Why is everything made in China - Research Paper Example

?Why Is Everything Made In China Table of Contents Why Is Everything Made In China Table of Contents 2 Overview 3 Benefits and Reasons for Manufacturing in China 5 Advantages and Disadvantages for Economy and Environment of China 7 13 Impact on Global Economy 14 Future Prospects 17 References 19 Overview China is one of the fastest growing economies of the world. It has the highest population in the world. As compared to other countries the labor cost is much lower in China due to which a company can earn higher profit out there. China is an industrialized nation and has the support from various aspects such as government for survival in the industry. The trading relationships with other countries are also excellent such as the US traders prefer to have Chinese suppliers because the bulk shipping order’s cost is less which means import from China is cheap compared to other countries. According to the study performed by Booz Allen Hamilton, only those companies are successful that integrate China as the basis of competitive advantage. The improvement in the economy shows that China has a great potential for future domestic sales, therefore setting up factories will facilitate to be a beneficial project for the future. The major domestic industry in China is automobile, which may change in the future (Booz Allen Hamilton Inc, “Booz Allen/AMCHAM Shanghai Study Finds Companies Adopting China as Both a Growth Market and Manufacturing Hub Are Two-Thirds More Profitable Than Others”). There are certain controversial views such as China is not good in social responsibilities because they make the children work for cost minimization. Hence, the myth is that a company in China is only concerned about the profit and not the society. They do not consider all the 3 P’s that are Profit, People and Planet (Whycenter, “Why Is Everything Made In China”). ‘Made in China’ products are becoming more famous in today’s world. In this research paper, the benefits of manufacturing units in China have been analyzed with an example of plastic manufacturing unit. The effect of the economy and environment are examined to understand the reason for building manufacturing units in China. The integration of all economy implies globalization, hence the increase of ‘Made in China’ products are affecting the world’s economy. The economy of China and other countries have been analyzed to understand the impact in other countries. Every company focuses on cost minimization to increase the profit margin. The labor cost in China is a factor to be taken into consideration for the labor intensive companies such as clothing, footwear and others. In order to reduce cost of production, companies generally look to shift to China for establishing manufacturing units. There is a potential growth in China but the question arises whether it is sustainable or not. In this context, the future prospects in China are identified. Benefits and Reasons for Manufacturing in China China has emerged as preferred destination for setting up of manufacturing units due to certain advantages that are present in the country. The labor cost is less in India and Africa. However, to build a plant in developing country a few infrastructure facilities such as electricity, technology, telecommunication, financial infrastructure, government cooperation and others are essential to be considered. In this case, China is advanced than India and it is incomparable with Africa. Hence, China provides the advantage of cheap labor and adequate industrial infrastructures. China is perceived as the huge potential market thus it encourages the potential to build the operations in the country. Certain examples of reasons as well as benefits of manufacturing in China are: Reduction in cost of Direct Labor, Overhead and Material Cost Indirect Engineering, Marketing, Financial Labor & Transactional Cost is reduce. Supply chain logistics & service are made simpler to Asia’s customers Center for Material Sourcing throughout Asia for Domestic and China Production Fast-turnaround regarding the Low Cost Tooling as well as Fixtures Currency Transaction related Flexibility between ‘Multi-National Countries’ Knowledge about the promising Local Chinese as well as Asian Markets (usa-chinanet, “Manufacturing in China, The Best Choice?”) In this context the following example is presented to highlight the benefit that a company can acquire by manufacturing in China. Benefits of China Plastic Manufacturer are as follows: 1. Saves Money The clients are provided with cost savings as they work with selected shops that refrain from charging ‘foreigner premium’ of around 20%-30%. The clients are provided cost savings due to the use of imported molds as well as molds that are used in China. 2. Maintain Quality The western engineers are considered to be the examiners, who prevent problems from happening and provide weekly reports. The process of delivering the quality plastic related parts is the responsibility of China Plastic Injection Molding (CPIM). 