete if they cut prices below their cost of materials.

What does this mean for U.S. companies that are still using American manufacturers to produce their goods? A serious competitive disadvantage. With big retailers such as Wal-Mart exerting constant downward pressure on prices, suppliers must cut costs now or risk losing their largest accounts to competitors who are already taking advantage of China. All industries are affected. Business Week mentions apparel, footware, electric appliances, plastics products - even electronics and automobiles. Here are some more examples from "The China Price" article:

  • In the category of bedroom furniture, Chinese imports have increased 221% to $1.4 billion, which is half of the U.S. market. Prices are down 30 percent.

  • In printed circuit boards, U.S. sales have decreased $6 billion since 2001. Meanwhile, Chinese imports have doubled, nearing $3.4 billion.

  • In computer hardware, exports have slid $17 billion as China has become the category leader.

  • In electronics, companies such as Flextronics have cut U.S production $10 billion while doubling Chinese output - a figure that's expected to double again by 2007.

Low-Cost Labor Is Key

Why is China becoming the key to competing in the 21st century? In a word: labor. According to Business Week, even if wages for factory workers rose at 8 percent annually for the next five years, the average wage in China would still be only $1.30 per hour by 2010. (Contrast that with the U.S. minimum wage, which stands at $5.15 today and will approach $6 per hour by 2010.) And it isn't just unskilled labor that China has to offer. The nation's "army of engineers," as Business Week puts it, is growing at a rate of 350,000 professionals per year.

Another factor is the Chinese work ethic. Simply put, Chinese laborers work longer and harder than their American counterparts. Employees and managers work 12-hour days, and it's standard practice to work a half-day on Saturday. Skilled employees who work more hours for less money? It's every company's dream - and more U.S. companies are realizing that dream by outsourcing to China.

Speed Is Another Advantage

Can other manufacturers compete with China? Robert B. Cassidy doesn't think so. The former U.S. Trade Representative, who is quoted in the Business Week article, says the reason is speed. China adapts so quickly other countries can't compete. He gives the examples of Japan, South Korea and Europe, all of which take four or five years to react to changes, putting them years behind the highly flexible and efficient Chinese.

American manufacturers are even slower. Plus, they simply can't squeeze profits any more, according to Cassidy. The bottom line: Not even an automated process - which of course involves development time and R&D costs - could help U.S. manufacturers catch the nimble Chinese.

What To Do

Although the picture for U.S. manufacturing is gloomy, it's rosy for U.S. companies who choose to leverage the China advantage. And getting into China has never been easier.

On December 11, 2001, China became a member of the World Trade Organization (WTO). This was a significant milestone because under its WTO agreement, China made substantial commitments to restructure its economic and trade policies. These included the opening of markets for foreign goods, the lifting of most import quotas, and the strengthening of trading and intellectual property rights.

As of January 1, 2005, most of these commitments had been fulfilled. "China has amended 2,300 and abolished 700 relevant laws and regulations in conformity with WTO rules," reported Sun Zhenyu, the Chinese ambassador to the WTO. Additionally, China eliminated the need for import licenses and quotas on more than 400 tariffed goods. On a recent visit to Beijing, WTO Director General Supachai Panitchpakdi called China's performance since its WTO accession "outstanding." He added: "I would give China's performance a top score."

The Chinese government's support and encouragement for foreign investment and private ownership is also well noted. In Guangdong province, which accounts for the largest GDP and exports of all provinces, production by the private sector (non state-owned enterprises) accounted for 83 percent of the province's total industrial output for 2004. Production by the private sector in Jiangsu province exceeded 90 percent during the same period.

The world's confidence in China's stability and commitment to trade is directly reflected in the actions of the world's top multinational companies. The long list of companies that have invested heavily in China includes such well-known names as Motorola, Toshiba, Siemens, IBM, Intel, Hitachi, Samsung, Nokia, Sony, General Electric, Procter & Gamble, Panasonic, Bosch, Nestle, Pepsi and Coca-Cola. Additionally, more than 200 foreign-owned banks have set up branches in China, and about 40 foreign-owned insurance companies have joined with Chinese companies to form some 70 new joint ventures.

Impact Products specializes in moving US production to China and can make the whole process simple and hassle free. With our China business expertise, buying power and reputation, manufacturing in China has never been easier.

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