Operation Management

In China, as in the rest of the world, the costs of labor, energy and other commodities rose relentlessly in recent years. Although the global economic slowdown has relieved some cost pressures in the near term, costs will likely resume their upward climb over the long run -- a trend with major implications for the country's manufacturing base. Will Chinese manufacturers lose out to even lower-cost markets, such as Vietnam? Or will rising prices for resources push manufacturers to find new and better sources of comparative advantage?
In this article, part of a special report on the challenges facing China's manufacturing sector, experts from Wharton and The Boston Consulting Group (BCG) discuss how the rising cost of resources over the long term will affect Chinese manufacturers, and how companies inside and outside of China can best profit from those changes.
China's rise to become a leader in global manufacturing began when the country started opening its markets to the West 30 years ago. The combination of a vast pool of relatively low-cost labor and government incentives set to encourage foreign investment proved irresistible to many Western companies. The advantages were so compelling that by early 2000 most MNCs either had set up their own operations in China or were using the country's contract manufacturers. Companies that didn't make the jump faced the daunting challenge of selling to buyers who had come to expect "the China price," which was typically far lower than what high-cost manufacturers in developed countries could charge -- one-third to one half lower than what goods made in the U.S. cost, for instance.
Short-term Advantage, Long-term Threat
This cost advantage was so significant that it more than offset increases in the cost of energy or commodity prices. Until the downturn in the world economy and plummeting oil prices, some observers had even argued that then-rising energy costs could make China more competitive in the short run, since... [continues]

Read full essay