3. Time Saving The Chinese manufacturing companies are able to create loyal customers as they are able to save the time of customers by offering them a facility of ordering through mail or phone and subsequently they provide the quality product. 4. Avoid Risk CPIM works with mold makers to avoid the fluctuation in the quality and constantly monitors the process until it is perfect. 5. Avoiding Misunderstanding Communication should be understandable. One should be a good listener to avoid the misunderstanding which may create problems in future. The experienced project manager always tries to make the communication perfect in order to alleviate communication gap so that manufacturing process is performed without any fault (Titoma Group, “Benefits of China Plastic Manufacture”). In terms of resource based view, it can be observed that the competitive advantage of the Chinese firms have helped to develop the image of made in China products as a low cost but good value product (Zhang & Xiaohua, “Made In China At A Crossroads: A Recourse-Based View”). Advantages and Disadvantages for Economy and Environment of China Every country in the world is competing due to globalization, hence only those countries that manufacture product better and faster at cheap price can survive and win. Chinese are grabbing lots of prices in consumer products and are moving towards high technology. For example, Lenovo of China acquired PC Business of IBM (SINA, “Lenovo acquires IBM's PC business”). The following are the facts about manufacturing in China at present: Constant increase in manufacturing units Importance of cost advantage Good and repetitive quality In terms of global market-share – 20% share of refrigerators, 30% share of air conditioners as well as televisions, 50% market share of cameras and 25% share of washing machines 40% of microwave ovens that are sold in Europe is done by a single private company of China Wenzhou city situated in Eastern China produces 70% of the world's metal cigarette lighters 70% of world’s cigarette lighters are produced in Wenzhou which is located in Eastern China (Automation, “Global Manufacturing – The China Challenge”) Economy China has successfully emerged as a place for multinational companies to set up factories but in today’s China only modern and efficient factories can succeed. China is popular for setting a factory such as electronics, cloths, toys and other consumer goods. The industrial model of China has enabled the country to achieve double digit economic growth in China and has helped to lift a number of people from the level of poverty. In recent years, the phase of shutting down of several factories has started due to the industrial model because the increasing cost of labor, raw materials and at the same time the government has become more stringent. The companies were not able to earn profit and diversify the business; therefore they started to closedown the business in Guangdong region of China, which is main region of business in the country. In 2008, the growth rate had slowed down in Shenzhen, one of China’s first special economic zones that were set up 1979 (World Economic Forum, “Global Business: Manufacturing”). According to a survey conducted by Booz & Co., out of 66 multinational companies operating in Shanghai, it had been found that 54% consider that China is losing the competitive advantage regarding the low cost due to rising labor cost, 20% of them had plan to move their operation in other countries such as India and Vietnam. There was an economic evolution in China after decades of fast growth. The increased cost of business and rise in standard of living provoked an exodus of manufacturers having low cost. Due to shutting of the businesses, many of the people were unemployed and slowly the employment rate has increased. The workers’ salaries had increased by 66% in between the years 2004 and 2007. During this period there was an appreciation of the Chinese currency. In 2005, value of Yuan had climbed to 10% against the dollar in the previous year (World Economic Forum, “Global Business: Manufacturing”). The survival of corporations, economies and countries with the changing scenario of China is mainly because of improvement of workers productivity, modernization of manufacturing processes and use of fewer workers to churn more products to preserve profit margin. Profits were also protected by producing and selling higher and expensive products. China has also moved towards producing sophisticated and value added products and services such as financial services, cars and high-tech gears. There was a need of improvement of the quality and reputation of the country’s export as the Chinese were growing but it resulted in the environmental degradation and social imbalance (World Economic Forum, “Global Business: Manufacturing”). China with the economic reform has been able to eliminate weak and maintain the strong manufacturing