What do you need to know about China?

 

Well, that may be too big a question to ask. As far as outsourcing is concerned, however, one should watch closely some developments in China, especially those affecting production costs:

  1. RMB appreciation. China has been under tremendous pressure to appreciate its currency, RMB (Ren Min Bi, or Chinese Yuan), against other key currencies such as US dollar. In fact, the RMB has been appreciating consistently in recent years; for example, the exchange rate (cash) between US dollar and RMB was about 1: 7.85 by end of 2006; it dropped to 1: 6.6 by end of 2010. 

    Note RMB appreciation against US dollar is equivalent of saying US dollar depreciation against Chinese RMB; same is true to other currencies. What does it mean to manufacturers and foreign marketers? It means an US dollar that could buy 7.85 RMB of goods before could only buy 6.6 RMB of same goods a few years later, almost 19% loss.

    The problem is that, even with the adjustment, many believe the RMB is still under-valued by as much as 39% against the other major currencies. Whether or not it is a correct evaluation, this trend is certain to remain; one should just hope it would not change dramatically.
     
  2. Raw material costs raise. Costs for raw materials, especially by-products of oil and other natural resources, have been raised dramatically during past few years. Raw resin and plastic materials, are at least 100% more costly in last few years, while prices for items like paints, cardboard, and Styrofoam have been increated 30-50% yearly.
     
  3. We had predicted that labor cost would increase 100% in couple years since China put in effect in February, 2008, the new Labor Law; it has actually increased more than 300%! At the beginning of 2008, for example, minimum wages in Shenzhen City was about 800 Yuan, it was increased to 1250 Yuan by the end of 2008; nowadays, workers would refuse to work if they think they couldn't not make 100 Yuan a day, meaning 2400-3000 Yuan a month; a 200-240% hike in a little bit more than a year.

    By practice, on the other hand, workers used to work longer hours, including at least Saturday. The new Labor Law requires employers to pay overtime at least 150% on weekdays, 2-3 times on weekend; plus other benefits. While enhancing workers' well being should be everybody's goal, sudden change would mean disaster for business. In fact, many factories, especially labor-intense companies, have closed out for business.

    Although overall cost of manufacturing in China is still low compared to elsewhere (average household income for 2008, for example, is about $2,800), these changes are nonetheless affecting the bottom-line of your accounting book, manufacturers and marketers alike. Probably the only good news is that this is everybody's problem and people will forever buy quality goods. So one should at least focus more on enhancing product quality. According to a study conducted by research firm Nielsen, while factors relating to value and price are important drivers of where to shop and what to buy, retailers and manufacturers who offer good values stand to gain the most from consumers who continue efforts to stretch their money, even in a economy down turn.

The links on the right will connect you to some of the resources if you want to learn more about China, its culture, and business environment.