Chinese manufacturing growth and the sourcing challenge

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The China Economic Review today mentions an article in the South China Morning Post reporting on Liu Yupu, a protege of Hu Jintao, who has been named as party secretary in Shenzhen. Liu is said to confront three major issues facing the Pearl River Delta: upgrading the electronics industry, attracting new talent and maintaining industrial advantages despite rising costs. 

Yet despite facing higher labour costs and intense pressure to keep prices low, Chinese industrial companies' profits rose 36.7% in the first eleven months of 2007. According to a report on Bloomberg on Saturday, combined net income climbed to 2.3 trillion yuan, while sales jumped 27.6% to 35.5 trillion yuan. As the government tries to decrease investment in factories to curb environmental damage and prevent the risk of industrial overcapacity, spending on properties and factories in urban areas climbed 26.8% in January through November from a year earlier. The government has ordered state-owned companies to pay as much as 10% of profit as dividends to soak up more of the money that could fuel investment.

In an extended and very insightful assessment of manufacturing in Shenzhen and the state of Chinese manufacturing generally, James Fallows in the July/August edition of Atlantic Monthly describes China's factories as the country's backbone:

Most of what has been good about China over the past generation has come directly or indirectly from its factories. The country has public money with which to build roads, houses, and schools - especially roads. The vast population in the countryside has what their forebears acutely lacked, and peasants elsewhere today still do: a chance at paying jobs... Americans complain about cheap junk pouring out of Chinese mills, but they rely on China for a lot that is not junk, and whose cheap price is important to American industrial and domestic life. 

Indeed, Liu Yupu in Shenzhen would probably be heartened by Global Sources' 2007 China Design Capabilities Survey, which indicated that 66% of mainland China's electronics design engineers are looking to extend design functionality, while 56% are concentrating on designing products with more reliable performance.

Yet in sourcing products from China, Supply&Demand-Chain Executive cautioned in a commentary yesterday, 'all that glitters may not be gold.'  

There is money to be saved and quality products to be had in China. You can save up to 40 percent of your manufacturing costs, but only if you can avoid the potential margin-eating pitfalls. The caveat being that the management time and learning curve dollars are a burden that few companies want to absorb. Unless you work through experienced domestic suppliers to manage the risks for you, be ready for late nights, early mornings, frustrating phone calls, confusing e-mails, and some long and grueling trips... 

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