units, thus the result has been more efficient and competitive manufacturing sectors. The failure of business reduces the job availability for China and hence the country is in need of industrialization reforms. The industrialization reforms affect the export sector as the cost of export increase, price of essential product also increases. It has been found by a survey that 90% plan of raising the price results due to worldwide inflationary pressure. From this period onwards the made in China products are no more sold at cheaper price (World Economic Forum, “Global Business: Manufacturing”). With this attitude of China, most of the companies making labor intensive product such as clothing will look beyond China and hence it is an advantage for countries such as India and Bangladesh as the average labor cost are low. Vietnam is the other beneficiary country whose labor cost is 40% lower as compared to China. Many of the manufacturers have divested their manufacturing units in Vietnam and invested heavily (World Economic Forum, “Global Business: Manufacturing”). The companies were moving towards other countries, yet China was able to retain the competitive advantages. China’s superior infrastructure makes shipping product overseas more efficient. Many of the manufacturers decided to set up a plant in the interior region where labor cost is low in spite of moving to other countries. The competitors such as India is quickly improving its infrastructure, Indonesia is changing its law of investment and tax to attract the foreign firms, thus China should introduce certain other reforms to cope in this competitive world. There would be a danger for China if the competitors would be able to add lower labor cost to a friendlier business climate. According to a survey conducted for China becoming less competitive in manufacturing, the following are the top four reasons observed: Increase in cost of labor- 51.8% High inflation rate-70.3% Poor retention of employee-33.3% Currency appreciation-70.3% (World Economic Forum, “Global Business: Manufacturing”). Environment The economic growth of China is simultaneously effecting the environment. The growth of economy causes rapid urbanization as well as industrialization which are creating pollution in the country. The sustainable development is important in today’s world. The growth of the country is necessary but consistently the environment is required to be taken into consideration. The impact of doing a project is to be analyzed in advanced. In this fast growing economy, there is an increase in consumption pattern. People require more luxurious life; motor vehicle consumption is increasing which results in air and water pollution. More and more plants are setting up and thus more energy is being generated (especially coal field plant) which is harmful for the environment. China is the third largest country in factory output. Every year there is 12% growth in industrial sector. The country is largely dependent on industries (i.e. iron, steel, petrochemical) which produce huge amount of wastage. The wastage is not disposed in an appropriate way. Air Pollution China is dependent on coal as a fuel which is a polluting energy source. The factor that China lagged behind is the air pollution which effects the surrounding. The causes of air pollution are emission of harmful gasses (SO2 and CO2). In the five year plan (2001-2006) of the Chinese government SO2 emission, were the most off target. In 2005, the target for SO2 emission was 18.0 million tons/year but the actual emission was 25.5 million. The target was fulfilled and it was overshot by 40%. The target for soot and industrial dust emission were 11% and 1% respectively, but their level was remaining stable since 2001 at about 12 million tons/year and 10 million tons/year. Water Pollution During the five year plan (2001-2006), water pollution was also off target. They were not able to meet the target of chemical oxygen. Domestic CO2 discharged had been raised from 704 million tons to 8.6 million in 2005. The main driver for decreases in water pollution was domestic discharge. It was proved that the problem of water pollution is more in highly populated area. Around 400 rivers of China are monitored. Among them 90% fails to meet the aquatic life standards. The southern part of China has huge amount of water hence the number of household usable division has gone up from 5% in 1990 to 55% in 2005. As in northern part volume of water is less so the number went from 4% to 9%. In the high polluted region of North China, the quality of water is low. 40% of Chinese does not have access to water pipeline and therefore they drink impure water. Environment Impact The growth of China does not seem to be sustainable and it is important to tackle issue related to environment such as: The five most polluted cities of the world out of 10 are in China On average air pollution is five times higher the level recommended by World Health Organization Shortage of water in the northern part is not only due to inadequate volume of reserves but also lack of regulation of local bodies towards industrial companies creating water population (Mei-Jung Chen & Et. Al., “Environmental Impact on Chinese Economy”). The disadvantages of setting up of manufacturing unit in China can be observed from the following example in which quality of Chinese product had been questioned by another country. The import of Chinese toys had been banned by the government of India under the prohibition of ‘ITC codes 9501, 9502, 9503, of Schedule-1 of ITC (HS) Classifications of Export and Import Items’ (Kids Online Stories, “Banning of Chinese toys- Kids’ Story”). The reason for ban was the quality of the product. The product that had been used to make a soft toy was quite harmful for the health of children. It contained high level of toxic lead which may causes various kinds of sickness such as diarrhea and nausea, harm children’s IQ level and intellectual development. The report also said that Phthalates-DEHP, DBP and BBP are added to make them soft which may cause long term side consequence such as reproductive effect as well as hormone malfunctioning. The other chemical that had been used for doll dress were carcinogenic. India is a late entrant to join banning of Chinese Toy’s as the US and Europe had already done so earlier. India did not have quality standard for children toy’s and was reported that they are working about it after the ban. Hence it is important for Chinese company to increase their quality standard instead of being irresponsible towards the society. The sustainable growth is essential rather than earning profit for a small period without considering the social context (Kids Online Stories, “Banning of Chinese toys- Kids’ Story”). Impact on Global Economy The import of China has been growing along with export. China’s current, export-oriented manufacturing divisions are dependent on imported raw materials, energy and capital equipment. The products prepared in China have dominated the global economy and with the passage of time, its products are also changing. During 1980-1990s, China was best known for fuel, garments, footwear and light manufactures, it has moved towards telecom munitions, furniture, industrial suppliers and office machineries in late 1990’s and now to consumer electronics and automated data processing. China is the world’s fourth largest trader; its exports have grown at the rate of 20% per annum. As a result, the share of world trade of China is 6%. The market share in Japan in 1990 was 5.1 and rose to 18.5% in 2002; in the same way share in the United States was 3.2 in 1990 to 11.1% in 2002 and in Europe it rose from 2.0 in 1990 to 7.5 in 2002 (Eichengreen & Et. Al., ”Impact of China on the Export of Other Countries”). Globally, the impact of China’s exports on the exports of other Asian countries has allegation to revaluate the currency Yuan in order to lead for a general revaluation of Asian currencies and rectify the problem of global imbalances. One frequently heard argument is that if China revalues, other Asian economies will have the capability to revalue and the general realignment regarding the Asian currencies next to the US Dollar will assist to slender the US current account related deficit and relieve the competitive pressure that are felt by Europe without causing significant disruptions to the world economy. However, if China’s exports are connected with the exports of its Asian neighbors, the main impact of China’s export growth is to encourage that country’s own demand for imports of raw materials, components and capital equipment from elsewhere in the region. To revaluate the RMB which enables the growth to become slow of China in own exports works to lessen the exports that are performed by the neighbors, rather than to boost their own growth and creates pressure for depreciation instead of appreciation somewhere else in the region. Therefore, the revaluation of Asian currencies has been seen as a problem of global imbalances. China’s agreement to the WTO is a liberalization of its trading system that increases its import and export (Eichengreen & Et. Al., ”Impact of China on the Export of Other Countries”). Ianchovichina and Walmsley (2001) regulate a multi-sector copy of international trade and observed that China’s WTO accessibility had reduced the exports of Vietnam, Philippines, Thailand, Indonesia and Malaysia (Ianchovichina & Walmsley, “Impact of China’s WTO Accession on East Asia”). Another model is that of IMF (2004), which uses general equilibrium model to capture the geographical structure of trade flows. The analysis pointed out small negative impact on exports and output of all segments. This negative impact had largely affected in Middle East and North Africa and minimum on advanced economies. The ASEAN economies were largely affected, while the NIEs (Hong Kong, South Korea, Singapore as well as Taiwan) and economies in South Asian countries were affected to a lesser extent. For example, the nations that depend significantly on export related to textiles as well as clothing, which are labor-intensive manufacturing, had experienced negative effects due to the comparative advantage of China in those sectors (IMF, “China’s Emergence and its Impact on the Global Economy”). Future Prospects China is known as “the factory of the world” after it became the member of World Trade Organization. The globalization integrates all the countries to work together and can exchange goods and services from one place to another (Cheung, “Made in China vs. Made by Chinese: Global Identities of Chinese Business”). The future of made in China goods seems to be good and its positive aspects to sustain include improved infrastructure and technological environment, most favorable industrial formation, more competitive manufacturing industry, a wide domestic market with vast expansion potentials, the structural reforms and the enhancement of the investment environment. These are the reasons to believe that China's strong growth can be maintained in the next 15 to 20 years (Garnaut & Et. Al., “China: The Next Twenty Years of Reform and Development”). China has provided investors with investment opportunities in the country. Companies can utilize the opportunities which have arisen from the development of China into the manufacturing unit. The major driver has been the low labor in China. Therefore, the investment opportunities are for labor-oriented companies producing in China mainly for export such as clothing and footwear manufacturer and retailers, consumer electronics products and components, or assured commodity consumer goods. Later on companies may start to target the Chinese domestic market, providing new opportunities for investors, which will increase the interest for Chinese companies regardless of whether the investment opportunities can be exploited or not. Socially responsible investors have to be concerned about the sustainability "flight to China". The sustainable development viewpoints such as poor labor situation in Chinese factories, low wages, ignorance of international labor rights and environmental problems are the subjects to be considered. These issues comprise a challenge for companies situated in China which take the social responsibility factor seriously in their factories as well as supply chains. Due to the increase in the number of manufacturing companies, the availability of jobs has also increased. In the globalized competitive market minimization of cost is an important factor to increase profit margin. Several companies are forced to outsource their certain functions to other countries where the trained employee are willing to work at a lower rate. All type of industries are affected by outsourcing, however there are certain industries which are heavily affected such as telecommunications, telemarketing and web marketing, where human resource are outsourced in daily basis. The self employed sites are available where the global provider can find variety of job at lower rates. Thus, it can be said that there is a continuous growth prospect of ‘made in China’ products in future too (Ashida & Plinke, “Made In China”). References Ashida, Makiko. & Plinke, Eckhard. ”Made In China”, April 29, 2011. Sarasin Basic Report, 2004. Automation. “Global Manufacturing – The China Challenge”. April 29, 2011. Articles, 2010. Booz Allen Hamilton Inc. “Booz Allen/AMCHAM Shanghai Study Finds Companies Adopting China as Both a Growth Market and Manufacturing Hub Are Two-Thirds More Profitable Than Others”. April 29, 2011. Home, 2008. Cheung, Gordon, C. K. Made in China vs. Made by Chinese: Global Identities of Chinese Business. Journal of Contemporary China, 2009. Eichengreen, Barry. & Et. Al. ”Impact of China on the Export of Other Countries”. April 29, 2011. NBER Working Paper Series, 2004. Garnaut, Ross. & Et. Al. “China: The Next Twenty Years of Reform and Development”. April 29, 2011. Brookings Institution Press, 2010. International Monetary Fund. China’s Emergence and its Impact on the Global Economy World Economic Outlook (April), 2004. Ianchovichina, Elena. & Walmsley, Terrie. Impact of China’s WTO Accession on East Asia unpublished manuscript, the World Bank, 2003. Kids Online Stories. “Banning of Chinese toys- Kids’ Story”. April 29, 2011. Home, 2011. Mei-Jung Chen & Et. Al. “Environmental Impact on Chinese Economy”. April 29, 2011. EMDC Report, 2007. SINA. “Lenovo Acquires IBM's PC Business”. April 29, 2011. Special Report, 2004. Titoma Group. “Benefits of China Plastic Manufacture”. April 29, 2011. Home, 2011. usa-chinanet. “Manufacturing in China, The Best Choice?”. April 29, 2011. Home, No Date. Why center. “Why Is Everything Made In China”. April 29, 2011. It’s Important to Know Why, 2011. World Economic Forum. Global Business: Manufacturing. Special Report. Zhang, Shujun & Xiaohua, Su. Made In China At A Crossroads: A Recourse-Based View. Journal of Public Affairs, 2009. Read More